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:

10

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.

11 GENPRU 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 sector10and 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.

4 GENPRU 3.1.29 R 4 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:

5 5

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 11GENPRU 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 2510 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

5 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.

8

GENPRU 3.2 implemented 6 requirements that corresponded 6in part to5 article 183 of the Financial Groups Directive, article 1273 of the CRD and (in relation to BIPRU firms) article 143 of the BCD3.

1 1

The first question that must be asked about a third-country group is whether the UK regulated entities5 in that third-country group are subject to supervision by a third-country competent authority, which is equivalent to that provided for in GENPRU 35 (in the case of a financial conglomerate) or the UK prudential sectoral legislation5 for the banking sector, the CRR investment services sector or the MIFIDPRU investment services sector6 (in the case of a banking and investment group).

1 2 3 3

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,1 the methods set out in MIFIDPRU or 6the UK provisions which implemented the5CRD and UK CRR45 will apply. Alternatively, 6the FCA5 may apply other methods that ensure appropriate supervision of the UK regulated entities5 in that third-country group in accordance with the aims of supplementary supervision in GENPRU 35 or consolidated supervision under the applicable UK prudential sectoral legislation5.

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, the FCA5 may, rather than take the measures described in GENPRU 3.2.4 G, apply, by analogy, the provisions concerning supplementary supervision in GENPRU 35 or, as applicable, consolidated supervision under the applicable UK prudential sectoral legislation, to the UK regulated entities5 in the banking sector, CRR investment services sector, MIFIDPRU investment services sector6 and (in the case of a financial conglomerate ) insurance sector.

The FCA3 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 4A permission of a firm6in that third-country group.

1

Classification of Groups (GENPRU 3.1.3 G) - This annex consists only of one or more forms. Forms are to be found through the following address. 5[Editor’s note: The form can be found at this address: https://fca.org.uk/publication/forms/genpru/GENPRU_03_ann_03.pdf ]

Purpose and scope

The form is designed to identify groups and sub-groups that are likely to be financial conglomerates under GENPRU 35. A group may be a financial conglomerate if it contains both insurance and banking/investment businesses and meets certain threshold tests. The FCA4 needs to identify conglomerates with their head offices in the UK5and those with their head offices outside the UK5, although this does not necessarily mean that the latter will be subject to UK5conglomerate supervision.

This form’s purpose is to enable the FCA4 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 PRA5. 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 detail5. We have, therefore, asked for some additional information in part 4 of the form.

A copy of this form4 can be found on the FCA's4 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 UK5. 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 2 Capital Requirements Directive 2013/36/EU2
  • insurance activities are listed in - 3 schedule 1 to, and contracts of insurance defined in article 3(1) of, the Regulated Activities Order3 2 .
  • 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 FCA 4 on the appropriateness of using other measures under regulation 19 of the Financial Conglomerates and Other Financial Groups Regulations 20045.
• 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 FCA 4 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 5 that would apply to the type of entity. However, you can use 5 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 FCA4 . 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 financial 5 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 another 5 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 another 5 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 4 under the appropriate sectoral rules; or5
  • using local requirements* for the appropriate sector (where permissible)5 .
• 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

5The aim is to identify any standard industry approaches to measuring market share 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%

4