COND 2.3 Threshold condition 3: Close links

Threshold condition 3 (Close links) implements requirements of the Post BCCI Directive, but the Act extends this condition to firms from outside the EEA and other firms which are outside the scope of the Single Market Directives and the UCITS Directive.

In assessing this threshold condition, factors which the FSA will take into consideration include, among other things, whether:

1. (1)

   it is likely that the FSA will receive adequate information from the firm, and those persons with whom the firm has close links, to enable it to determine whether the firm is complying with the requirements and standards under the regulatory system and to identify and assess the impact on the regulatory objectives in section 2 of the Act (The FSA's general duties); this will include consideration of whether the firm is ready, willing and organised to comply with Principle 11 (Relations with regulators and the rules in SUP on the provision of information to the FSA;

2. (2)

   the structure and geographical spread of the firm, the group to which it belongs and other persons with whom the firm has close links, might hinder the provision of adequate and reliable flows of information to the FSA; factors which may hinder these flows include the fact there may be branches or connected companies in territories which supervise companies to a different standard or territories with laws which restrict the free flow of information, although the FSA will consider the totality of information available from all sources;

3. (3)

   the firm and the group to which it belongs are, or will be, subject to supervision on a consolidated basis (consolidated supervision) (for example, if a financial resources requirement is determined for the group as a whole); and

4. (4)

   it is possible to assess with confidence the overall financial position of the group at any particular time; factors which may make this difficult include lack of audited consolidated accounts for a group, if companies in the same group as the firm have different financial years and accounting dates and if they do not share common auditors.

When assessing whether the firm will satisfy and continue to satisfy this threshold condition, the FSA will have regard to all relevant matters, whether arising in the United Kingdom or elsewhere.

The FSA will take into account relevant matters only in so far as they are significant (see COND 1.3.3 G). In determining the weight to be given to any relevant matter, the FSA will consider its significance in the context of its ability to supervise the firm adequately, having regard to the regulatory objectives in section 2 of the Act. In this context, a series of matters may be significant when taken together, even though each of them in isolation might not give serious cause for concern.

1. (1)

   Section 420(1) of the Act (Parent and subsidiary undertaking) states that, except in relation to an incorporated friendly society, 'parent undertaking' and 'subsidiary undertaking' have the same meaning as in the Companies Acts (see section 1162 of, and schedule 7 to, the Companies Act 2006)4. These are the cases referred to in COND 2.3.7 G (1)(a) to (f).

   4
2. (2)

   Section 420(2) of the Act supplements these definitions in two ways; these are the cases referred to in COND 2.3.7 G (1)(g) and (h).

3. (3)

   Paragraph 3(3)of Schedule 6 to the Act extends the meaning of 'subsidiary undertaking' for the purposes of threshold condition 3 (Close links) to all the cases in articles 1(1) and (2) of the Seventh Company Law Directive in which one undertaking may be a subsidiary of another undertaking (see COND 2.3.11 G).

1. (1)

   For the purposes of threshold condition 3 (Close links) and except in relation to an incorporated friendly society, an undertaking is a parent undertaking of another undertaking (a subsidiary undertaking) if any of the following apply to it:

   1. (a)

      it holds a majority of the voting rights in the subsidiary undertaking; or

   2. (b)

      it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of its board of directors; or

   3. (c)

      it has the right to exercise a dominant influence over the subsidiary undertaking through:

      1. (i)

         provisions contained in the subsidiary undertaking's memorandum or articles; or

      2. (ii)

         a control contract; or

   4. (d)

      it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the subsidiary undertaking; or

   5. (e)

      it has a participating interest (as defined in section 421A of the Act4(Meaning of “participating interest”4)) in the subsidiary undertaking and:

      44
      1. (i)

         actually exercises a dominant influence over it; or

      2. (ii)

         it and the subsidiary undertaking are managed on a unified basis; or

   6. (f)

      it is a parent undertaking of a parent undertaking of the subsidiary undertaking; or

   7. (g)

      it is an individual and would be a parent undertaking if it were an undertaking; or

   8. (h)

      it is incorporated in or formed under the law of another EEA State and is a parent undertaking within the meaning of any rule of law in that State for purposes connected with implementation of the Seventh Company Law Directive.

2. (2)

   A flowchart of COND 2.3.7 G (1) is set out in COND 2 Annex 1.

1. (1)

   In relation to COND 2.3.7 G (1)(b) and (d), an undertaking is treated as a member of another undertaking if any of its subsidiary undertakings is a member of that undertaking, or if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.

2. (2)

   In relation to COND 2.3.7 G (1)(e), a 'participating interest' means an interest held by an undertaking in the shares of another undertaking which it holds on a long-term basis, for the purpose of securing a contribution to its activities by the exercise of control or influence arising from or related to that interest. A holding of 20% or more of the shares of an undertaking is presumed to be a participating interest unless the contrary is shown. Examples of interests of a temporary nature which do not constitute participating interests for the purpose of this control relationship include market-makers' holdings in a trading book.

3. (3)

   Section 421A of the Act4 states that an interest held on behalf of an undertaking is treated as held by it. Thus, if the chain of ownership includes a trust, the FSA will treat the trustees as legal owners when determining whether it considers there to be a close link. The beneficiaries or settlors of a trust (or both) may also come within the scope of these provisions, depending on the terms of the trust. However, the FSA will consider each case on its merits.

   3

The provisions of Schedule 74to the Companies Act 20064(Parent and subsidiary undertakings:4 supplementary provisions) explain and supplement the provisions of section 1162 4of the Companies Act 20064(outlined in COND 2.3.7 G (1)(a) to (f)).

Section 420(3) of the Act (Parent and subsidiary undertaking) (supplemented by paragraph 3(3) of Schedule 6 to the Act) states that an incorporated friendly society is a parent undertaking of another body corporate (a subsidiary undertaking) if it has the following relationship to it:

1. (1)

   it holds a majority of the voting rights in the subsidiary undertaking; or

2. (2)

   it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of the subsidiary undertaking's board of directors; or

3. (3)

   it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in it.

For the purposes of this threshold condition 3 (Close links), an undertaking is a subsidiary undertaking of another undertaking if:

1. (1)

   the other undertaking (its parent) is a member of the undertaking;

2. (2)

   a majority of the undertaking's board of directors who have held office during the financial year and during the preceding financial year have been appointed solely as a result of the exercise of the parent's voting rights; and

3. (3)

   no one else is the parent undertaking of the undertaking under COND 2.3.7 G (1)(a) or COND 2.3.10 G (1).

The guidance in COND 2.3 is not comprehensive and is not a substitute for consulting the relevant legislation, for example the Companies Act 2006,4 the Friendly Societies Act 1992 and the Seventh Company Law Directive, or obtaining appropriate professional advice.