a firm that falls into any one or more of the following categories:
SYSC 12.1.8 R and SYSC 12.1.10 R apply with respect to all groups, including FSA regulated EEA financial conglomerates, other financial conglomerates and groups dealt with in SYSC 12.1.13 R to SYSC 12.1.16 R;
The rules referred to in (1):
(so far as they apply with respect to a financial conglomerate) do not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation;
(so far as they apply with respect to other groups) do not apply to a firm with respect to a group of which it is a member if the only relationship of the kind set out in paragraph (3) of the definition of group between it and the other members of the group is nothing more than a participation; and
do not apply with respect to a third-country group.
For the purpose of this section, a group is defined in the Glossary, and includes the whole of a firm's group, including financial and non-financial undertakings. It also covers undertakings with other links to group members if their omission from the scope of group risk systems and controls would be misleading. The scope of the group systems and controls requirements may therefore differ from the scope of the quantitative requirements for groups.
The purpose of this chapter is to set out how the systems and control requirements imposed by SYSC (Senior Management Arrangements, Systems and Controls) apply where a firm is part of a group. If a firm is a member of a group, it should be able to assess the potential impact of risks arising from other parts of its group as well as from its own activities.
This section implements Articles 73(3) (Supervision on a consolidated basis of credit institutions) and 138 (Intra-group transactions with mixed activity holding companies) of the Banking Consolidation Directive, Article 9 of the Financial Groups Directive (Internal control mechanisms and risk management processes) and Article 8 of the Insurance Groups Directive (Intra-group transactions).
A firm must:
have adequate, sound and appropriate risk management processes and internal control mechanisms for the purpose of assessing and managing its own exposure to group risk, including sound administrative and accounting procedures; and
ensure that its group has adequate, sound and appropriate risk management processes and internal control mechanisms at the level of the group, including sound administrative and accounting procedures.
The internal control mechanisms referred to in SYSC 12.1.8 R must include:
mechanisms that are adequate for the purpose of producing any data and information which would be relevant for the purpose of monitoring compliance with any prudential requirements (including any reporting requirements and any requirements relating to capital adequacy, solvency, systems and controls and large exposures):
mechanisms that are adequate to monitor funding within the group.
sound governance and management processes, which must include the approval and periodic review by the appropriate managing bodies within the financial conglomerate of the strategies and policies of the financial conglomerate in respect of all the risks assumed by the financial conglomerate, such review and approval being carried out at the level of the financial conglomerate;
adequate capital adequacy policies at the level of the financial conglomerate, one of the purposes of which must be to anticipate the impact of the business strategy of the financial conglomerate on its risk profile and on the capital adequacy requirements to which it and its members are subject;
adequate procedures for the purpose of ensuring that the risk monitoring systems of the financial conglomerate and its members are well integrated into their organisation; and
adequate procedures for the purpose of ensuring that the systems and controls of the members of the financial conglomerate are consistent and that the risks can be measured, monitored and controlled at the level of the financial conglomerate.
ensure that the risk management processes and internal control mechanisms at the level of any UK consolidation group or non-EEA sub-group of which it is a member comply with the obligations set out in the following provisions on a consolidated (or sub-consolidated) basis:
- (a) 1
- (b) 1
- (c) 1
- (d) 1
- (e) 1
- (f) 1
- (g) 1
[Note: article 73(3) of the Banking Consolidation Directive]
In the case of a firm that:
the risk management processes and internal control mechanisms referred to in SYSC 12.1.8 R must include sound reporting and accounting procedures and other mechanisms that are adequate to identify, measure, monitor and control transactions between the firm's parent undertaking mixed-activity holding company and any of the mixed-activity holding company's subsidiary undertakings.
In the case of an insurer that has a mixed-activity insurance holding company as a parent undertaking, the risk management processes and internal control mechanisms referred to in SYSC 12.1.8 R must include sound reporting and accounting procedures and other mechanisms that are adequate to identify, measure, monitor and control transactions between the firm's parent undertaking mixed-activity insurance holding company and any of the mixed-activity insurance holding company's subsidiary undertakings.
In some cases the management of the systems and controls used to address the risks described in SYSC 12.1.8R (1) may be organised on a group-wide basis. If the firm is not carrying out those functions itself, it should delegate them to the group members that are carrying them out. However, this does not relieve the firm of responsibility for complying with its obligations under SYSC 12.1.8R (1). A firm cannot absolve itself of such a responsibility by claiming that any breach of that rule is caused by the actions of another member of the group to whom the firm has delegated tasks. The risk management arrangements are still those of the firm, even though personnel elsewhere in the firm's group are carrying out these functions on its behalf.
SYSC 12.1.8R (1) deals with the systems and controls that a firm should have in respect of the exposure it has to the rest of the group. On the other hand, the purpose of SYSC 12.1.8R (2) and the rules in this section that amplify it is to require groups to have adequate systems and controls. However a group is not a single legal entity on which obligations can be imposed. Therefore the obligations have to be placed on individual firms. The purpose of imposing the obligations on each firm in the group is to make sure that the FSA can take supervisory action against any firm in a group whose systems and controls do not meet the standards in this section. Thus responsibility for compliance with the rules for group systems and controls is a joint one.