16 Financial services
| (31898)
12940/10
+ ADDs 1-2
COM (10) 433
| Draft Directive amending Directives 98/78/EC, 2002/87/EC and 2006/48/EC as regards the supplementary supervision of financial entities in a financial conglomerate
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| Legal base | Article 53(1); co-decision; QMV
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| Document originated | 16 August 2010
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| Deposited in Parliament | 1 September 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 15 September 2010
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| Previous Committee Report | None
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| Discussion in Council | Not yet known
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
16.1 The Financial Conglomerates Directive provides for supplementary
supervision of regulated entities that form part of a financial
conglomerate, that is a group with licences in both the banking
and the insurance sector. It focuses on potential risks of double
gearing, that is multiple use of capital, and on "group risks",
that is the risks of contagion, management complexity, risk concentration
and conflicts of interest. It supplements the sectoral Directives
governing the prudential supervision of banking and investment
firms and of insurance firms by providing additional supervision
at the top level of the group.
16.2 The main objectives of the Directive were to:
- ensure that financial conglomerates are adequately capitalised,
preventing the same capital being counted twice over and used
simultaneously as a buffer against risk in different entities;
- establish standard methods for calculating a
conglomerate's overall solvency position; and
- provide for the establishment of a single lead
regulator for financial conglomerates, rather than multiple lead
regulators as at present.
16.3 The Directive was reviewed in 2009 by the Joint
Committee on Financial Conglomerates.[60]
Its advice pointed to three areas that are currently hampering
the achievement of the Directive's objectives in day-to-day supervision
of financial conglomerates:
- supervision at the holding
company level;
- supervisory coordination; and
- identification.
16.4 The Directive was implemented in the UK in
2004 through a mixture of Treasury regulations and Financial Services
Authority rules.
The document
16.5 The intention of the Commission's draft Directive
is to amend the Financial Conglomerates Directive in order to
address the three areas of concern highlighted by the Joint Committee
on Financial Conglomerates.
Supervision at the holding company level
16.6 Supervision at this level is governed by the
combination of the provisions of the present Directive, the Banking
Directive and the Insurance Groups Directive. The supervisory
tools that can be applied at the top level change when that top
level becomes a financial conglomerate. This may occur following
a change to the group structure, for example following an acquisition.
This change in structure and identification can affect the application
of sectoral group supervision — as a result:
- certain tools of sectoral group
supervision that would have otherwise applied, cannot be applied
to the whole group when the group is identified as a financial
conglomerate — the tools include waiving of solo-supervision
of subsidiaries, application of provisions on disclosure and self-assessment
and supervisory review on a consolidated basis; and
- this leads to the anomalous result that a group,
which has acquired a licence in the other sector (banking or insurance)
and qualifies under the Financial Conglomerates Directive, is
subject to a regulatory regime that is enhanced in one way, but
may not be as comprehensive as that which applied before the acquisition
in another way, even though the group has increased in size and
complexity and may therefore represent a higher risk to the financial
system.
Supervisory coordination
16.7 The Financial Conglomerates Directive contains
provisions for coordination among different sectoral supervisors
of a group. It defines who is a "relevant competent authority"
and requires a lead competent authority to be appointed, which
must consult all relevant competent authorities on certain supervisory
issues. However, the current provisions are unclear and result
in an unnecessarily large number of relevant competent authorities
being consulted, undermining efficient supervision. The draft
Directive would allow for all the relevant competent authorities
with an interest in the conglomerate in question to be represented
at the supervisory college.[61]
Identification
16.8 Qualification as a financial conglomerate depends
upon, among other things, whether a group meets certain thresholds
with respect to assets and capital requirements. These criteria
give rise to three problems:
- the current Directive does
not require the inclusion of asset management companies in the
threshold tests;
- the threshold tests are ambiguous as to how to
deal with certain issues, for example, different accounting treatments
of assets or parts of a group which do not always have a solvency
requirement; and
- third, the threshold conditions, given their
fixed amounts, are not risk-based, and the notion of expected
group risks is not addressed by the threshold test. This means
that very small groups with a few licences in each sector are
subject to supplementary supervision, while the largest most complex
groups may technically not qualify as a conglomerate.
The Government's view
16.9 The Financial Secretary to the Treasury (Mr
Mark Hoban), noting that the amendments in the draft Directive
have been developed in conjunction with the Joint Committee on
Financial Conglomerates, while it was being chaired by a representative
from the Financial Services Authority, tells us that a key aim
of Government policy on financial groups is to ensure consistent
application of group supervision for all financial groups operating
in the EU. He comments that:
- it has been important, therefore,
to ensure that the legislation enables the relevant competent
authority to regulate on the basis of the whole group, rather
than regulating different sectors of the business independently
of each other;
- incorporation of the proposed changes will enable
greater EU cooperation in the context of financial conglomerates
and will improve oversight of cross-border groups that comprise
banking and insurance firms by the appropriate relevant competent,
such as the Financial Services Authority; and
- the proposed changes would help promote Government
objectives on the supervision of financial groups to improve the
stability of financial system and protect customers of financial
groups.
The Minister says that the proposals are in line
with UK regulatory policy on financial groups and the Government
believes they should be supported.
16.10 In two further comments the Minister says that:
- in relation to the Commission's
impact assessment for the draft Directive, the cost impact for
the financial groups concerned is expected to be negligible, given
the overall low level of materiality of the net incremental effect
of the identified options; and
- the Government has previously engaged with the
industry to inform its assessment of the proposals and the associated
costs and benefits.
Conclusion
16.11 Although we have no issues to raise about
the draft Directive, and clear the document from scrutiny, we
draw it to the attention of the House as part of the continuing
revision of the EU's regulatory and supervisory legislation for
the financial services sector.
60 The Committee of European Banking Supervisors and
the Committee of European Insurance and Occupational Pensions
work through the Joint Committee on Financial Conglomerates on
convergence in the supervision of financial conglomerates in the
EU. Back
61
This would ensure that following regulatory reform in the UK both
the Prudential Regulation Authority and the Consumer Protection
and Markets Authority could be represented at the college, assuming
they had a relevant interest. Back
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