Michael Folger, Director of Wholesale and Prudential Policy at the FSA, said:
“The final rules that we have published today mark an important step forward in ensuring the financial soundness of large complex financial groups. A growing number of such groups operate across different sectors within the financial services industry, and across national borders. These rules will enable us to regulate on the basis of the whole group, rather than regulating different sectors of the business independently of each other. And applying these new requirements will promote greater co-operation between international regulators."The implementation of the Financial Groups Directive in 2005 creates a new financial regime for conglomerates. The requirements for conglomerates build on key aspects of the existing regulatory regimes for the different business sectors, including the need for a conglomerate to have adequate capital. Requirements are also set governing risk concentration and intra-group transactions. In addition conglomerates must have adequate systems and controls to monitor their intra-group risks. To streamline the supervision of such groups, the Directive requires a single supervisory co-ordinator for each conglomerate.
A key aim of the Directive is the consistent application of group supervision for all financial groups operating in Europe. It achieves this by extending the scope of the current supervisory oversight of banking and investment groups, to include parent companies located outside the EEA, as is already the case for insurance groups. Where such non-EEA groups are already subject to equivalent supervisory requirements in their home country, the need for additional regulation from the EEA falls away. Conglomerates will also be subject to similar requirements if they have non-EEA parents. One issue on which we consulted that is not covered in today's policy statement is the proposed introduction of a 'hard' group capital adequacy test for insurance groups. In view of the consultation responses to this proposal, we will be considering the issue further in discussion with the industry, before looking to issue a supplementary policy statement in September.
Background
- This is a joint policy statement issued by the FSA and HM Treasury on the implementation of the Financial Groups Directive in the FSA Handbook and HM Treasury Regulations.
- Part 1 sets out the FSA response to Consultation Paper 204 (Financial Groups), published in October 2003, and contains the final rules that have been made by the FSA Board.
- Part 2 sets out HM Treasury proposals to legislate for procedural aspects of the Directive and contains the draft Statutory Instrument.
- The Financial Groups directive was published in final form in February 2003. It is also sometimes referred to as the Financial Conglomerates Directive. It implements internationally agreed principles for the supervision of financial groups that were published by the Joint Forum. (The Joint Forum comprises the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors).
- A group will be a financial conglomerate if at least 40% of its business is financial and at least 10%, or failing that €6 billion of its financial business, is in each of the insurance and the combined banking/investment sectors.
- In detail the new rules will require conglomerates to:
- hold a minimum level of capital;
- monitor risk concentrations and intra-group exposures in the conglomerate;
- eliminate both the double counting of capital, and the excessive leveraging of capital where debt is down-streamed as equity;
- Have adequate systems and controls to monitor risks in their business;
- Supervisors will need to:
- designate an appointed EU cross-sector supervisory co-ordinator for each conglomerate group to streamline supervision; and
- establish procedures for assessing the equivalence of regulatory regimes applying to the non-EEA parents of FSA regulated groups.
- The Directive also amends the existing group supervision requirements for each of the major business sectors, by reducing the existing differences of scope and application of those rules.
- A number of changes have been made to the proposed rules published in CP204, the most significant of which are:
- amending the requirements under which a firm should notify the FSA that it is, or has ceased to be, a conglomerate;
- the addition of a flowchart that provides guidance to firms to help them identify whether they are a conglomerate, and what sort of conglomerate they are;
- confirmation for insurance groups, that surplus assets in an unregulated financial institution that is part of the group, can be used in the group capital calculation.
- Our policy on insurance regulation, and the requirements for individual insurance firms, was set out in Policy Statement 04/16 (Integrated Prudential sourcebook for insurers) published in July 2004.
- CP204 also consulted on harmonising the existing four sets of group supervision rules for investment firms into one. These harmonised rules have now been made.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.