GENPRU 3.1 Application

GENPRU 3.1 implemented requirements in11 the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:

1. (1)

   further material on third-country financial conglomerates can be found in GENPRU 3.2;

2. (2)

   SUP 15.9 contains notification rules for members of financial conglomerates;

3. (3)

   material on reporting obligations can be found in SUP 16.12.32 R and SUP 16.12.33 R2; and

   2
4. (4)

   material on systems and controls in financial conglomerates can be found in SYSC 12.

11GENPRU 3.1 has been amended to reflect the introduction of a new prudential regime for MiFID investment firms (MIFIDPRU). This new regime streamlines and simplifies the prudential requirements for MIFIDPRU investment firms. It refocuses prudential requirements and expectations away from the risks a firm faces to also consider, and look to mitigate, the potential for harm these firms can pose to consumers and markets. If a financial conglomerate for which the FCA is the coordinator considers the amendments to GENPRU 3.1 do not appropriately reflect the risks and potential harms to which its activities give rise, it should contact the FCA to discuss how the rules could be modified to do so.

1. (1)

   In general the process in (2) to (8) applies for identifying financial conglomerates.

2. (2)

   The relevant competent authority that has10 authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authority10.

3. (3)

   A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.

4. (4)

   A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.

5. (5)

   If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.

6. (6)

   The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).

7. (7)

   The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.

8. (8)

   A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in GENPRU 3.1.

9. (9)

   GENPRU 3 Annex 3 is a questionnaire (together with its explanatory notes) that the FCA8 asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.

10. (10)

    If a mixed financial holding company is subject to equivalent provisions under the UK prudential sectoral legislation10 in relation to the banking and investment services sector8 and under GENPRU 3 (Cross sector groups) and the FCA8 is the coordinator, the FCA8 may, on application by a firm and after consulting the other competent authority10 responsible for the supervision of subsidiaries, disapply such provisions of the UK prudential sectoral legislation10 in relation to the banking and investment services sector8 with regard to the mixed financial holding company and apply only the relevant provisions of GENPRU 3 to the mixed financial holding company.5

6If a mixed financial holding company is subject to equivalent provisions under this Chapter and under UK prudential sectoral legislation10 in relation to the insurance sector 10and the FCA is the coordinator, the FCA may, on application by the firm10, disapply such provisions of the UK prudential sectoral legislation10 with regard to that undertaking which are considered by the FCA as equivalent to those applying to the firm under GENPRU 3.1.

[Note: article 120(2) of CRD]

A lead supervisor (called the coordinator) is appointed for each financial conglomerate. The definition of coordinator in the Financial Groups Directive Regulations10 describes the criteria for deciding which competent authority is appointed as coordinator. 10

Regulation 16 to 20, 21 and 24 of the financial groups directive regulations10 allow competent authorities, on a case by case basis, to:

1. (1)

   change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate (which would include, where the appropriate regulator would be the coordinator under GENPRU 3.1.3G (6), permitting firms to apply, on an annual basis and subject to publication and notification to the competent authority10, for a group of which it is a member not to be regarded as a financial conglomerate on the basis of regulation 16 of the financial groups directive regulations (10for a group that, in terms of the tests in GENPRU 3 Annex 4, does not meet Threshold Test 2 but meets Threshold Test 3) or regulation 17 of the financial groups directive regulations10 (for a group that, in terms of the tests in GENPRU 3 Annex 4, meets Threshold Test 2 but not Threshold Test 3)5;

2. (2)

   apply the scheme in the financial groups directive regulations to UK regulated entities10 in specified kinds of group structures that do not come within the definition of financial conglomerate; and

3. (3)

   exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.

The capital adequacy provisions of GENPRU 3.1 are designed to be applied to financial conglomerates.

GENPRU 3.1.25 R is a high level capital adequacy rule. It applies whether or not the FCA8 is the coordinator of the financial conglomerate concerned.

4GENPRU 3.1.29 R4 to GENPRU 3.1.31 R and GENPRU 3 Annex 1 apply10 the detailed capital adequacy requirements that correspond with10 the Financial Groups Directive. They only deal with a financial conglomerate for which the FCA8 is the coordinator. If another competent authority is coordinator of a financial conglomerate, those rules do not apply with respect to that financial conglomerate and instead that coordinator will be responsible for implementing those detailed requirements.

Annex I of the Financial Groups Directive laid10 down three5 methods for calculating capital adequacy at the level of a financial conglomerate. Those three5 methods are as follows:

1. (1)

   Method 1 calculates capital adequacy using accounting consolidation. It is set out in 11GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 1 of GENPRU 3 Annex 1.

2. (2)

   Method 2 calculates capital adequacy using a deduction and aggregation approach. It is set out in 11 GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 2 of GENPRU 3 Annex 1.

3. (3)

   [deleted]5

   5
4. (4)

   Method 35 consists of a combination of Methods 1 and 25 10 and would be implemented by means of a requirement.5

   555

Paragraph 5.7 of GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) deals with a case in which there are no capital ties between entities in a financial conglomerate. In particular, the FCA8 , after consultation with the other competent authority10 and in accordance with this chapter10, will determine which proportional share of a solvency deficit in such an entity will have to be taken into account, bearing in mind the liability to which the existing relationship gives rise.

The5 method to be applied may be5 decided by the coordinator after consultation with the other competent authority10 and the financial conglomerate itself. Where the FCA8 acts as coordinator, the financial conglomerate itself may choose which of Method 1 or Method 2 10it will apply, unless the firm is subject to a requirement obliging the firm to apply a particular method.5

GENPRU 3.1.35 R implements requirements that correspond to10 Article 7(4) and Article 8(4) of the Financial Groups Directive10 that where a financial conglomerate is headed by a mixed financial holding company, the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate, if any, shall apply to that sector as a whole, including the mixed financial holding company.

The FCA10 may, on a case by case basis, require the application10 at the level of the financial conglomerate of10 the provisions of the sectoral rules on risk concentrations and intra-group transactions.