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MIFIDPRU 2.1 Application and purpose

Application

Purpose

MIFIDPRU 2.1.2 G

1This chapter contains:

  1. (1)

    a rule in MIFIDPRU 2.2.1R applying requirements in this sourcebook to MIFIDPRU investment firms on an individual basis;

  2. (2)

    rules in MIFIDPRU 2.3 outlining the circumstances in which a MIFIDPRU investment firm may apply to the FCA for an exemption from specific requirements in this sourcebook that apply on an individual basis;

  3. (3)

    rules and guidance in MIFIDPRU 2.4 which cover:

    1. (a)

      the definition of an investment firm group;

    2. (b)

      the undertakings that are included within an investment firm group; and

    3. (c)

      when and how an investment firm group may apply to the FCA for permission to use the group capital test as an alternative to the prudential consolidation requirements in MIFIDPRU 2.5;

  4. (4)

    rules and guidance in MIFIDPRU 2.5 which cover the following:

    1. (a)

      when requirements in this sourcebook apply on a consolidated basis;

    2. (b)

      the circumstances in which the FCA may permit an investment firm group to disapply certain prudential consolidation requirements; and

    3. (c)

      how an investment firm group must apply obligations in this sourcebook on a consolidated basis;

  5. (5)

    rules and guidance in MIFIDPRU 2.6 in relation to the group capital test; and

  6. (6)

    rules and guidance in MIFIDPRU 2.7 which cover:

    1. (a)

      additional requirements and FCA supervisory powers that are relevant to a UK parent entity; and

    2. (b)

      additional requirements that are relevant to a MIFIDPRU investment firm which is a subsidiary of a UK mixed-activity holding company.

MIFIDPRU 2.3 Exemptions

MIFIDPRU 2.3.1 R

1A MIFIDPRU investment firm will be exempt from MIFIDPRU 8 (Disclosure) on an individual basis if:

  1. (1)

    the firm has applied to the FCA in accordance with MIFIDPRU 2.3.3R;

  2. (2)

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

    1. (a)

      the firm is a SNI MIFIDPRU investment firm;

    2. (b)

      the firm is a subsidiary and is included in the supervision on a consolidated basis of an insurance undertaking or reinsurance undertaking in accordance with Rule 10.5 of the PRA Rulebook: Solvency II firms: Group Supervision;

    3. (c)

      the firm and its parent undertaking are subject to authorisation and supervision in the UK;

    4. (d)

      own funds are distributed adequately between the firm and its parent undertaking and:

      1. (i)

        there is no current or foreseen material practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the parent undertaking;

      2. (ii)

        either the parent undertaking will guarantee the commitments entered into by the firm, or the risks in the firm are of negligible interest;

      3. (iii)

        the risk evaluation, measurement and control procedures of the parent undertaking include the firm; and

      4. (iv)

        the parent undertaking holds more than 50% of the voting rights attached to shares in the capital of the firm or has the right to appoint or remove a majority of the members of the firm’s management body.

  3. (3)

    the PRA does not object to the exemption.

MIFIDPRU 2.3.2 R

1A MIFIDPRU investment firm will be exempt from MIFIDPRU 6 (Liquidity) on an individual basis where:

  1. (1)

    the firm has applied to the FCA in accordance with MIFIDPRU 2.3.3R;

  2. (2)

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

    1. (a)

      the firm:

      1. (i)

        is supervised on a consolidated basis in accordance with Chapter 2 of Title II of Part One of the UK CRR; or

      2. (ii)

        is included in an investment firm group that is subject to MIFIDPRU 2.5.11R and has not obtained the exemption referred to in MIFIDPRU 2.5.19R;

    2. (b)

      the parent undertaking, on a consolidated basis, monitors and has oversight at all times over the liquidity positions of all institutions and MIFIDPRU investment firms within the group or sub‐group that are exempted from liquidity requirements on an individual basis, and ensures a sufficient level of liquidity for all of those institutions and MIFIDPRU investment firms;

    3. (c)

      the parent undertaking and the firm have entered into contracts that, to the satisfaction of the appropriate regulator, provide for the free movement of funds between the parent undertaking and the firm to enable them to meet their individual obligations and joint obligations as they become due;

    4. (d)

      there is no current or foreseen material, practical or legal impediment to the fulfilment of the contracts in (c); and

  3. (3)

    the PRA does not object to the exemption if it is the consolidating supervisor of the group.

MIFIDPRU 2.3.3 R

1An application referred to in MIFIDPRU 2.3.1R(1) or MIFIDPRU 2.3.2R(1) must:

  1. (1)

    be made using the form in MIFIDPRU 2 Annex 1R; and

  2. (2)

    be submitted using the online notification and application system.

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).

MIFIDPRU 2.5 Prudential consolidation

MIFIDPRU 2.5.1 R
  1. (1)

    1This section applies to a UK parent entity that is not subject to the group capital test under MIFIDPRU 2.6.

  2. (2)

    This section also applies to a MIFIDPRU investment firm that forms part of the same investment firm group as the relevant UK parent entity in (1).

MIFIDPRU 2.5.2 G

1Prudential consolidation under this section and the group capital test under MIFIDPRU 2.6 are mutually exclusive requirements that may apply to an investment firm group. If an investment firm group is not permitted to use the group capital test under MIFIDPRU 2.6, the consolidation requirements in this section will apply to that investment firm group, except to the extent that an exemption applies.

MIFIDPRU 2.5.3 G

1The table below is a guide to the content of this section.

Provisions of MIFIDPRU 2.5

Summary of content

MIFIDPRU 2.5.4G

The interaction between prudential consolidation under MIFIDPRU 2.5 and prudential consolidation under the and prudential consolidation under the UK CRR

MIFIDPRU 2.5.5G

The meaning of the consolidated situation

MIFIDPRU 2.5.6G

The treatment of tied agents included within the consolidated situation

MIFIDPRU 2.5.7R to MIFIDPRU 2.5.12G

The main requirements in relation to prudential consolidation under MIFIDPRU 2.5

MIFIDPRU 2.5.13R to MIFIDPRU 2.5.16G

The default position requiring full consolidation and the availability of alternative methods of consolidation

MIFIDPRU 2.5.17R and MIFIDPRU 2.5.18G

Proportional consolidation

MIFIDPRU 2.5.19R and MIFIDPRU 2.5.20R

Exemption from consolidated liquidity requirements

MIFIDPRU 2.5.21R and MIFIDPRU 2.5.22G

Determining whether a UK parent entity should be treated as an SNI MIFIDPRU investment firm on a consolidated basis

MIFIDPRU 2.5.23G

Determining consolidated own funds

MIFIDPRU 2.5.24G to MIFIDPRU 2.5.46R

Determining the consolidated own funds requirement

MIFIDPRU 2.5.47R and MIFIDPRU 2.5.48G

Consolidated liquidity requirements

[deleted]2

[deleted]2

MIFIDPRU 2.5.50G

Consolidated reporting requirements

MIFIDPRU 2.5.51

Consolidated governance requirements

MIFIDPRU 2.5.52

Application of the ICARA process on a group basis

Interaction between consolidation under MIFIDPRU and the UK CRR

MIFIDPRU 2.5.4 G
  1. (1)

    1Under this section, prudential consolidation applies where there is an investment firm group. The definition of an investment firm group excludes a group which contains a UK credit institution (except where the credit institution is a connected undertaking). Where a group includes a UK credit institution, prudential consolidation applies in accordance with the UK CRR and the PRA Rulebook.

  2. (2)

    However, a group may be an investment firm group where it contains both a MIFIDPRU investment firm and a designated investment firm subject to the UK CRR, but no UK credit institution. In this case, the MIFIDPRU investment firm would trigger prudential consolidation under this section and the designated investment firm would trigger consolidation under the UK CRR. Therefore, certain group structures may be subject to consolidation under both MIFIDPRU and the UK CRR, with the same entities included within the scope of consolidation of each. In this situation, the relevant group must comply with both sets of consolidated requirements, which are aimed at addressing different types of risks.

Meaning of “consolidated situation”

MIFIDPRU 2.5.5 G
  1. (1)

    1The application of prudential consolidation under this section is based on the consolidated situation of a UK parent entity.

  2. (2)

    A consolidated situation is defined as the situation that results from applying requirements in MIFIDPRU under MIFIDPRU 2.5.7R and MIFIDPRU 2.5.11R to a UK parent entity, as if it and the relevant financial undertakings in its investment firm group, form a single MIFIDPRU investment firm.

  3. (3)

    For the purposes of the consolidated situation, the term “relevant financial undertaking” and the underlying definitions of “investment firm”, “financial institution”, “ancillary services undertaking” and “tied agent” include undertakings established outside the UK that would satisfy those definitions if they were established in the UK.

Tied agents included within the consolidated situation

MIFIDPRU 2.5.6 G
  1. (1)

    1If a tied agent is included within the consolidated situation, all relevant activities and expenditure of that tied agent will be consolidated in full (or, where proportional consolidation applies, the relevant proportion of the activities of that tied agent will be consolidated) for the purpose of calculating the consolidated fixed overheads requirement and the consolidated K-factor requirement. This applies whether the tied agent carries out investment services and/or activities or incurs relevant expenses on behalf of another entity within the consolidated situation or on behalf of a third party.

  2. (2)

    The guidance in (1) relates to a tied agent that is included within the consolidated situation. There are separate requirements in:

    1. (a)

      MIFIDPRU 4.5.6R, which applies in relation to the individual fixed overheads requirement of a MIFIDPRU investment firm where a tied agent incurs expenses on behalf of that firm; and

    2. (b)

      MIFIDPRU 4.7.2R, MIFIDPRU 4.8.3R, MIFIDPRU 4.9.2R or MIFIDPRU 4.10.2R, which apply in relation to the individual K-factor requirement of a MIFIDPRU investment firm where a tied agent carries on certain investment services and/or activities on behalf of that firm.

    These requirements apply in relation to the calculation of the individual fixed overheads requirement and K-factor requirement of a MIFIDPRU investment firm, even if the tied agent is not part of the same investment firm group as that MIFIDPRU investment firm. Where MIFIDPRU 4 applies on a consolidated basis, those requirements will also be relevant to any activities carried on by tied agents on behalf of a third country investment firm included within the consolidated situation.

  3. (3)

    Where the requirements in (2)(a) or (2)(b) apply in relation to a MIFIDPRU investment firm or a third country investment firm that is included within the consolidated situation, the relevant amounts that are added to the individual requirements of that MIFIDPRU investment firm or third country investment firm due to the activities of the tied agent must be included in the consolidated situation, irrespective of whether the tied agent is itself included within the consolidated situation.

  4. (4)

    An individual tied agent (“A”) may both:

    1. (a)

      be included within the consolidated situation; and

    2. (b)

      incur expenses or carry on investment services and/or activities on behalf of a MIFIDPRU investment firm or third country investment firm (“B”) where B is also included in the consolidated situation.

    In this case, the contribution of A to the consolidated fixed overheads requirement and consolidated K-factor requirement may be adjusted to prevent double-counting of any amounts due to B being included in the consolidated situation and a proportion of A’s activities or expenses having already been attributed to B.

Prudential consolidation – main requirements

MIFIDPRU 2.5.7 R

1A UK parent entity must comply with the following on the basis of its consolidated situation:

  1. (1)

    MIFIDPRU 3 (Own funds);

  2. (2)

    MIFIDPRU 4 (Own funds requirements);

  3. (3)

    MIFIDPRU 5 (Concentration risk);

  4. (4)

    [deleted]2

  5. (5)

    MIFIDPRU 9 (Reporting).

MIFIDPRU 2.5.8 R

1To ensure that the data required to comply with the consolidated requirements under MIFIDPRU 2.5.7R are duly processed and forwarded, a UK parent entity to which MIFIDPRU 2.5.7R applies and any MIFIDPRU investment firm in the same investment firm group must establish the following:

  1. (1)

    a proper organisational structure; and

  2. (2)

    appropriate internal control mechanisms.

MIFIDPRU 2.5.9 R

1A UK parent entity to which MIFIDPRU 2.5.7R applies and any MIFIDPRU investment firm in the same investment firm group must each ensure that any of their subsidiaries that are not subject to MIFIDPRU implement the necessary arrangements, processes and mechanisms to ensure that the UK parent entity complies with the consolidated requirements under MIFIDPRU 2.5.7R.

MIFIDPRU 2.5.10 R
  1. (1)

    1When applying MIFIDPRU 3 on a consolidated basis, the requirements in Title II of Part Two of the UK CRR shall also apply with the modifications in this rule2.

  2. (2)

    A reference in Title II of Part Two of the UK CRR to an entity or person included within the “consolidation pursuant to Chapter 2 of Title II of Part One” is a reference to an entity or person included in the consolidated situation of the investment firm group under MIFIDPRU 2.5.

  3. (3)

    2The relevant subsidiaries for the purposes of articles 81(1)(a) and 82(a) of the UK CRR are:

    1. (a)

      a MIFIDPRU investment firm;

    2. (b)

      a designated investment firm; and

    3. (c)

      a UK credit institution that is included in the consolidated situation under MIFIDPRU 2.5 because it is a connected undertaking.

  4. (4)

    2The modifications in (5) apply where the following provisions of the UK CRR apply to a subsidiary that is a MIFIDPRU investment firm:

    1. (a)

      article 84(1)(a)(i);

    2. (b)

      article 85(1)(a)(i); and

    3. (c)

      article 87(1)(a)(i).

  5. (5)

    2The modifications referred to in (4) are as follows:

    1. (a)

      the relevant amount of common equity tier 1 capital in article 84(1)(a)(i) is the sum of:

      1. (i)

        the amount of common equity tier 1 capital required to meet the firm’s own funds threshold requirement; and

      2. (ii)

        any other requirements that apply to the firm under additional third countries local supervisory regulations in to the extent that those requirements must be met by common equity tier 1 capital;

    2. (b)

      the relevant amount of tier 1 capital in article 85(1)(a)(i) is the sum of:

      1. (i)

        the amount of tier 1 capital required to meet the firm’s own funds threshold requirement; and

      2. (ii)

        any other requirements that apply to the firm under additional local supervisory regulations in third countries to the extent that those requirements must be met by tier 1 capital; and

    3. (c)

      the relevant amount of own funds in article 87(1)(a)(i) is the sum of:

      1. (i)

        the amount of own funds required to meet the firm’s own funds threshold requirement; and

      2. (ii)

        any other requirements that apply to the firm under additional local supervisory regulations in third countries to the extent that those requirements must be met by own funds.

  6. (6)

    2The following provisions of the UK CRR are modified as follows:

    1. (a)

      article 84(1)(a)(ii) applies as if it refers to the sum of:

      1. (i)

        the amount of consolidated common equity tier 1 capital that relates to the subsidiary that is required on a consolidated basis to meet the requirement in MIFIDPRU 2.5; and

      2. (ii)

        any other requirements that apply to the subsidiary under additional local supervisory regulations in third countries to the extent that those requirements must be met by common equity tier 1 capital;

    2. (b)

      article 85(1)(a)(ii) applies as if it refers to the sum of:

      1. (i)

        the amount of consolidated tier 1 capital that relates to the subsidiary that is required on a consolidated basis to meet the requirement in MIFIDPRU 2.5; and

      2. (ii)

        any other requirements that apply to the subsidiary under additional local supervisory regulations in third countries to the extent that those requirements must be met by tier 1 capital; and

    3. (c)

      article 87(1)(a)(ii) applies as if it refers to the sum of:

      1. (i)

        the amount of consolidated own funds that relates to the subsidiary that is required on a consolidated basis to meet the requirement in MIFIDPRU 2.5; and

      2. (ii)

        any other requirements that apply to the subsidiary under additional local supervisory regulations in third countries to the extent that those requirements must be met by own funds.

MIFIDPRU 2.5.10A G

2 MIFIDPRU 3 Annex 7.57G and MIFIDPRU 3 Annex 7.58R contain supplementary provisions that may be relevant when a firm is applying MIFIDPRU 2.5.10R.

MIFIDPRU 2.5.11 R

1A UK parent entity must comply with MIFIDPRU 6 (Liquidity) on the basis of its consolidated situation.

MIFIDPRU 2.5.12 G

1 MIFIDPRU 2.5.7R to MIFIDPRU 2.5.11R require a UK parent entity to comply with other chapters of MIFIDPRU on the basis of its consolidated situation. Certain requirements in those chapters do not apply, or apply in a modified manner, to SNI MIFIDPRU investment firms. MIFIDPRU 2.5.21R explains how the UK parent entity should determine whether it should be treated as an SNI MIFIDPRU investment firm on the basis of its consolidated situation.

Default position: full consolidation of relevant entities

MIFIDPRU 2.5.13 R
  1. (1)

    1For the purposes of determining the consolidated situation under MIFIDPRU 2.5.7R and MIFIDPRU 2.5.11R, a UK parent entity must carry out a full consolidation of all relevant financial undertakings that form part of its investment firm group, unless (2) applies.

  2. (2)

    A UK parent entity is not required to carry out a full consolidation of a relevant financial undertaking under (1) where:

    1. (a)

      the relevant financial undertaking is a connected undertaking that forms part of the investment firm group due to a participation in accordance with MIFIDPRU 2.4.15R; and

    2. (b)

      the conditions for proportional consolidation under MIFIDPRU 2.5.17R are satisfied.

MIFIDPRU 2.5.14 G

1A UK parent entity that is subject to MIFIDPRU 2.5.13R(1) may apply to the FCA under section 138A of the Act to modify the application of MIFIDPRU 2.5.13R(1) to require an alternative method of consolidation.

MIFIDPRU 2.5.15 G

1When the FCA considers an application described in MIFIDPRU 2.5.14G, it will consider a range of factors, including whether full consolidation is appropriate because the UK parent entity or a MIFIDPRU investment firm within the same investment firm group:

  1. (1)

    acts as sponsor by managing or advising the relevant financial undertaking or marketing its securities;

  2. (2)

    provides liquidity or credit enhancements to the relevant financial undertaking;

  3. (3)

    is an important investor in the equity or debt instruments of the relevant financial undertaking;

  4. (4)

    through contractual or non-contractual relationships, is exposed to risks or equity-like returns that are derived from the assets of the relevant financial undertaking or that are dependent upon the performance of that undertaking;

  5. (5)

    is effectively involved in the decision-making process of the relevant financial undertaking or exercises influence over that undertaking;

  6. (6)

    receives critical operational services from the relevant financial undertaking which cannot be replaced in a timely fashion without excessive cost;

  7. (7)

    has a credit rating upon which the credit rating of the relevant financial undertaking is based;

  8. (8)

    has a close commercial relationship with other investors in the relevant financial undertaking;

  9. (9)

    has a common customer base with the relevant financial undertaking or is involved in the commercialisation of its products;

  10. (10)

    is part of the same brand as the relevant financial undertaking;

  11. (11)

    has already provided financial support to the relevant financial undertaking in relation to financial difficulties; or

  12. (12)

    incurs a disproportionate amount of the expenses connected with the business operations of the relevant financial undertaking.

MIFIDPRU 2.5.16 G

1The FCA would generally expect that the alternative method of consolidation proposed in an application described in MIFIDPRU 2.5.14G would involve either:

  1. (1)

    proportional consolidation according to the share of the capital or voting rights held in the relevant financial undertaking, in which case the FCA will take into account factors equivalent to those set out in MIFIDPRU 2.5.17R(2) in addition to the factors in MIFIDPRU 2.5.15G; or

  2. (2)

    consolidation of an appropriate alternative fixed percentage of the relevant metrics attributable to the relevant financial undertaking.

Proportional consolidation: participations

MIFIDPRU 2.5.17 R
  1. (1)

    1This rule applies where a relevant financial undertaking forms part of an investment firm group because it is a connected undertaking due to a participation in accordance with MIFIDPRU 2.4.15R.

  2. (2)

    For the purposes of determining the consolidated situation under MIFIDPRU 2.5.7R and MIFIDPRU 2.5.11R, a UK parent entity (“A”) may apply proportional consolidation in relation to the relevant financial undertaking in (1) (“B”) if the following conditions are met:

    1. (a)

      A’s liability is limited to the share of capital that it holds in B;

    2. (b)

      the liability of the other shareholders or members of B (“participating undertakings”) is clearly established by a legally binding and enforceable contract between A and all participating undertakings which:

      1. (i)

        limits the liability of each party to the percentage of its shareholding;

      2. (ii)

        clearly states that any potential losses arising from B will be borne by all shareholders or members proportionately to the share of capital held by each of them at such point in time;

      3. (iii)

        states that any change in the share of capital of a shareholder or member is subject to the explicit consent of all the shareholders or members;

      4. (iv)

        states that if B is recapitalised, A will inform the FCA in a timely manner about the progress of the recapitalisation process and that each shareholder or member is liable to contribute to the recapitalisation no more than an amount that is proportionate to its current share of capital held in A;

    3. (c)

      there are no other agreements or arrangements between any of the following that would override or undermine any of the conditions in (b);

      1. (i)

        some or all of the participating undertakings; or

      2. (ii)

        some or all of the participating undertakings and one or more third parties;

    4. (d)

      any participating undertakings who do not form part of the same investment firm group as A either:

      1. (i)

        are subject to prudential supervision; or

      2. (ii)

        can reasonably be expected to have sufficient resources to fund any contribution for which they may be liable under (b)(iv);

    5. (e)

      the solvency of the participating undertakings is satisfactory and can be expected to remain satisfactory;

    6. (f)

      the UK parent entity has notified the FCA in advance that it intends to apply proportional consolidation in relation to B; and

    7. (g)

      the notification in (f) has been made using the form in MIFIDPRU 2 Annex 3R and submitted using the online notification and application system.

MIFIDPRU 2.5.18 G

1Proportional consolidation allows a UK parent entity to include within its consolidated situation only a proportion of the relevant metrics associated with the relevant financial undertaking to which it is connected by a participation. The relevant proportion is equal to the proportion of capital or voting rights that comprises that participation.

Exemption from consolidated liquidity requirements

MIFIDPRU 2.5.19 R

1A UK parent entity is exempt from MIFIDPRU 2.5.11R if:

  1. (1)

    the UK parent entity has applied to the FCA in accordance with MIFIDPRU 2.5.20R; and

  2. (2)

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

    1. (a)

      all MIFIDPRU investment firms in the investment firm group are subject to the rules in MIFIDPRU 6 (Liquidity) on an individual basis; and

    2. (b)

      the exemption is appropriate, taking into account the nature, scale and complexity of the investment firm group.

MIFIDPRU 2.5.20 R

1A UK parent entity must make an application under MIFIDPRU 2.5.19R(1) by completing the form in MIFIDPRU 2 Annex 4R and submitting it using the online notification and application system.

Application of conditions for classification as an SNI MIFIDPRU investment firm on a consolidated basis

MIFIDPRU 2.5.21 R
  1. (1)

    1This rule applies for the purpose of determining whether a UK parent entity should be treated as an SNI MIFIDPRU investment firm when applying the chapters of MIFIDPRU specified in MIFIDPRU 2.5.7R and MIFIDPRU 2.5.11R on a consolidated basis.

  2. (2)

    Where any individual MIFIDPRU investment firm within the investment firm group has been classified as a non-SNI MIFIDPRU investment firm in accordance with MIFIDPRU 1.2 (including on a combined basis under MIFIDPRU 1.2.10R), the UK parent entity in (1) must comply with the relevant chapters of MIFIDPRU that apply on a consolidated basis as if it were a non-SNI MIFIDPRU investment firm.

  3. (3)

    Where no individual MIFIDPRU investment firm within the investment firm group has been classified as a non-SNI MIFIDPRU investment firm (including on a combined basis under MIFIDPRU 1.2.10R), the UK parent entity in (1) must apply the criteria and comply with the calculation requirements in MIFIDPRU 1.2 on the basis of the consolidated situation.

  4. (4)

    When applying the criteria in MIFIDPRU 1.2 in accordance with (3), if any entity included within the consolidated situation is dealing on own account, the UK parent entity in (1) must comply with the relevant chapters of MIFIDPRU that apply on a consolidated basis as if it were a non-SNI MIFIDPRU investment firm.

  5. (5)

    For the purposes of (3), when calculating the contribution of a collective portfolio management investment firm to the consolidated situation, the UK parent entity is required to include only amounts that are attributable to the investment services and/or activities carried on by the collective portfolio management investment firm.

MIFIDPRU 2.5.22 G
  1. (1)

    1MIFIDPRU 2.5.21R(3) requires the relevant UK parent entity to consolidate all of the relevant metrics for the criteria in MIFIDPRU 1.2.1R.

  2. (2)

    This is separate from the application of only certain metrics (AUM, COH, the on- and off-balance sheet total and the total annual gross revenue) on a combined basis to an individual MIFIDPRU investment firm under MIFIDPRU 1.2.10R.

  3. (3)

    If any of the thresholds in MIFIDPRU 1.2.1R are exceeded on a consolidated basis, the relevant chapters of MIFIDPRU specified in MIFIDPRU 2.5.7R and MIFIDPRU 2.5.11R apply to the UK parent entity as if it were a non-SNI MIFIDPRU investment firm. However, if none of the thresholds in MIFIDPRU 1.2.1R are exceeded on a consolidated basis, the relevant chapters of MIFIDPRU that apply on a consolidated basis apply to the UK parent entity as if it were an SNI MIFIDPRU investment firm.

  4. (4)

    When calculating whether the thresholds in MIFIDPRU 1.2.1R are exceeded on a consolidated basis, MIFIDPRU 2.5.21R(5) permits a UK parent entity to exclude amounts that relate to its non-MiFID business. However, a UK parent entity should not apply this approach to the calculation of the consolidated on- and off-balance sheet total for the purposes of MIFIDPRU 1.2.1R(6). This is because the FCA does not consider that it is reasonable to subdivide a collective portfolio management investment firm's balance sheet in this way. Therefore, a UK parent entity should include the full on- and off-balance sheet total of a collective portfolio management investment firm in the consolidated total for these purposes.

Prudential consolidation in practice: own funds

MIFIDPRU 2.5.23 G
  1. (1)

    1Where MIFIDPRU 3 applies on a consolidated basis, the total consolidated own funds requirement of an investment firm group must be met by consolidated own funds. Consolidated own funds must satisfy the requirements of MIFIDPRU 3 and the deductions from consolidated own funds must be applied in accordance with that chapter as it applies on a consolidated basis.

  2. (2)

    MIFIDPRU 2.5.10R applies the provisions on minority interests and additional tier 1 instruments and tier 2 instruments issued by subsidiaries in Title II of Part Two of the UK CRR to a UK parent entity, but with the modifications set out in that rule.

  3. (3)

    The determination of consolidated own funds should be consistent with any reporting of consolidated financial statements that the FCA may require. Under section 165(6) and (7) of the Act, the FCA may require a UK parent entity to provide independent verification of the calculation of its consolidated own funds.

Prudential consolidation in practice: own funds requirement

General

MIFIDPRU 2.5.24 G
  1. (1)

    1Generally, the same approach to own funds requirements that applies to a MIFIDPRU investment firm on an individual basis under MIFIDPRU 4 applies to a UK parent entity on a consolidated basis.

  2. (2)

    Where MIFIDPRU 4 applies on a consolidated basis, the consolidated own funds requirement is the highest of the components of the own funds requirement specified in MIFIDPRU 4.3 as they apply on a consolidated basis – i.e. the highest of:

    1. (a)

      the consolidated fixed overheads requirement;

    2. (b)

      the consolidated permanent minimum capital requirement; or

    3. (c)

      the consolidated K-factor requirement if the UK parent entity is treated as a non-SNI MIFIDPRU investment firm in accordance with MIFIDPRU 2.5.21R.

Consolidated fixed overheads requirement

MIFIDPRU 2.5.25 R
  1. (1)

    1This rule applies for the purposes of a UK parent entity’s calculation of the fixed overheads requirement on a consolidated basis.

  2. (2)

    A UK parent entity must:

    1. (a)

      use figures arising from its most recent:

      1. (i)

        audited consolidated annual financial statements after distribution of profits; or

      2. (ii)

        unaudited consolidated annual financial statements, where audited financial statements are not available;

    2. (b)

      if the relevant figures under (a) are not available, calculate the consolidated fixed overheads as the sum of the following:

      1. (i)

        the individual fixed overheads of the UK parent entity;

      2. (ii)

        the full amount of the individual fixed overheads of each relevant financial undertaking that is fully consolidated within the consolidated situation; and

      3. (iii)

        the relevant proportion of the individual fixed overheads of each relevant financial undertaking that is subject to proportional consolidation on a consolidated basis.

    3. (c)

      Where the relevant figures under (2)(a) are available, but the consolidated annual financial statements include undertakings that are not members of the investment firm group, a UK parent entity may use the approach in (2)(b) to calculate its fixed overheads requirement on a consolidated basis.3

  3. (3)

    Where these amounts are not already included in the relevant figures under (2), a UK parent entity must include within its calculation of the consolidated fixed overheads any fixed expenses incurred by a third party, including a tied agent, on behalf of:

    1. (a)

      the UK parent entity; or

    2. (b)

      any relevant financial undertaking included in the consolidated situation.

  4. (4)

    Where the figures under (2)(b) include expenses that are incurred between entities included in the consolidated situation, the UK parent entity may adjust the consolidated fixed overheads figure to avoid double-counting of these amounts.

MIFIDPRU 2.5.26 G

1Where the FCA considers that there has been a material change in the activities of the investment firm group, the FCA may use its powers under section 55L or section 143K of the Act to require a UK parent entity to use an appropriate adjusted figure as the consolidated fixed overheads requirement.

Consolidated permanent minimum capital requirement

MIFIDPRU 2.5.27 R
  1. (1)

    1This rule applies for the purposes of a UK parent entity’s calculation of the consolidated permanent minimum capital requirement when MIFIDPRU 4 applies on a consolidated basis.

  2. (2)

    The consolidated permanent minimum capital requirement is the sum of the following:

    1. (a)

      for entities that are fully consolidated within the consolidated situation, the full amount of each of the following:

      1. (i)

        the individual permanent minimum capital requirement of each MIFIDPRU investment firm; and

      2. (ii)

        where applicable, the base own funds requirement or initial capital requirement of any other relevant financial undertaking; and

    2. (b)

      for entities that are subject to proportional consolidation under the consolidated situation, the relevant proportion of each of the amounts specified in (a).

  3. (3)

    For the purposes of (2):

    1. (a)

      references to a MIFIDPRU investment firm include a third country entity within the investment firm group that would satisfy the definition if it were established in the UK; and

    2. (b)

      the individual permanent minimum capital requirement, base own funds requirement or initial capital requirement of any third country entity in (a) is the individual requirement that would apply if that entity were established in the UK.

Consolidated K-Factor Requirement

MIFIDPRU 2.5.28 G
  1. (1)

    1The general principle is that the consolidated K-factor requirement should be calculated on the basis of the consolidated situation of a UK parent entity, so that the entities included in the consolidated situation are treated as if they form a single MIFIDPRU investment firm. This is subject to any rules in this section which require a modified approach to the relevant calculation on a consolidated basis.

  2. (2)

    As is the case when calculating the K-factor requirement on an individual basis, the K-factor metrics that are relevant to the consolidated situation depend on the investment services and/or activities (or equivalent activities in the case of a third country entity) carried on by relevant entities within the investment firm group. The consolidated K-factor requirement should be calculated in accordance with MIFIDPRU 4, but on the basis of the consolidated situation.

  3. (3)

    MIFIDPRU 2.5.6G contains additional guidance on how the consolidated K-factor requirement applies in relation to tied agents that are included within the consolidated situation.

Consolidated K-AUM, K-COH and K-DTF requirements

MIFIDPRU 2.5.29 R
  1. (1)

    1This rule applies for the purposes of a UK parent entity’s calculation on a consolidated basis of the following:

    1. (1)

      the K-AUM requirement;

    2. (2)

      the K-COH requirement; and

    3. (3)

      the K-DTF requirement.

  2. (2)

    Subject to (4), the consolidated AUM, COH or DTF for the purposes of (1) is the sum of the following:

    1. (a)

      the full amount of the relevant individual K-factor metrics of each MIFIDPRU investment firm that is fully consolidated within the consolidated situation; and

    2. (b)

      the relevant proportion of the relevant individual K-factor metrics of each MIFIDPRU investment firm that is subject to proportional consolidation on a consolidated basis.

  3. (3)

    For the purposes of (2):

    1. (a)

      references to a MIFIDPRU investment firm include a third country entity within the investment firm group that would satisfy that definition if it were established in the UK; and

    2. (b)

      the relevant individual K-factor metric of any third country entity in (a) is the individual K-factor metric that would be attributable to that entity if that entity were established in the UK.

  4. (4)

    Where the consolidated AUM, COH or DTF under (2) includes amounts attributable to transactions or arrangements solely between two or more entities included within the consolidated situation, those amounts are excluded when calculating the consolidated AUM, COH or DTF.

MIFIDPRU 2.5.29A G
  1. (1)

    3As the exclusion in MIFIDPRU 2.5.29R(4) applies only to transactions or arrangements solely between two or more entities included within the consolidated situation of an investment firm group, it does not apply to transactions or arrangements involving counterparties or clients outside that consolidated situation. This is illustrated by the example in (2).

  2. (2)

    Firm A and Firm B are part of the consolidated situation of an investment firm group. Firm A delegates management of assets to Firm B. If the assets delegated by Firm A are beneficially owned by a client outside the consolidated situation, such assets would not benefit from the exclusion under MIFIDPRU 2.5.29R(4) for the purposes of the UK parent entity’s calculation of consolidated AUM.

Consolidated K-CMH and K-ASA requirements

MIFIDPRU 2.5.30 R

1The consolidated K-CMH requirement and consolidated K-ASA requirement for an investment firm group must be calculated in accordance with the following:

  1. (1)

    the contribution of any individual MIFIDPRU investment firm to the consolidated situation must be determined by applying the rules for calculating CMH and ASA in MIFIDPRU 4.8 and MIFIDPRU 4.9 to that individual firm; and

  2. (2)

    the contribution of any other entity (“X”) in the investment firm group to the consolidated situation must be determined by:

    1. (a)

      identifying whether, in the course of, or in connection with, business which would be MiFID business if it were carried on by a MIFIDPRU investment firm in the UK, X holds:

      1. (i)

        any money that was received from its clients; or

      2. (ii)

        any assets belonging to its clients;

    2. (b)

      subject to (3), applying the calculation rules in MIFIDPRU 4.8 or 4.9 to the amounts in (a) by treating:

      1. (i)

        the amounts identified in (a)(i) as CMH;

      2. (ii)

        the amounts identified in (a)(ii) as ASA;

    3. (c)

      where an amount under (a) was originally received by X from a client in the form of money but has subsequently been placed in a collective investment undertaking to meet segregation requirements, treating the relevant amount as:

      1. (i)

        ASA if, on the insolvency of X, the relevant client would be considered to have a direct proprietary interest in the relevant units, shares or equivalent interests in the collective investment undertaking; or

      2. (ii)

        CMH in any other circumstance.

  3. (3)

    when applying the calculation rules in MIFIDPRU 4.8, an arrangement operated by X in relation to client money is a segregated account only if (ignoring MIFIDPRU 4.8.9E, which does not apply for these purposes) it meets the requirements in MIFIDPRU 4.8.8R.

MIFIDPRU 2.5.31 R

1Where the UK parent entity of the investment firm group has been unable to ascertain whether:

  1. (1)

    the money or assets referred to in MIFIDPRU 2.5.30R(2)(a) were received or are held in the course of, or in connection with, business which would be MiFID business if it were carried on by a MIFIDPRU investment firm in the UK, it must treat the amounts as if they were received or are held in connection with such business;

  2. (2)

    any amount treated as CMH held by X under MIFIDPRU 2.5.30R(2) is held in an account which meets the requirements to be classified as a segregated account, it must treat the relevant amount as held in a non-segregated account; and

  3. (3)

    a client would be considered to have a direct proprietary interest in a unit, share or equivalent interest in a collective investment undertaking on the insolvency of X for the purposes of MIFIDPRU 2.5.30R(2)(c), it must treat the relevant amount as CMH.

Consolidated K-NPR and K-CMG requirements

MIFIDPRU 2.5.32 R

1A UK parent entity must apply the relevant provisions for the calculation of the K-NPR requirement in MIFIDPRU 4 to a position or exposure included in the consolidated situation unless a rule in this section:

  1. (1)

    permits the UK parent entity to include that position or exposure within the calculation of the consolidated K-CMG requirement; or

  2. (2)

    otherwise permits the position or exposure to be excluded from the calculation of the consolidated K-NPR requirement.

MIFIDPRU 2.5.33 G

1For the K-NPR requirement there is no coefficient in MIFIDPRU 4. The requirement is instead based upon the concept of positions and exposures.

MIFIDPRU 2.5.34 R
  1. (1)

    1This rule applies to a UK parent entity when calculating the K-NPR requirement on a consolidated basis.

  2. (2)

    The UK parent entity may only use positions in one undertaking to offset positions in another undertaking if it has obtained permission to do so in accordance with (3).

  3. (3)

    The permission in (2) will only be granted where:

    1. (a)

      the UK parent entity has applied to the FCA in accordance with (4); and

    2. (b)

      the application demonstrates to the satisfaction of the FCA that the conditions in article 325b of the UK CRR are met.

  4. (4)

    An entity that applies for a permission under (3) must complete the form in MIFIDPRU 2 Annex 5R and submit it using the online notification and application system.

MIFIDPRU 2.5.35 G

1The effect of MIFIDPRU 2.5.34R is that there is no automatic offsetting of positions held by different undertakings within an investment firm group for the purposes of applying the K-NPR requirement on a consolidated basis. If a UK parent entity has not obtained permission under MIFIDPRU 2.5.34R, it must include all positions held by the relevant undertakings within the investment firm group within its calculation of the consolidated K-NPR requirement without netting such positions.

MIFIDPRU 2.5.36 G
  1. (1)

    1MIFIDPRU 2.5.37R to MIFIDPRU 2.5.42R explain the circumstances in which a UK parent entity may calculate a K-CMG requirement when applying MIFIDPRU 4 on a consolidated basis. Where a UK parent entity is not permitted to calculate a K-CMG requirement in relation to a relevant position included within its consolidated situation, it must include that position within its calculation of the consolidated K-NPR requirement.

  2. (2)

    MIFIDPRU 4.13 permits a MIFIDPRU investment firm on an individual basis to calculate a K-CMG requirement for a portfolio in trading book if it has obtained a K-CMG permission from the FCA. A MIFIDPRU investment firm must calculate a K-NPR requirement in relation to all other trading book positions, and positions other than trading book positions where those positions give rise to foreign exchange risk or commodity risk. These positions must be included within the calculation of the consolidated K-NPR requirement.

MIFIDPRU 2.5.37 R

1When applying MIFIDPRU 4 on a consolidated basis, a UK parent entity may calculate a consolidated K-CMG requirement in relation to portfolios that form part of its consolidated situation in accordance with MIFIDPRU 2.5.38R to MIFIDPRU 2.5.42R.

MIFIDPRU 2.5.38 R
  1. (1)

    1This rule applies where a MIFIDPRU investment firm:

    1. (a)

      is included within the consolidated situation of a UK parent entity; and

    2. (b)

      has been granted a K-CMG permission in relation to a portfolio on an individual basis.

  2. (2)

    Where this rule applies, the UK parent entity may include the portfolio in (1)(b) within its calculation of the consolidated K-CMG requirement without requiring a further K-CMG permission.

MIFIDPRU 2.5.39 G

1 MIFIDPRU 2.5.38R sets out the only circumstance in which a UK parent entity can include a portfolio of a MIFIDPRU investment firm within the calculation of the consolidated K-CMG requirement. Unlike for designated investment firms under MIFIDPRU 2.5.40R and third country entities under MIFIDPRU 2.5.41R, it is not possible to make a separate application to calculate a K-CMG requirement in relation to that portfolio only on a consolidated basis. This reflects the FCA’s view that the choice of whether to calculate a K-NPR requirement or a K-CMG requirement in relation to a specific portfolio must be applied consistently on both an individual and consolidated level.

MIFIDPRU 2.5.40 R
  1. (1)

    1This rule applies where a designated investment firm (“A”) is included within the consolidated situation of a UK parent entity.

  2. (2)

    A UK parent entity may include a portfolio of A within the calculation of the UK parent entity’s consolidated K-CMG requirement if:

    1. (a)

      the UK parent entity, or a MIFIDPRU investment firm within the same investment firm group, has applied to the FCA in accordance with MIFIDPRU 2.5.42R; and

    2. (b)

      the application demonstrates to the satisfaction of the FCA that A satisfies the requirements in MIFIDPRU 4.13 as modified by (3) to obtain a K-CMG permission in respect of the portfolio on an individual basis.

  3. (3)

    For the purposes of (2), the following modifications apply to the rules relating to the calculation of the K-CMG requirement in MIFIDPRU 4.13:

    1. (a)

      a reference to the “MIFIDPRU investment firm” or “firm” is a reference to A;

    2. (b)

      the clearing member in MIFIDPRU 4.13.9R(2)(c) may be one of the following:

      1. (i)

        A itself;

      2. (ii)

        another designated investment firm;

      3. (iii)

        a MIFIDPRU investment firm;

      4. (iv)

        a third country investment firm;

      5. (v)

        a UK credit institution; or

      6. (vi)

        a credit institution established in a third country.

    3. (c)

      the reference in MIFIDPRU 4.13.12R to MIFIDPRU 4.13.9R is a reference to MIFIDPRU 4.13.9R as modified by this rule; and

    4. (d)

      the requirement in MIFIDPRU 4.13.13R(1)(b) does not apply, but A must ensure that its ongoing processes and systems for assessing the nature and level of risks to which it is, or might be, exposed take into account the understanding of relevant individuals within A of the margin model for the purposes of considering whether:

      1. (i)

        the resulting consolidated K-CMG requirement for the portfolio(s) is sufficient to cover the relevant risks to which A is exposed; and

      2. (ii)

        the K-CMG permission remains appropriate in relation to the portfolio(s) in respect of which it was granted.

MIFIDPRU 2.5.41 R
  1. (1)

    1This rule applies where a third country entity (“B”) is included within the consolidated situation of a UK parent entity.

  2. (2)

    A UK parent entity may include a portfolio of B within the calculation of the UK parent entity’s consolidated K-CMG requirement if:

    1. (a)

      the UK parent entity, or a MIFIDPRU investment firm within the same investment firm group, has applied to the FCA in accordance with MIFIDPRU 2.5.42R; and

    2. (b)

      the application demonstrates to the satisfaction of the FCA that B satisfies the requirements in MIFIDPRU 4.13 as modified by (3) to obtain a K-CMG permission in respect of the portfolio on an individual basis.

  3. (3)

    For the purposes of (2), the following modifications apply to the rules relating to the calculation of the K-CMG requirement in MIFIDPRU 4.13:

    1. (a)

      a reference to the “MIFIDPRU investment firm” or “firm” is a reference to B;

    2. (b)

      the clearing member for the purposes of MIFIDPRU 4.13.9R(2)(c) may be any of the following:

      1. (i)

        an entity listed in MIFIDPRU 4.13.9R(2)(c);

      2. (ii)

        another entity that the application in (2)(a) demonstrates is subject to appropriate prudential regulation and supervision in the jurisdiction in which it operates; or

      3. (iii)

        B itself, provided that the application demonstrates that B satisfies the conditions in (ii);

    3. (c)

      a reference to the “clearing member” is a reference to the clearing member in (b);

    4. (d)

      the reference in MIFIDPRU 4.13.12R to:

      1. (i)

        MIFIDPRU 4.13.9R is a reference to MIFIDPRU 4.13.9R as modified by this rule; and

      2. (ii)

        both the clearing member and client of the clearing member being entities listed in MIFIDPRU 4.13.9R(2)(c) is to both of those entities being entities listed in (b)(i) or (b)(ii);

    5. (e)

      the obligation in MIFIDPRU 4.13.13R(1)(b) does not apply, but B must ensure that its ongoing processes and systems for assessing the nature and level of risks to which it is, or might be, exposed incorporate the understanding of relevant individuals within B of the margin model for the purposes of considering whether:.

      1. (i)

        the resulting consolidated K-CMG requirement for the portfolio(s) is sufficient to cover the relevant risks to which B is exposed; and

      2. (ii)

        the K-CMG permission remains appropriate in relation to the portfolio(s) in respect of which it was granted.

MIFIDPRU 2.5.42 R
  1. (1)

    1A UK parent entity or a MIFIDPRU investment firm within the same investment firm group that wishes to apply for a K-CMG permission in relation to one or more portfolios included in the consolidated situation of its investment firm group must complete the application form in MIFIDPRU 2 Annex 6R or MIFIDPRU Annex 7R and submit it using the online notification and application system.

  2. (2)

    A single application under (1) may be made in respect of multiple portfolios of multiple entities referenced in MIFIDPRU 2.5.40R or MIFIDPRU 2.5.41R, provided that the application demonstrates to the FCA how the relevant conditions in MIFIDPRU 4.13.9R (as modified by MIFIDPRU 2.5.40R(3) in relation to a portfolio of a designated investment firm or MIFIDPRU 2.5.41R(3) in relation to a portfolio of a third country entity) are satisfied in respect of each such portfolio.

  3. (3)

    A UK parent entity or MIFIDPRU investment firm that submits an application under (1) must have the necessary authority to make the application on behalf of all entities within the investment firm group whose portfolios are the subject of that application.

Consolidated K-TCD requirement

MIFIDPRU 2.5.43 G
  1. (1)

    1For the K-TCD requirement there is no coefficient in MIFIDPRU 4. The requirement is instead based upon the concept of positions and exposures. The relevant provisions in MIFIDPRU 4 for calculating the K-TCD requirement should therefore also be applied to transactions included in the consolidated situation.

  2. (2)

    When calculating the K-TCD requirement on a consolidated basis, transactions between counterparties included in the consolidated situation are disregarded. This applies irrespective of whether the exclusion in MIFIDPRU 4.14.6R applies to a transaction when a MIFIDPRU investment firm is calculating its K-TCD requirement on an individual basis.

MIFIDPRU 2.5.44 R
  1. (1)

    1When calculating its K-TCD requirement on a consolidated basis, a UK parent entity may only net offsetting transactions entered into between one or more entities included in the consolidated situation and a third party counterparty if the conditions in MIFIDPRU 4.14.28R, as modified by (2), are met.

  2. (2)

    When applying MIFIDPRU 4.14.28R on the basis of the consolidated situation, the following modifications apply:

    1. (a)

      any netting agreement or netting contract referenced in that rule must cover all entities included in the consolidated situation whose transactions with the same third party counterparty are being netted;

    2. (b)

      any references in that rule to the rights and obligations of the “firm” refer to the rights and obligations of the entities included in the consolidated situation whose transactions with the same third party counterparty are being netted; and

    3. (c)

      the legal opinion referenced in MIFIDPRU 4.14.28R(3)(c):

      1. (i)

        may be obtained by the UK parent entity or any MIFIDPRU investment firm in the investment firm group; and

      2. (ii)

        must address the relevant claims and obligations of all entities included in the consolidated situation whose transactions with the same third party counterparty are being netted.

Consolidated K-CON requirement

MIFIDPRU 2.5.45 G
  1. (1)

    1The K-CON requirement under MIFIDPRU 5 applies to a MIFIDPRU investment firm on an individual basis in relation to positions held in its trading book. Broadly, the K-CON requirement is calculated by reference to all relevant trading book exposures that exceed the concentration risk soft limit.

  2. (2)

    MIFIDPRU 2.5.46R explains how the K-CON requirement applies on a consolidated basis.

MIFIDPRU 2.5.46 R

1When a UK parent entity is calculating a K-CON requirement on the basis of its consolidated situation, the provisions in MIFIDPRU 5 apply, subject to the following:

  1. (1)

    the exposure value with regard to an individual client or group of connected clients must be calculated on the basis of all relevant exposures included in the consolidated situation;

  2. (2)

    to the extent that the calculation rules for the K-NPR requirement or K-TCD requirement are relevant to the calculation of an exposure value under MIFIDPRU 5.4 or the OFR under MIFIDPRU 5.7.3R(2), the UK parent entity must apply the methods for the calculation of the consolidated K-NPR requirement in MIFIDPRU 2.5.32R to MIFIDPRU 2.5.34R and consolidated K-TCD requirement in MIFIDPRU 2.5.43G to MIFIDPRU 2.5.44R; and

  3. (3)

    the own funds to be used for the purposes of calculating the limits in MIFIDPRU 5.5 and MIFIDPRU 5.9 on a consolidated basis are the consolidated own funds of the investment firm group, as explained in the guidance in MIFIDPRU 2.5.23G.

Prudential consolidation in practice: liquidity

MIFIDPRU 2.5.47 R

1When applying MIFIDPRU 6 on a consolidated basis, a UK parent entity must ensure that the total liquid assets held by the UK entities included within the consolidated situation are equal to or greater than the consolidated liquid assets requirement.

MIFIDPRU 2.5.48 G
  1. (1)

    1MIFIDPRU 2.5.11R requires a UK parent entity to comply with the liquidity requirements in MIFIDPRU 6 on the basis of its consolidated situation. In practice, this means that the UK parent entity must ensure that the investment firm group holds liquid assets equivalent to one third of the consolidated fixed overhead requirement, plus 1.6% of the total amount of any guarantees provided to clients by entities included within the consolidated situation.

  2. (2)

    Under MIFIDPRU 2.5.47R, the required amount of consolidated liquid assets must be held by the UK entities included within the consolidated situation. This means that while third country entities may contribute to the consolidated liquid assets requirement (through the consolidated fixed overheads requirement), any liquid assets held by a third country entity do not count towards the liquid assets held by the investment firm group for the purposes of that rule.

  3. (3)

    UK parent entities are reminded that:

    1. (a)

      the consolidated liquid assets requirement applies only where the UK parent entity is subject to consolidation obligations under MIFIDPRU 2.5.11R. It does not apply where the group capital test under MIFIDPRU 2.6 applies to an investment firm group instead (although MIFIDPRU 6 will continue to be relevant to MIFIDPRU investment firms within that investment firm group on an individual basis in such circumstances); and

    2. (b)

      a UK parent entity that is subject to consolidation obligations under MIFIDPRU 2.5.11R is exempt from the consolidated liquidity requirement if the conditions in MIFIDPRU 2.5.19R are met.

MIFIDPRU 2.5.49 G

[deleted]2

1

Prudential consolidation in practice: reporting by investment firms

MIFIDPRU 2.5.50 G

1Under MIFIDPRU 2.5.7R, a UK parent entity must comply with the reporting obligations in MIFIDPRU 9 on a consolidated basis. In practice, this involves reporting the same categories of information that would be reported by a MIFIDPRU investment firm to the FCA on an individual basis, but using the figures that result from applying the relevant requirements on a consolidated basis in accordance with this section. This does not apply to data item MIF007 (ICARA assessment questionnaire), which does not need to be submitted on a consolidated basis.

Prudential consolidation in practice: governance requirements

MIFIDPRU 2.5.51 G
  1. (1)

    1Under MIFIDPRU 7.1.3R, a UK parent entity to which MIFIDPRU 2.5.7R applies must comply with the general governance requirements in MIFIDPRU 7.2 (Senior management and systems and controls) on a consolidated basis. In practice, this means that the UK parent entity must ensure that it has a proper organisational structure, effective processes and adequate internal controls covering the business of the investment firm group.

  2. (2)

    The requirements in MIFIDPRU 7.3 (Risk, remuneration and nomination committees) do not apply on a consolidated basis.

Prudential consolidation in practice: ICARA requirements

MIFIDPRU 2.5.52 G

1As explained in MIFIDPRU 7.9.4G, an investment firm group is not required to operate an ICARA process on a consolidated basis. However, MIFIDPRU 7.9.5R permits an investment firm group to operate a single group ICARA process covering the business carried on by that investment firm group, provided that certain requirements are met.

MIFIDPRU 2.6 The group capital test

MIFIDPRU 2.6.1 R

1This section applies to an investment firm group that has been granted permission by the FCA to apply the group capital test under MIFIDPRU 2.4.17R.

Group capital test: requirements

MIFIDPRU 2.6.2 R

1For the purposes of MIFIDPRU 2.6:

  1. (1)

    ‘own funds instruments’ means own funds as defined in MIFIDPRU 3, without applying the deductions referred to in MIFIDPRU 3.3.6R(8), article 56(d), and article 66(d) of the UK CRR;

  2. (2)

    the terms ‘investment firm’, ‘financial institution’, ‘ancillary services undertaking’, ‘tied agent’ and ‘relevant financial undertaking’ include undertakings established in third countries that would satisfy the definitions of those terms if they were established in the UK.

MIFIDPRU 2.6.3 G

1The definition of ‘own funds instruments’ for the purpose of MIFIDPRU 2.6.2R ensures that significant investments in common equity tier 1 instruments, additional tier 1 instruments and tier 2 instruments of financial sector entities in the investment firm group do not need to be deducted by a parent undertaking when applying the group capital test. This is to avoid ‘double counting’ of those investments.

MIFIDPRU 2.6.4 G

1 MIFIDPRU 3.7 contains rules and guidance on the composition of capital for parent undertakings subject to the group capital test.

MIFIDPRU 2.6.5 R

1Where the FCA has granted an application under MIFIDPRU 2.4.17R, a UK parent entity and any other GCT parent undertakings in the investment firm group must hold own funds instruments sufficient to cover the sum of the following:

  1. (1)

    the sum of the full book value of their holdings, subordinated claims and instruments referred to in MIFIDPRU 3.3.6R(8), article 56(d), and article 66(d) of the UK CRR in relevant financial undertakings in the investment firm group; and

  2. (2)

    the total amount of their contingent liabilities in favour of relevant financial undertakings in the investment firm group.

MIFIDPRU 2.6.6 G
  1. (1)

    1Each GCT parent undertaking in the investment firm group must satisfy the group capital test. The group capital test can therefore apply at each level within the group structure. This mitigates the risk of leverage or capital gearing being introduced at levels underneath the UK parent entity.

  2. (2)

    The requirement in MIFIDPRU 2.6.5R only applies to GCT parent undertakings. However, MIFIDPRU 2.6.7R imposes obligations on GCT parent undertakings in relation to their subsidiaries that are:

    1. (a)

      parent undertakings established in a third country; or

    2. (b)

      parent undertakings incorporated in, or with their principal place of business in, the UK that are not GCT parent undertakings.

  3. (3)

    This prevents leverage and capital gearing being introduced into the investment firm group through:

    1. (a)

      intermediate parent undertakings established in a third country; or

    2. (b)

      intermediate parent undertakings in the UK to which the group capital test does not directly apply.

MIFIDPRU 2.6.7 R
  1. (1)

    1This rule applies where:

    1. (a)

      an investment firm group has been granted permission to apply the group capital test under MIFIDPRU 2.4.17R; and

    2. (b)

      a parent undertaking in that investment firm group is a relevant financial undertaking and either:

      1. (i)

        is established in a third country; or

      2. (ii)

        is incorporated in, or has its principal place of business in, the UK and is not a GCT parent undertaking.

  2. (2)

    Where this rule applies, the responsible UK parent must either:

    1. (a)

      ensure that the undertaking in (1)(b) holds own funds instruments sufficient to cover the sum of the amounts in MIFIDPRU 2.6.5R(1) and (2) as they would apply to that undertaking; or

    2. (b)

      hold own funds instruments sufficient to cover the sum of the amounts in MIFIDPRU 2.6.5R(1) and (2) that:

      1. (i)

        apply to the responsible UK parent itself; and

      2. (ii)

        would apply to the undertaking in (1)(b).

MIFIDPRU 2.6.8 G
  1. (1)

    1The effect of MIFIDPRU 2.6.7R is shown through the example below of a hypothetical investment firm group that contains the following undertakings:

    1. (a)

      a UK parent entity (“A”);

    2. (b)

      an intermediate investment holding company (“B”), that is incorporated in the UK and is a direct subsidiary of A;

    3. (c)

      an undertaking established in a third country (“C”) that would be an investment holding company if it were established in the UK and that is a direct subsidiary of B;

    4. (d)

      an undertaking established in a third country (“D”) that would be a MIFIDPRU investment firm if it were established in the UK and that is a direct subsidiary of C;

    5. (e)

      a MIFIDPRU investment firm (“E”) that is a direct subsidiary of D;

    6. (f)

      a tied agent (“F”) that is established in the UK and that is a direct subsidiary of B;

    7. (g)

      an undertaking established in a third country (“G”) that would be a financial institution if it were established in the UK and that is a direct subsidiary of C;

    8. (h)

      an intermediate holding company (“H”) that is incorporated in the UK and is a direct subsidiary of A; and

    9. (i)

      an authorised payment institution (“I”) that is incorporated in the UK and is a direct subsidiary of H.

  2. (2)

    The group capital test:

    1. (a)

      applies directly to A and B because they are both GCT parent undertakings;

    2. (b)

      applies only indirectly to C and D, through the obligations imposed on the responsible UK parent, because C and D are parent undertakings established in a third country;

    3. (c)

      applies only indirectly to H, through the obligations imposed on A in its capacity as the responsible UK parent, because H is not a GCT parent undertaking; and

    4. (d)

      does not apply to E, F, G or I because they are not parent undertakings.

  3. (3)

    1In this example, B is a responsible UK parent because:

    1. (a)

      B has two subsidiaries (a direct subsidiary, C, and an indirect subsidiary, D) that are both parent undertakings established in a third country and that would be relevant financial undertakings if they were established in the UK; and

    2. (b)

      B does not have a subsidiary in the UK that is the parent undertaking of C or D. (Although F is a UK subsidiary of B, F is not a parent undertaking.) This means that there is no intermediate parent undertaking in the UK between B and either of C or D.

  4. (4)

    A is not a responsible UK parent in relation to C and D. This is because A has a subsidiary, B, that is a parent undertaking of C and D and that is incorporated in the UK. B is therefore an intermediate parent undertaking in the UK between A on the one hand and C and D on the other.

  5. (5)

    B is a responsible UK parent in relation to C and D. Note that B is the responsible UK parent of both C and D, even though D is only an indirect subsidiary of B. This is because there is no parent undertaking between C and D that is established in the UK and the definition of a subsidiary includes subsidiaries of subsidiaries.

  6. (6)

    Under MIFIDPRU 2.6.7R(2), B therefore has the choice of whether to:

    1. (a)

      ensure that both C and D comply with the requirements of the group capital test as it would apply to them if they were established in the UK; or

    2. (b)

      hold own funds instruments that are sufficient to cover the sum of the requirements of the group capital test that apply to B and would apply to C and D if they were established in the UK.

  7. (7)

    If B chooses the approach in (6)(a), B must:

    1. (a)

      hold sufficient own funds instruments to cover the sum of B’s holdings in, and contingent liabilities in favour of, C and F;

    2. (b)

      ensure that C holds sufficient own funds instruments to cover the sum of C’s holdings in, and contingent liabilities in favour of, D and G; and

    3. (c)

      ensure that D holds sufficient own funds instruments to cover the sum of D’s holdings in, and contingent liabilities in favour of, E.

  8. (8)

    If B chooses the approach in (6)(b), B must hold sufficient own funds instruments to cover the sum of:

    1. (a)

      B’s holdings in, and contingent liabilities in favour of, C and F;

    2. (b)

      C’s holdings in, and contingent liabilities in favour of, D and G; and

    3. (c)

      D’s holdings in, and contingent liabilities in favour of, E.

  9. (9)

    A is, however, a responsible UK parent in relation to H. This is because A is a GCT parent undertaking that is the parent undertaking of H. H is a relevant financial undertaking (being a holding company, and therefore a financial institution) and a parent undertaking. H is not a GCT parent undertaking because H is not an authorised person and does not have a MIFIDPRU investment firm as a subsidiary. There is also no intermediate GCT parent undertaking between A and H.

  10. (10)

    In a similar way to B above, A therefore has a choice under MIFIDPRU 2.6.7R(2) of whether to:

    1. (a)

      ensure that H complies with the requirements of the group capital test as if it applied directly to H; or

    2. (b)

      hold own funds instruments that are sufficient to cover the sum of the requirements of the group capital test that apply to A and would apply to H.

  11. (11)

    If A chooses the approach in (10)(a), A must:

    1. (a)

      hold sufficient own funds instruments to cover the sum of A’s holdings in, and contingent liabilities in favour of, B and H; and

    2. (b)

      ensure that H holds sufficient own funds instruments to cover the sum of H’s holdings in, and contingent liabilities in favour of, I.

  12. (12)

    If A chooses the approach in (10)(b), A must hold sufficient own funds instruments to cover the sum of:

    1. (a)

      A’s holdings in, and contingent liabilities in favour of, B and H; and

    2. (b)

      H’s holdings in, and contingent liabilities in favour of, I.

MIFIDPRU 2.6.9 R

1A UK parent entity must have systems in place to monitor and control the sources of capital and funding of all relevant financial undertakings within the investment firm group.

Group capital test: reporting requirements

MIFIDPRU 2.6.10 R
  1. (1)

    1Where the FCA has granted an application under MIFIDPRU 2.4.17R, a UK parent entity and any other GCT parent undertakings in the investment firm group must comply with the reporting requirements in (2).

  2. (2)

    Each GCT parent undertaking in (1) must:

    1. (a)

      report in accordance with MIFIDPRU 9 how that GCT parent undertaking meets the group capital test; and

    2. (b)

      if the GCT parent undertaking is a responsible UK parent, also report in accordance with MIFIDPRU 9 how:

      1. (i)

        the undertaking in MIFIDPRU 2.6.7R(1)(b) holds the required amount of own funds instruments referenced in MIFIDPRU 2.6.7R(2)(a); or

      2. (ii)

        the GCT parent undertaking holds at least the amount of own funds instruments to cover the amount applicable to the undertaking in MIFIDPRU 2.6.7R(1)(b), as referenced in MIFIDPRU 2.6.7R(2)(b).

MIFIDPRU 2.6.11 R

1An investment firm group may designate:2

  1. (1)

    a parent undertaking in the UK that is part of the investment firm group; or2

  2. (2)

    a MIFIDPRU investment firm that is part of the investment firm group and that is not a parent undertaking;2

to submit reports to the FCA under MIFIDPRU 2.6.10R on behalf of the GCT parent undertakings in the investment firm group.

Inclusion of holding companies in supervision of compliance with the group capital test

MIFIDPRU 2.6.12 G

1 UK investment holding companies and UK mixed financial holding companies are included in the FCA’s supervision of compliance with the group capital test where they are GCT parent undertakings.

MIFIDPRU 2.7 Investment holding companies, mixed financial holding companies and mixed-activity holding companies

Qualifications of directors

MIFIDPRU 2.7.1 G

1Under section 143R of the Act, a UK investment holding company, UK mixed financial holding company or UK mixed-activity holding company must take reasonable care to ensure that the members of its management body are of sufficiently good repute and possess sufficient knowledge, skills and experience to perform their duties effectively.

Mixed-activity holding companies

MIFIDPRU 2.7.2 G
  1. (1)

    1Under section 165 of the Act, the FCA may require a parent undertaking of a MIFIDPRU investment firm to provide information that is relevant for the FCA’s supervision of the MIFIDPRU investment firm.

  2. (2)

    Under section 167 of the Act, the FCA may appoint an investigator to verify the information received from a parent undertaking of a MIFIDPRU investment firm and any subsidiaries of that parent undertaking.

  3. (3)

    The powers in (1) and (2) also apply to a mixed-activity holding company.

MIFIDPRU 2.7.3 R
  1. (1)

    1Where the parent undertaking of a MIFIDPRU investment firm is a UK mixed‐activity holding company, the MIFIDPRU investment firm must have in place adequate risk management processes and internal control mechanisms.

  2. (2)

    The processes and mechanisms in (1) must include sound reporting and accounting procedures to identify, measure, monitor and control transactions between the firm, the UK mixed‐activity holding company and its subsidiaries.

Sanctions

MIFIDPRU 2.7.4 G

1Under section 143W of the Act, the FCA may impose disciplinary measures on the following, where they are not authorised persons, to end or mitigate breaches of a requirement under the MIFIDPRU sourcebook or sections 143K, 143R or 143S(6) of the Act:

  1. (1)

    a UK investment holding company;

  2. (2)

    a UK mixed financial holding company;

  3. (3)

    a UK mixed-activity holding company; or

  4. (4)

    a member of the management body of the entities in (1) to (3).

MIFIDPRU 2 Annex 1 Application under MIFIDPRU 2.3.3R for an exemption from application of specific requirements on an individual basis

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Part A – Permission under MIFIDPRU 2.3.1R to be exempt from disclosure requirements in MIFIDPRU 8 (Disclosure by investment firms) for SNI firms in consolidated insurance groups 2

MIFIDPRU 2 Annex 1R(A) Part A – Permission under MIFIDPRU 2.3.1R to be exempt from disclosure requirements.pdf2

Part B – Individual exemption from liquidity requirements under MIFIDPRU 2.3.2R for MIFIDPRU investment firms in consolidated CRR or MIFIDPRU groups

MIFIDPRU 2 Annex 1R(B) Part B – Individual exemption from liquidity requirements under MIFIDPRU 2.3.2R.pdf2

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MIFIDPRU 2 Annex 8 Notification under MIFIDPRU 2.4.20R relating to membership of an investment firm group and/or a financial conglomerate

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1[Editor’s note: the form can be found at this address: MIFIDPRU_2_Annex_8R_20233103.pdf2]