Select Committee on European Scrutiny Ninth Report


The European Scrutiny Committee has made further progress in the matter referred to it and has agreed to the following Report:—


COM(01) 213

Draft Directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Directives 73/239/EEC, 79/267/EEC; 92/49/EEC, 92/96/EEC, 93/6/EEC, 93/22/EEC, 98/78/EC and 2000/12/EC.
Legal base: Article 47(2) EC; consultation; qualified majority voting
Document originated: 24 April 2001
Forwarded to the Council: 25 April 2001
Deposited in Parliament: 20 June 2001
Department: HM Treasury
Basis of consideration: EM of 5 July 2001
Previous Committee Report: None
To be discussed in Council: Early 2002
Committee's assessment: Legally and politically important
Committee's decision: Not cleared; further information requested


  1.1  The Commission argues that increasing consolidation in the financial services market has led to the emergence of financial conglomerates, defined as firms combining services in differing sectors including the insurance, banking and investment sectors. The importance of such financial conglomerates varies throughout the EU with the Benelux and Scandinavian Member States containing a large concentration of such firms.[1] A regulatory framework for financial conglomerates has been identified as a priority under the Financial Services Action Plan.


  1.2  Under the present regulatory regime, financial institutions such as credit institutions, investment firms and insurance companies are regulated under specific sectoral directives. The rules which apply to these groups do not, however, specifically address groups which combine the services of investment firms, banks and insurance companies. The result is a limited framework for the supervision of such financial institutions. In particular, gaps exist in that certain types of financial group are not covered by the existing directives, and important rules on prudential matters which cover firms subject to the sectoral directives do not cover financial conglomerates.[2] There are also overlaps under the present system in that inconsistencies arise in the treatment of similar prudential questions, and the same financial group can be covered by different sectoral directives.

  1.3  The aim of the document is to introduce comprehensive rules for the supervision of financial conglomerates. It is being supplemented by a mapping exercise which the Commission is undertaking in order to obtain a better assessment of the importance of such groups in the EU.

The document

  1.4  The starting point of the Directive is the definition of a financial conglomerate, set out in Articles 2 and 3.

  1.5  Articles 5 and 6 set out measures to secure capital adequacy. The Directive aims to ensure that entities have sufficient capital even if they are part of a cross-sector financial conglomerate. It proposes to do this by preventing multiple gearing (where the same capital is used simultaneously as a buffer against risk in two or more entities in the conglomerate) and excessive leveraging (where the parent company issues debt and down streams the proceeds as equity to its regulated subsidiaries).

  1.6  Another provision is the regulation of intra-group transactions and risk exposures (Article 6). This is to be based on an internal management policy (subject to overview by the supervisory authorities), reporting requirements to supervisors, and effective supervisory enforcement powers.

  1.7  The Directive recognises the importance of coordination and information sharing between supervisory authorities to ensure effective group-wide supervision of financial conglomerates. The advantages of this would be that all aspects of the supervision of financial conglomerates would be covered, duplication of the supervisory tasks would be avoided with attendant cost savings, and there would be a simplified supervision structure.

The Government's view

  1.8  In her Explanatory Memorandum dated 5 July 2001, the Economic Secretary to the Treasury (Ruth Kelly) states that the government broadly supports the Directive and its objectives so long as they are :

"—  flexible and market responsive: it will be important that the new regulatory framework should be responsive to and capable of adapting to the changing market; it should not constrain market developments;

"—  appropriate and proportionate: the directive needs to focus on material inconsistencies and be capable of being agreed and implemented efficiently; it will be important to ensure that the new framework does not place undue regulatory burdens or increased costs on the financial services industry;

"—  effective and efficient: in particular, the directive should lay down principles for the appointment of a 'lead co-ordinator' — that is, ensuring that there are agreed arrangements for a supervisory authority to lead in the exchange of information and co-ordination of activities (few other EU Member States have the single cross-sector supervisory authority embodied in the FSA)."

  1.9  The Minister also states that:

"It will also be essential to ensure that the terms of the Directive, as finally agreed, do not undermine or constrain the operation of the Financial Services and Markets Act. In particular, careful consideration will need to be given to the directive's proposed treatment of third country groups. It will be important to ensure that the directive does not create disincentives to firms based outside the EU which wish to establish within: and specifically, does not undermine London's or elsewhere in the UK's position as a key financial centre."


  1.10  The Directive would fill gaps in the current regulatory framework and reduce overlap and inconsistency, but we agree with the Government that the Directive must be flexible, proportionate and effective. We request further information from the Minister on the proposed treatment of third country financial conglomerates and on the effects, if any, of the Directive on the operation of the Financial Services and Markets Act 2000. Meanwhile, we do not clear the document.

1  As the Commission is unaware of the actual importance of these firms in individual Member States, a mapping exercise is being carried out with the aim of assessing the status and significance of such firms.  Back

2  The document gives the example of the elimination of multiple gearing of regulatory capital - that is, the same capital being counted twice over and used simultaneously as a buffer against risk in different entities in the same financial conglomerate. Back

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