Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Add to favourites

View Options:

More Resources:

External link Handbook Publications

Alternative versions

  3. Point in time
    2009-02-10

ELM 7.2 Purpose

ELM 7.2.1 G

The requirements of this chapter address three main areas of supervisory concern arising from group membership:

  1. (1)

    losses in another group entity lead to financial pressure on a firm, because of financial or reputational linkages, or both;

  2. (2)

    capital is subject to double gearing or leveraging: that is, a solo assessment of a firm over-estimates the quantity or quality of capital, or both, that is available to support that firm's risks, because of the way its capital has been raised or accounted for by the group;

  3. (3)

    business is booked in an unauthorised group entity to avoid regulatory requirements.

ELM 7.2.2 G

This chapter implements the consolidation requirements of the Banking Consolidation Directive as applied by article 2 of the E-Money Directive.

ELM 7.3 Consolidated capital adequacy

ELM 7.3.1 R

If:

  1. (1)

    a firm (firm A) is a member of a group;

  2. (2)

    another member of that group (firm B) is a firm that is subject to BIPRU 81;

    1
  3. (3)

    firm B is in firm A's immediate group; and

  4. (4)

    firm A is included in the scope of the consolidation under BIPRU 81 as it applies to firm B;

    1

firm A must comply with BIPRU 8 as it applies to firm B except that the rules in BIPRU 8 relating to non-EEA sub-group do not apply.1

1
ELM 7.3.2 R

If:

  1. (1)

    ELM 7.3.1 R does not apply to a firm;

  2. (2)

    the firm is a member of an EEA consolidated group;

    1
  3. (3)

    there is a full credit institution or an investment firm in that EEA consolidated group;1

    1
  4. (4)

    the undertaking in (3) is in the firm's immediate group; and1

  5. (5)

    that EEA consolidated group is not subject to supervision on a consolidated basis by a competent authority of another EEA State under the Banking Consolidation Directive, the E-Money Directive or the Capital Adequacy Directive;1

the firm must comply with BIPRU 8 with respect to that EEA consolidated group as follows:1

1
  1. (6)

    BIPRU 8 applies as it does to a bank in a UKconsolidation group; and1

  2. (7)

    the rules in BIPRU 8 relating to non-EEA sub-group do not apply.1

ELM 7.3.2A R

1If:

  1. (1)

    ELM 7.3.1 R and ELM 7.3.2 R do not apply to a firm;

  2. (2)

    the firm is a member of an UKconsolidated group;

  3. (3)

    there is a full credit institution or an investment firm in that UKconsolidated group; and

  4. (4)

    the undertaking in (3) is in the firm'simmediate group;

the firm must, at all times, maintain capital resources (calculated in accordance with the relevant rule) at a level that ensures that, taking into account (in the manner and to the extent provided for in that rule) the capital resources of other members of the firm'sgroup, the firm would comply with BIPRU 8 as it applies when there is a bank in the UK consolidation group if it applied to the firm. For the purposes of ELM 7.3.3 R, the rules in BIPRU 8 apply to the UK consolidated group in the same way as they apply to a UK consolidation group under BIPRU 8. The rules in BIPRU 8 relating to non-EEA sub-group do not apply.

ELM 7.3.3 R

If:

  1. (1)

    ELM 7.3.1 R, ELM 7.3.2 R and ELM 7.3.2A R1 do not apply to a firm;

    1
  2. (2)

    the firm is a member of an EEA consolidated group; and

  3. (3)

    that EEA consolidated group is not subject to supervision on a consolidated basis by a competent authority of another EEA State under the Banking Consolidation Directive, the E-Money Directive or the Capital Adequacy Directive;

the firm must ensure that at all times its own funds are of such an amount that its EEAgroup riskown funds are equal to or exceed its EEAgroup riskown funds requirement.

ELM 7.3.4 R

If:

  1. (1)

    ELM 7.3.1 R, ELM 7.3.2 R, ELM 7.3.2A R1 and ELM 7.3.3 R do not apply to a firm; and

  2. (2)

    the firm is a member of a UK consolidated group;

the firm must ensure that at all times its own funds are of such an amount that its UK group riskown funds are equal to or exceed its UK group riskown funds requirement.

ELM 7.4 Scope of consolidation

ELM 7.4.2 R

A firm has no EEA consolidated group if the firm would be its only member or if it has no EEA financial parent undertaking.

ELM 7.4.3 R

A firm's UK consolidated group is the consolidated sub-group of:

  1. (1)

    the firm'sUK financial parent undertaking; or

  2. (2)

    (if the firm has no UK financial parent undertaking and the firm is a UK domestic firm) the firm.

ELM 7.4.4 R

A firm has no UK consolidated group if the firm would be its only member.

ELM 7.4.5 R

A firm, having given prior notice to the FSA, may exclude from its EEA consolidated group or UK consolidated group for the purposes of this chapter:

  1. (1)

    an undertaking, the total assets of which; or

  2. (2)

    two or more undertakings, the total of whose assets added together;

are less than the smaller of 10 million euro and 1% of the total assets of the firm.

ELM 7.5 Calculation of capital adequacy on a consolidated basis

EEA group risk own funds

ELM 7.5.1 R

A firm's EEAgroup risk own funds are calculated as follows:

  1. (1)

    the own funds of members of the EEA consolidated group are consolidated using the principles that apply to preparing consolidated accounts under the Companies Act 1985 where applicable, otherwise the Companies Act 2006,2 and in accordance with accounting principles generally accepted in the United Kingdom;

  2. (2)

    for these purposes the own funds of a person to whom ELM 2.4.2 R does not apply are calculated as if it did apply;

  3. (3)

    the adjustments provided for in article 651 of the Banking Consolidation Directive apply (if required by the Banking Consolidation Directive), in accordance with (1);

    1
  4. (4)

    the deductions specified in ELM 2.4.2 R must be recalculated at the level of the EEA consolidated group;

  5. (5)

    the deduction at stage (F) of the calculation in ELM 2.4.2 R does not apply to material holdings held by members of the EEA consolidated group in another member;

  6. (6)

    the limits in ELM 2.4.18 R and ELM 2.4.19 R (Limits on components of own funds) must be applied;

  7. (7)

    minority interests are not included; and

  8. (8)

    own funds of members of the EEA consolidated group other than the person at its head are only included if they represent capital that is freely transferable to other members of the EEA consolidated group.

EEA group risk own funds requirement

ELM 7.5.2 R

A firm's EEA group risk own funds requirement is calculated by way of consolidation using the principles that apply to preparing consolidated accounts under the Companies Act 1985 where applicable, otherwise the Companies Act 20062 as follows:

  1. (1)

    the rules for calculating a firm's own funds requirement must be applied to the firm's EEA consolidated group as if it were a single firm subject to the ELM financial rules;

  2. (2)

    the consolidation must be in accordance with accounting principles generally accepted in the United Kingdom.

Proportional consolidation

ELM 7.5.3 R

All items included in the calculation of a firm's EEA group risk own funds and EEA group risk own funds requirement must be included in full, even though the member of the EEA consolidated group concerned is not a wholly owned subsidiary undertaking of the undertaking at the head of the EEA consolidated group.

The Banking Consolidation Directive

ELM 7.5.4 R

A firm's EEA group risk own funds and EEA group risk own funds requirement must be calculated in a way that is not contrary to the Banking Consolidation Directive as applied by the E-Money Directive. The other rules in ELM 7.5 are subject to this rule.

UK group risk own funds and UK group risk own funds requirement

ELM 7.5.5 R

A firm's UK group risk own funds and UK group risk own funds requirement are calculated in the same way as its EEA group risk own funds and EEA group risk own funds requirement except that references to its UK consolidated group are substituted for references to its EEA consolidated group.

ELM 7.6 Large exposures

The EEA group

ELM 7.6.1 R

If ELM 7.3.3 R applies to a firm, the firm must ensure that at all times its own funds are of such an amount that:

  1. (1)

    no EEA group large exposure exceeds 25% of its EEA groupriskown funds;

  2. (2)

    the total of its EEA group large exposures does not exceed 800% of its EEA groupriskown funds.

ELM 7.6.2 R

A firm's EEA group large exposures must be calculated as follows:

  1. (1)

    the rules for calculating a firm's large e-money float exposures must be applied to the firm's EEA consolidated group as if it were a single firm subject to the ELM financial rules;

  2. (2)

    the exclusions in ELM 3.5.6 R are applied at the level of the firm'sEEA consolidated group; and

  3. (3)

    the consolidation must be in accordance with accounting principles generally accepted in the United Kingdom.

The UK group

ELM 7.6.3 R

If ELM 7.3.4 R applies to a firm, the firm must ensure that at all times its own funds are of such an amount that:

  1. (1)

    no UK grouplarge exposure exceeds 25% of its UK groupriskown funds;

  2. (2)

    the total of its UK group large exposures does not exceed 800% of its UK group risk own funds.

ELM 7.6.4 R

A firm's UK group large exposure means the same thing as its EEA group large exposure except that references to members of its EEA consolidated group are replaced with references to its UK consolidated group.

ELM 7.7 Waiver

ELM 7.7.1 G

Article 731of the Banking Consolidation Directive says that competent authorities responsible for exercising supervision on a consolidated basis may decide that a credit institution, financial institution or ancillary services undertaking1 which is a subsidiary or in which a participation is held need not be included in the consolidation in certain cases. These include the following:

1 1
  1. (1)

    where1 the undertaking concerned1 is situated in a third country where there are legal impediments to the transfer of the necessary information;

    11
  2. (2)

    if, in the opinion of the competent authorities responsible for exercising supervision on a consolidated basis, the consolidation of the financial situation of the undertaking concerned1 would be inappropriate or misleading as far as the objectives of the supervision of credit institutions are concerned.

    1
ELM 7.7.2 G

It is generally the FSA's policy to agree to a firm's request to modify the rules in ELM 7 so as to exclude undertakings from the consolidation in the cases listed in ELM 7.7.1 G if section 148 of the Act allows this. See SUP 8 (waiver and modification of rules) for information on how to apply for such a modification.

ELM 7.8 Summary of consolidation rules

ELM 7.8.1 G

The rules in this chapter are in addition to the other rules about own funds in ELM.

ELM 7.8.2 G

If a firm is not part of a group, ELM 7 does not apply.

ELM 7.8.3 G

Broadly speaking, ELM 7.3.1 R to ELM 7.3.2A R apply the consolidation rules in BIPRU 8 to an ELMI.2

2
ELM 7.8.4 G

If an ELMI is a member of a group that has another member in it subject to BIPRU 8, then ELM 7.3.1 R applies BIPRU 8 to the ELMI in the same way as it applies to the other firm.2

2
ELM 7.8.5 G

ELM 7.3.2 R and ELM 7.3.2A R say that where ELM 7.3.1 R does not apply, BIPRU 8 applies to the ELMI if there is a full credit institution or investment firm in the group. If the ELMI is part of an EEA consolidated group of which the FSA is the lead regulator, BIPRU 8 applies to that EEA consolidated group. If the ELMI is not part of such a group or another EEA competent authority is lead regulator for the EEA consolidated group, then BIPRU 8 applies to the UK consolidated group of the ELMI.2

2
ELM 7.8.6 G

ELM 7.3.3 R or ELM 7.3.4 R applies if there are no full credit institutions or investment firms in the EEA group. ELM 7 sets out a special regime for firms in such groups. This assesses capital adequacy by applying the ongoing own funds requirement in ELM 2.5.1 R at the level of the group. If one of those rules apply, the large exposure requirements in ELM 3.5 are also applied at the level of the UK consolidated group or EEA consolidated group.

ELM 7.8.7 G

If the ELM financial rules do not capture adequately the risks that arise because of a firm's membership of its group, of the effect which membership may have on the firm or of the risks that may arise because of the firm's connection with any person, the FSA may impose a requirement that has the effect of taking those other persons into account for the purpose of the prudential supervision of the firm. For example, ELM 7.3.3 R or ELM 7.3.4 R (and the corresponding provisions of ELM 7.6) could be extended beyond the UK consolidated group or EEA consolidated group.

ELM 7.8.8 G

The definitions of EEAfinancial parent undertaking and UKfinancial parent undertaking require that the parent undertaking concerned should be the highest relevant parent undertaking in the firm's group. In some cases there may be more than one person who could be such a parent undertaking but for that provision but it is not possible to say that one of them is the highest. The result may be that the firm does not have an EEA financial parent undertaking or UK financial parent undertaking. In such a case, the FSA will generally seek to add a requirement to the firm's permission that will apply the relevant provisions in ELM 7 in a suitably adapted form.

ELM 7.8.9 G

1If a firm is linked to other financial services undertakings by a consolidation Article 12(1) relationship, the FSA will determine how to apply the provisions of this chapter.

ELM 7.8.10 G

1If a firm is part of a financial conglomerate, the provisions of GENPRU 3.12 apply. If a firm is part of a third-country group, the provisions of GENPRU 3.22 apply.

2 2