MIFIDPRU 2.4 Investment firm groups: general

1. (1)

   1The definition of an investment firm group covers a parent undertaking that is incorporated in the UK or has its principal place of business in the UK, and its subsidiaries, at least one of which must be a MIFIDPRU investment firm.

2. (2)

   The definition of an investment firm group also includes connected undertakings. These are relevant financial undertakings that are not subsidiaries, but which form part of the investment firm group by one of the relationships listed in MIFIDPRU 2.4.6R.

3. (3)

   If the subsidiaries of the group include a UK credit institution, the group is not an investment firm group. However, if a UK credit institution is only a connected undertaking in relation to an investment firm group, the group is still an investment firm group. If the investment firm group includes a subsidiary or a connected undertaking that is credit institution established in a third country, the group is still an investment firm group.

1. (1)

   1When a UK parent entity or a MIFIDPRU investment firm is identifying whether it forms part of an investment firm group, it must identify all relevant financial undertakings that are either subsidiaries or connected undertakings.

2. (2)

   The UK parent entity or MIFIDPRU investment firm can use the analysis in (1) to determine whether the investment firm group:

   1. (a)

      is likely to be subject to consolidation under MIFIDPRU 2.5; or

   2. (b)

      has a sufficiently simple structure to justify submitting an application to the FCA to apply the group capital test under MIFIDPRU 2.6.

1. (1)

   1Where consolidation under MIFIDPRU 2.5 applies, the definition of an investment firm group and the resulting consolidated situation includes all relevant financial undertakings that are either subsidiaries or connected undertakings.

2. (2)

   Where MIFIDPRU 2.6 applies, the definition of an investment firm group means that the group capital test only applies to a parent undertaking in relation to relevant financial undertakings that are its subsidiaries or that are connected undertakings in which it holds a participation in accordance with MIFIDPRU 2.4.15R. The group capital test does not apply in relation to a relevant financial undertaking that is a connected undertaking of the parent undertaking otherwise than due to a participation.

3. (3)

   However, as explained in MIFIDPRU 2.4.19G, where an investment firm group contains material connected undertakings (other than those connected by a participation), the FCA considers that the underlying structure of the investment firm group is unlikely to be sufficiently simple to permit the application of the group capital test. In that case, it is likely that the UK parent entity of the investment firm group will be subject to consolidation under MIFIDPRU 2.5.

1. (1)

   1The definition of a subsidiary for the purposes of MIFIDPRU refers to any undertaking which is a “subsidiary undertaking” as defined in section 1162, read together with Schedule 7, of the Companies Act 2006.

2. (2)

   Under section 1162(4) of the Companies Act 2006, this includes relationships where either of the following apply in relation to an undertaking (“A”) and another undertaking (“B”):

   1. (a)

      A has the power to exercise, or actually exercises, dominant influence or control over B; or

   2. (b)

      A and B are managed on a unified basis.

3. (3)

   Under section 1162(5) of the Companies Act 2006, if an undertaking (“A”) has a subsidiary undertaking (“B”) and B is a parent undertaking of another undertaking (“C”), then C is also a subsidiary undertaking of A. As a result, the definition of a subsidiary in MIFIDPRU includes subsidiaries of subsidiaries.

1The criteria in MIFIDPRU 2.4.8R(2)-(5) and MIFIDPRU 2.4.12R(2)-(5) for determining the deemed parent undertaking in relation to a connected undertaking apply to the facts at the time when the relevant relationship is created. This means that a subsequent change in the own funds requirement of an entity or investment firm group does not change the deemed parent undertaking.

1A MIFIDPRU investment firm may apply to the FCA under section 138A of the Act to modify the application of MIFIDPRU 2.4.8R(2)-(5), if it considers that a different undertaking should be deemed to be the parent undertaking on the basis of majority common management for the purposes of MIFIDPRU 2.5.

1. (1)

   1To assess whether A exercises significant influence over a relevant financial undertaking, the FCA considers that the equivalent accounting position, as it would be assessed under the guidance in International Accounting Standard 28 (as amended in 2011) under IFRS or Financial Reporting Standard 102 (March 2018) under UK GAAP, will be relevant. In particular, a firm should consider whether A has the power to participate in the financial and operating policy decisions of the relevant financial undertaking, even though A does not have control or joint control of those policies. The indicators in (2) may be evidence of significant influence but are not conclusive. A firm should consider all relevant facts and circumstances.

2. (2)

   When applying MIFIDPRU 2.4.10R(1)(a), the following circumstances may be indicators that A exercises significant influence over the relevant financial undertaking:

   1. (a)

      A appoints or has the ability to appoint a representative in the management body of the relevant financial undertaking, either in the executive or in the supervisory function;

   2. (b)

      A participates in the policy-making processes of the relevant financial undertaking, including participation in decisions about dividends and other distributions;

   3. (c)

      the existence of material transactions between the two undertakings;

   4. (d)

      the interchange of managerial personnel between the two undertakings;

   5. (e)

      the provision of essential technical information or critical services from one entity to the other;

   6. (f)

      A enjoys additional rights in the relevant financial undertaking, under a contract or a provision in the articles of association or other constitutional documents of the relevant financial undertaking, that could affect the management or the decision-making of the relevant financial undertaking; and

   7. (g)

      the existence of share warrants, share call options, debt instruments that are convertible into ordinary shares or other similar instruments that are currently exercisable or convertible and have the potential, if exercised or converted, to give voting power or to reduce another party’s voting power over the financial and operating policies of the relevant financial undertaking.

1When applying MIFIDPRU 2.4.12R, the following circumstances are indicators that the type of single management in MIFIDPRU 2.4.12R(1)(a) may exist:

1. (1)

   A and the relevant financial undertaking are controlled by:

   1. (a)

      the same natural person;

   2. (b)

      the same group of natural persons;

   3. (c)

      an undertaking or the same group of undertakings that do not otherwise belong to that group;

   4. (d)

      an undertaking or the same group of undertakings that are not established in the UK; or

2. (2)

   the majority of the management body, either in its executive or in its supervisory function, of A and the relevant financial undertaking is composed of people appointed by the same undertaking or undertakings, by the same natural person or by the same group of natural persons, even if they do not necessarily consist of the same people.

1The indicators in MIFIDPRU 2.4.13G are not conclusive. Whether two or more undertakings are placed under single management for the purposes of MIFIDPRU 2.4.12R depends on whether in practice there is effective coordination of the financial and operating policies of the relevant undertakings. A firm should consider all relevant facts and circumstances.

1. (1)

   1An undertaking (“A”) holds a participation in a relevant financial undertaking where A has direct or indirect ownership of 20% or more of the voting rights in, or capital of, a relevant financial undertaking.

2. (2)

   However, A may also hold a participation where, even though A does not have an ownership interest as described in (1), A nonetheless has rights in the capital of the relevant financial undertaking which create a durable link with that undertaking which is intended to contribute to its activities.

3. (3)

   For the purpose of assessing whether there is a participation of the type described in (2), it is relevant to consider the overall ownership structure of the relevant financial undertaking, having regard in particular to whether interests in the capital or voting rights of the relevant financial undertaking are distributed across a large number of shareholders, or whether A is the main investor.

1In the FCA’s view, where an investment firm group includes one or more undertakings that are connected undertakings (other than connected undertakings due to a participation in accordance with MIFIDPRU 2.4.15R), that are material (either individually or in aggregate), it is unlikely that the investment firm group will be sufficiently simple to be able to apply the group capital test. This is because the relationship between the relevant member of the investment firm group and the connected undertaking is likely to be more complex and because the group capital test can only apply to holdings in instruments issued by, or claims on, an entity. Therefore, prudential consolidation under MIFIDPRU 2.5 is likely to be more appropriate in such circumstances.