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MIFIDPRU 2.4 Investment firm groups: general

Application and purpose

MIFIDPRU 2.4.1 R

1This section applies to:

  1. (1)

    a UK parent entity; and

  2. (2)

    a MIFIDPRU investment firm.

MIFIDPRU 2.4.2 G
  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.

MIFIDPRU 2.4.3 G
  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.

MIFIDPRU 2.4.4 G
  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.

Subsidiaries

MIFIDPRU 2.4.5 G
  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.

Connected undertakings: general

MIFIDPRU 2.4.6 R

1An undertaking (“CU”) is a connected undertaking of another undertaking (“P1”) if:

  1. (1)

    P1 is connected to CU by majority common management in accordance with MIFIDPRU 2.4.8R(1);

  2. (2)

    P1 exercises significant influence over CU in accordance with MIFIDPRU 2.4.10R(1);

  3. (3)

    P1 and CU have been placed under single management, other than under a contract, clauses in memoranda or articles of association, in accordance with MIFIDPRU 2.4.12R(1);

  4. (4)

    CU is a subsidiary of another undertaking (“P2”), and P2:

    1. (a)

      is connected to P1 by majority common management in accordance with MIFIDPRU 2.4.8R(1); or

    2. (b)

      has been placed under single management with P1, other than under a contract, clauses in memoranda or articles of association, in accordance with MIFIDPRU 2.4.12R(1); or

  5. (5)

    P1 holds a participation in CU in accordance with MIFIDPRU 2.4.15R.

MIFIDPRU 2.4.7 G

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.

Connected undertakings: majority common management

MIFIDPRU 2.4.8 R
  1. (1)

    1This rule applies where:

    1. (a)

      a MIFIDPRU investment firm is connected to a relevant financial undertaking by majority common management; or

    2. (b)

      a relevant financial undertaking that forms part of an investment firm group is connected to another relevant financial undertaking by majority common management.

  2. (2)

    If only one of the undertakings connected by majority common management forms part of an existing investment firm group, that undertaking is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

  3. (3)

    If both undertakings connected by majority common management form part of separate existing investment firm groups, the undertaking that forms part of the investment firm group which has, or would have, the higher consolidated own funds requirement based on its consolidated situation, is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

  4. (4)

    If neither of the undertakings connected by majority common management forms part of an existing investment firm group and both undertakings are MIFIDPRU investment firms, the MIFIDPRU investment firm with the higher individual own funds requirement is deemed to be the parent undertaking of the other MIFIDPRU investment firm when applying the requirements in MIFIDPRU 2.5.

  5. (5)

    If neither of the undertakings connected by majority common management forms part of an existing investment firm group and only one of the undertakings is a MIFIDPRU investment firm, the MIFIDPRU investment firm is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

MIFIDPRU 2.4.9 G

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.

Connected undertakings: significant influence without participation or capital ties

MIFIDPRU 2.4.10 R
  1. (1)

    1This rule applies where:

    1. (a)

      any of the following undertakings (“A”) exercises significant influence over a relevant financial undertaking:

      1. (i)

        a MIFIDPRU investment firm;

      2. (ii)

        an investment holding company; or

      3. (iii)

        a mixed financial holding company; and

    2. (b)

      the relevant financial undertaking is not:

      1. (i)

        a subsidiary of A; or

      2. (ii)

        connected to A by majority common management.

  2. (2)

    Where this rule applies, A is deemed to be the parent undertaking of the relevant financial undertaking when applying MIFIDPRU 2.5.

MIFIDPRU 2.4.11 G
  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.

Connected undertakings: single management other than pursuant to a contract, clauses in memoranda or articles of association

MIFIDPRU 2.4.12 R
  1. (1)

    1This rule applies where:

    1. (a)

      any of the following undertakings (“A”) has been placed under single management, other than pursuant to a contract, clauses in memoranda or articles of association, with a relevant financial undertaking:

      1. (i)

        a MIFIDPRU investment firm;

      2. (ii)

        an investment holding company; or

      3. (iii)

        a mixed financial holding company; and

    2. (b)

      the relevant financial undertaking is not:

      1. (i)

        a subsidiary of A;

      2. (ii)

        connected to A by majority common management; or

      3. (iii)

        an undertaking over which A exercises significant influence in accordance with MIFIDPRU 2.4.10R.

  2. (2)

    If only one of the undertakings placed under single management already forms part of an existing investment firm group, that undertaking is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

  3. (3)

    If both undertakings placed under single management form part of separate existing investment firm groups, the undertaking that forms part of the investment firm group which has, or would have, the higher consolidated own funds requirement based on its consolidated situation is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

  4. (4)

    If neither of the undertakings placed under single management forms part of an existing investment firm group and both of those undertakings are MIFIDPRU investment firms, the MIFIDPRU investment firm with the higher individual own funds requirement is deemed to be the parent undertaking of the other MIFIDPRU investment firm when applying the requirements in MIFIDPRU 2.5.

  5. (5)

    If neither of the undertakings placed under single management forms part of an existing investment firm group and only one of those undertakings is a MIFIDPRU investment firm, the MIFIDPRU investment firm is deemed to be the parent undertaking of the other undertaking when applying the requirements in MIFIDPRU 2.5.

MIFIDPRU 2.4.13 G

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.

MIFIDPRU 2.4.14 G

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.

Connected undertakings: participations

MIFIDPRU 2.4.15 R
  1. (1)

    1This rule applies where the following conditions are met:

    1. (a)

      one of the following (“A”) holds, directly or indirectly, a participation in a relevant financial undertaking:

      1. (i)

        a MIFIDPRU investment firm;

      2. (ii)

        an investment holding company; or

      3. (iii)

        a mixed financial holding company;

    2. (b)

      the relevant financial undertaking is not:

      1. (i)

        a subsidiary of A; or

      2. (ii)

        connected to A by majority common management; or

      3. (iii)

        an undertaking over which A exercises significant influence in accordance with MIFIDPRU 2.4.10R; or

      4. (iv)

        an undertaking with which A has been placed under single management in accordance with MIFIDPRU 2.4.12R; and

    3. (c)

      A forms part of an existing investment firm group.

  2. (2)

    Where this rule applies, A is deemed to be the parent undertaking of the relevant financial undertaking when applying the requirements in MIFIDPRU 2.5 or the group capital test in MIFIDPRU 2.6.

MIFIDPRU 2.4.16 G
  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.

Application to apply the group capital test to an investment firm group

MIFIDPRU 2.4.17 R

1 MIFIDPRU 2.6 applies, and MIFIDPRU 2.5 does not apply, to an investment firm group where:

  1. (1)

    the UK parent entity of that investment firm group or a MIFIDPRU investment firm within that investment firm group has applied to the FCA in accordance with MIFIDPRU 2.4.18R; and

  2. (2)

    the application in (1) demonstrates to the satisfaction of the FCA that:

    1. (a)

      the group structure of the investment firm group is sufficiently simple to justify applying the group capital test; and

    2. (b)

      there are no significant risks to clients or to the market stemming from the investment firm group as a whole that require supervision on a consolidated basis.

MIFIDPRU 2.4.18 R

1An application submitted under MIFIDPRU 2.4.17R(1):

  1. (1)

    must be made using the form in MIFIDPRU 2 Annex 2R, and should be submitted using the online notification and application system;

  2. (2)

    must include:

    1. (a)

      a group structure chart that:

      1. (i)

        identifies each undertaking that forms part of the investment firm group;

      2. (ii)

        explains the nature of the business or activities of each undertaking;

      3. (iii)

        identifies whether each undertaking is a relevant financial undertaking and, if so, which type of relevant financial undertaking it is; and

      4. (iv)

        explains the nature and degree of ownership or control that connects the undertaking to the investment firm group (including any relationship that has led the undertaking to be classified as a connected undertaking in relation to the investment firm group);

    2. (b)

      an explanation of why the group structure is sufficiently simple to justify the application of the group capital test;

    3. (c)

      an explanation of why there are no significant risks to clients or to the market stemming from the investment firm group that require supervision on a consolidated basis;

    4. (d)

      calculations which show how each parent undertaking within the investment firm group would satisfy the group capital test;

    5. (e)

      evidence that the book value of each parent undertaking’s investment in each of the following is a fair reflection of the consideration paid by the parent undertaking:

      1. (i)

        a subsidiary, whether that subsidiary forms part of the investment firm group or not; and

      2. (ii)

        an entity that is a connected undertaking due to a participation in accordance with MIFIDPRU 2.4.15R.

    6. (f)

      calculations that demonstrate the consolidated own funds and liquid assets requirements that would apply on the basis of the consolidated situation of the investment firm group if consolidation under MIFIDPRU 2.5 applied instead;

    7. (g)

      an explanation of:

      1. (i)

        how the investment firm group would comply with the consolidated requirements in (f) if the FCA did not grant permission to apply the group capital test; and

      2. (ii)

        the timeframe in which the investment firm group would expect to achieve compliance with such consolidated requirements; and

    8. (h)

      an explanation of how the UK parent entity of the investment firm group:

      1. (i)

        would comply with the systems requirement in MIFIDPRU 2.6.9R; or

      2. (ii)

        would comply with the systems requirement in MIFIDPRU 2.5.8R if the FCA did not grant permission to apply the group capital test.

  3. (3)

    must be submitted by a UK parent entity or a MIFIDPRU investment firm that has the necessary authority to make the application on behalf of all undertakings within the investment firm group that would be subject to the group capital test.

MIFIDPRU 2.4.19 G

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.

Notifications relating to membership of a consolidation group or financial conglomerate

MIFIDPRU 2.4.20 R
  1. (1)

    2A MIFIDPRU investment firm must notify the FCA immediately if the firm becomes aware that:

    1. (a)

      it has become a member of an investment firm group;

    2. (b)

      it has ceased to be a member of an investment firm group;

    3. (c)

      there has been a change in the composition of an investment firm group of which that firm forms a part;

    4. (d)

      it has become a member of a financial conglomerate; or

    5. (e)

      it has ceased to be a member of a financial conglomerate.

  2. (2)

    A firm must:

    1. (a)

      notify the FCA under (1) using the form in MIFIDPRU 2 Annex 8R and submit it using the online notification and application system; and

    2. (b)

      as part of the notification in (a):

      1. (i)

        identify any entity that is becoming a member of the investment firm group or financial conglomerate;

      2. (ii)

        identify any existing members of the investment firm group or financial conglomerate that continue to be members of that investment firm group or financial conglomerate;

      3. (iii)

        identify any entity that is ceasing to be a member of the investment firm group or financial conglomerate; and

      4. (iv)

        where applicable, confirm that the investment firm group or financial conglomerate has ceased to exist.

  3. (3)

    A firm (“X”) is not required to notify the FCA under (1) if:

    1. (a)

      another member of the relevant investment firm group or financial conglomerate (“Y”) has notified the FCA under (1); and

    2. (b)

      the notification submitted by Y includes information that accurately reflects X’s relationship to the investment firm group or financial conglomerate and any other information required under (2)(b).