GENPRU 3.1 implements 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.

1. (1)

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

2. (2)

   Competent authorities that have 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 authorities concerned.

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 FSA asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.

A lead supervisor (called the coordinator) is appointed for each financial conglomerate. Article 10 of the Financial Groups Directive describes the criteria for deciding which competent authority is appointed as coordinator. Article 11 of the Financial Groups Directive sets out the tasks of the coordinator.

Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive 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;

2. (2)

   apply the scheme in the Financial Groups Directive to EEA regulated entities 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 EEA-based financial conglomerates.

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

GENPRU 3.1.26 R to GENPRU 3.1.31 R and GENPRU 3 Annex 1 implement the detailed capital adequacy requirements of the Financial Groups Directive. They only deal with a financial conglomerate for which the FSA 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 lays down four methods for calculating capital adequacy at the level of a financial conglomerate. Those four methods are implemented as follows:

1. (1)

   Method 1 calculates capital adequacy using accounting consolidation. It is implemented by GENPRU 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 implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 2 of GENPRU 3 Annex 1.

3. (3)

   Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 3 of GENPRU 3 Annex 1

4. (4)

   Method 4 consists of a combination of Methods 1, 2 and 3 from Annex I of the Financial Groups Directive, or a combination of two of those Methods. It is implemented by GENPRU 3.1.26 R to GENPRU 3.1.28 R, GENPRU 3.1.30 R and Part 4 of GENPRU 3 Annex 1.

Part 4 of GENPRU 3 Annex 1 (Use of Method 4 from Annex I of the Financial Groups Directive) applies the FSA'ssectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of GENPRU 3 Annex 1 applies the FSA'ssectoral rules for:

1. (1)

   the insurance sector, that involves a combination of Methods 2 and 3; and

2. (2)

   the banking sector and the investment services sector, that involves a combination of Methods 1 and 3.

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 FSA, after consultation with the other relevant competent authorities and in accordance with Annex I of the Financial Groups Directive, 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.

1. (1)

   In the following cases, the FSA (acting as coordinator) may choose which of the four methods for calculating capital adequacy laid down in Annex I of the Financial Groups Directive should apply:

   1. (a)

      where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or

   2. (b)

      the only relevant competent authority for the financial conglomerate is the FSA.

2. (2)

   GENPRU 3.1.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in GENPRU 3.1.28R (1)(e) and GENPRU 3.1.28R (1)(f). The process in GENPRU 3.1.22 G does not apply.

Where GENPRU 3.1.20 G does not apply, the Annex I method to be applied isdecided by the coordinator after consultation with the relevant competent authorities and the financial conglomerate itself.

The method of calculating capital adequacy chosen in respect of a financial conglomerate as described in GENPRU 3.1.21 G will be applied with respect to that financial conglomerate by varying the Part IV permission of a firm in that financial conglomerate to include a requirement. That requirement will have the effect of obliging the firm to ensure that the financial conglomerate has capital resources of the type and amount needed to comply with whichever of the methods in GENPRU 3 Annex 1 is to be applied with respect to that financial conglomerate. The powers in the Act relating to waivers and varying a firm'sPart IV permission can be used to implement one of the methods from Annex I of the Financial Groups Directive in a way that is different from that set out in GENPRU 3.1 and GENPRU 3 Annex 1 if that is necessary to reflect the consultations referred to in GENPRU 3.1.21 G.

If there is more than one firm in a financial conglomerate with a Part IV permission, the FSA would not normally expect to apply the requirement described in GENPRU 3.1.22 G to all of them. Normally it will only be necessary to apply it to one.

The FSA expects that in all or most cases falling into GENPRU 3.1.21 G, the rules in Part 4 of GENPRU 3 Annex 1 will be applied.

GENPRU 3.1.35 R implements Article 7(4) and Article 8(4) of the Financial Groups Directive, which provide 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.

Articles 7(3) (Risk concentration) and 8(3) (Intra-group transactions) and Annex II (Technical application of the provisions on intra-group transactions and risk concentration) of the Financial Groups Directive say that Member States may apply at the level of the financial conglomerate the provisions of the sectoral rules on risk concentrations and intra-group transactions. GENPRU 3.1 does not take up that option, although the FSA may impose such obligations on a case by case basis.

GENPRU 3.2 implements in part Article 18 of the Financial Groups Directive, Article 143 of the Banking Consolidation Directive.

The first question that must be asked about a third-country financial group is whether the EEA regulated entities in that third-country group are subject to supervision by a third-country competent authority, which is equivalent to that provided for by the Financial Groups Directive (in the case of a financial conglomerate) or the EEA prudential sectoral legislation for the banking sectoror the investment services sector (in the case of a banking and investment group). Article 18(1) of the Financial Groups Directive sets out the process for establishing equivalence with respect to third-country financial conglomerates and Article143 (1) and (2) of the Banking Consolidation Directive does so with respect to third-country banking and investment groups.

If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, competent authorities may apply other methods that ensure appropriate supervision of the EEA regulated entities in that third-country group in accordance with the aims of supplementary supervision under the Financial Groups Directive or consolidated supervision under the applicable EEA prudential sectoral legislation.

If the supervision of a third-country group by a third-country competent authority does not meet the equivalence test referred to in GENPRU 3.2.3 G, a competent authority may, rather than take the measures described in GENPRU 3.2.4 G, apply, by analogy, the provisions concerning supplementary supervision under the Financial Groups Directive or, as applicable, consolidated supervision under the applicable EEA prudential sectoral legislation, to the EEA regulated entities in the banking sector, investment services sectorand (in the case of a financial conglomerate ) insurance sector.

The FSA believes that it will only be right to adopt the option in GENPRU 3.2.5 G in response to very unusual group structures.

GENPRU 3.2.8 R and GENPRU 3.2.9 R and GENPRU 3 Annex 2 set out rules to deal with the situation covered in GENPRU 3.2.5 G. Those rules do not apply automatically. Instead, they can only be applied with respect to a particular third-country group through the Part IV permission of a in that third-country group. Broadly speaking the procedure described in GENPRU 3.1.22 G also applies to this process.firm

This annex consists only of one or more forms. Forms are to be found through the following address. genpru_ch3_annex3G.pdf

Purpose and scope

The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under

the Financial Groups Directive. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The FSA needs to identify conglomerates with their head offices in the EEA and those with their head offices outside the EEA, although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.

This form’s purpose is to enable the FSA to obtain sufficient information so as to be able to determine how likely a group/sub-group is to be a financial conglomerate. In certain cases this can only be determined after consultation with the other EU relevant competent authorities. A second purpose of the form is therefore to identify any groups and sub-groups that may need such consultation so that this can be made as soon as possible. This should allow firms time to prepare to comply.

The third purpose of the form is to gain information from firms on the most efficient way to implement the threshold calculations in

detail (consistently with the directive). We have, therefore, asked for some additional information in part 4 of the form.

A copy of this form will can be found on the FSA's Financial Groups Website with current contact details.

Please include workings showing the method employed to determine the percentages in part 2 (for the threshold conditions) and giving details of all important assumptions / approximations made in doing the calculations.

The definition of financial conglomerate includes not only conventional groups made up of parent-subsidiary relationships but groups linked by control and "consolidation Article 12(1) relationships". If this is the case for your group, please submit along with this form a statement that this is the case. Please include in that statement an explanation of how you have included group members not linked by capital ties in the questionnaire calculations.

A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:

• are managed on a unified basis; or
• have common management.

General guidance

We would like this to be completed based on the most senior parent in the group, and, if applicable, for the company heading the most senior conglomerate group in the

EEA. If appropriate, please also attach a list of all other likely conglomerate sub-groups.

Please use the most recent accounts for the top level company in the group together with the corresponding accounts for all subsidiaries and participations that are included in the consolidated accounts. Please indicate the names of any significant subsidiaries with a different year-end from the group’s year-end.

Please note the following:

• (a) Branches should be included as part of the parent entity.
• (b) Include in the calculations overseas entities owned by the relevant group or sub-group.
• (c) There are only two sectors for this purpose: banking/investment and insurance.
• (d) You will need to assign non-regulated financial entities to one of these sectors:
  • banking/investment activities are listed in – Annex 1 to the Banking Consolidation Directive
  • insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2 p 163-168 .
  • Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector and should be treated for these purposes as being outside the financial sector. They should therefore be ignored for the purposes of these calculations.

Threshold tests

For the purpose of completing section 2 of the form relating to the threshold tests, the following guidance should be used. However, if you consider that for your group there is a more appropriate calculation then you may use this calculation so long as the method of computation is submitted with the form.

Calculating balance sheet totals

Generally, use total (gross) assets for the balance sheet total of a group/entity. However, investments in other entities that are part of the group will need to be deducted from the sector that has made the investment and the balance sheet total of the entity is added to the sector in which it operates.

Our expectation of how this may be achieved efficiently is as follows:

• Off-balance-sheet items should be excluded.
• Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the FSA on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.
• If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).
• Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
• Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
• Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.
• The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).
• The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.
• If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.

Solvency (capital adequacy) requirements

Generally, the solvency requirements should be according to sectoral rules of the FSA that would apply to the type of entity. However, you can use EEA rules or local rules in the circumstances set out in Part 6 of GENPRU 3 Annex 1. But if this choice makes a significant difference, either with respect to whether the group is a financial conglomerate or with respect to which sector is the biggest, you should consult with the FSA. Non-regulated financial entities should have proxy requirements calculated on the basis of the most appropriate sector. If sub-groups submit single sector consolidated returns then the solvency requirement may be taken from those returns.

Our expectation of how this may be achieved efficiently is as follows:

• If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.
• Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
• Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent’s solvency requirement in respect of the cross-sector subsidiary or participation, the parent’s solvency requirement may be adjusted to exclude this.
• Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
  • as if the entity were regulated by the FSA under the appropriate sectoral rules;
  • using EU minimum requirements for the appropriate sector; or
  • using non-EU local requirements* for the appropriate sector .
• Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.
• For banking/investment requirements, use the total amount of capital required.
• For insurance requirements, use the total amount of capital required.

Market share measures

These are not defined by the directive. The aim is to identify any standard industry approaches to measuring market share in individual EU countries by sector, or any data sources which are commonly used as a proxy.

Article I.

Article II. Threshold tests

Test F2

B/S of banking/investment + insurance sector = result %

B/S total

Test F3/F4/F5

B/S of insurance sector

B/S of banking/investment sector + insurance sector = A%

B/S of banking/investment sector

B/S of banking/investment sector + insurance sector = B%

Solvency requirement of insurance sector

Solvency requirement of banking/investment sector +insurance sector = C%

Solvency requirement of banking/investment sector

Solvency requirement of banking/investment sector +insurance sector = D%

The relevant percentage for the insurance sector is:

(A% + C%)/2 = I %

The relevant percentage for the banking/investment sector is:

(B% + D%)/2 = BI %

The smallest sector is the sector with the smallest relevant percentage.

Article III. If I% < BI% then F3 is insurance, F4 = A%, and F5 = C%

Article IV. If BI% < I% then F3 is banking/investment, F4 = B% and F5 = D%