Documents considered by the Committee on 20 October 2010 - European Scrutiny Committee Contents

16 Financial services



+ 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

Legal baseArticle 53(1); co-decision; QMV
Document originated16 August 2010
Deposited in Parliament1 September 2010
DepartmentHM Treasury
Basis of considerationEM of 15 September 2010
Previous Committee ReportNone
Discussion in CouncilNot yet known
Committee's assessmentPolitically important
Committee's decisionCleared


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]


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.


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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 1 November 2010