EN
OPINION OF THE EUROPEAN CENTRAL BANK
of 3 October 2001
at the request of the Finnish Ministry of Finance
on a draft proposal concerning legislation on  the supervision of financial conglomerates
(CON/2001/30)
1. On 28 June 2001 the European Central Bank (ECB) received a request from the Finnish
Ministry of Finance for an opinion on a draft Government proposal concerning legislation onthe supervision of financial conglomerates (hereinafter referred to as the proposal). Theproposal intends to introduce in Finland a new law on the supervision of financialconglomerates (hereinafter referred to as the draft Law). In addition, the proposal intends tointroduce certain other revisions to existing related laws. The proposal intends to clarify thepowers of the Finnish supervisory authorities in respect of financial conglomerates in order toensure that the financial conglomerates do not give rise to risks which might distort the stabilityof financial market or payment and settlement systems and thus endanger the position ofdepositors and investors and the interests of the insured.
2. The ECBs competence to deliver an opinion is based on Article 105(4) of the Treaty
establishing the European Community (hereinafter referred to as the Treaty) and the fifth andsixth indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultationof the ECB by national authorities regarding draft legislative provisions
1, as the proposal
contains provisions concerning payment and settlement systems as well as rules applicable tofinancial institutions which could materially influence the stability of financial institutions andmarkets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of theEuropean Central Bank, this opinion has been adopted by the Governing Council of the ECB. 
3. According to Finnish legislation, the Finnish Fi nancial Supervision Authority (FSA), which is
functionally independent but operates in connection with Suomen Pankki, supervises thefinancial markets and entities operating therein. The powers and tasks of the FSA are governedby the Act on the Financial Supervision Authority ( rahoitustarkastuslaki  503/1993). 
                                                     
1 OJ L 189, 3.7.1998, p. 42.
2Separate legislation applies to the supervision of insurance and pension institutions that are
supervised by the Finnish Insurance Supervisory Authority. The Insurance SupervisoryAuthority operates under the control of the Ministry of Social Affairs and Health and the ruleson its administration are governed by the Act on Insurance Supervisory Authority ( laki
Vakuutusvalvontavirastosta 78/1999). However, the powers of this Authority are governed by
various specific laws concerning different types of insurance institutions.
4. A financial conglomerate characteristically consists of entities active in different sectors; it
includes at least one credit institution and one insurance undertaking. Therefore, from thesystem outlined above, it follows that in Finland two separate authorities will supervise theentities belonging to a financial conglomerate. Such divided supervision does not necessarilycover the conglomerate as a whole, in particular because the scope of application of the sectoralsupervision provisions is focused only on the entities which are subject to authorisation for theiractivities. Although the provisions on the consolidation of banking groups and on thesupplementary supervision of insurance undertakings in insurance groups, both based on therespective Community directives, provide rules for additional group supervision, this does notcover a financial conglomerate as such. In other words, insurance undertakings belonging to afinancial conglomerate are not fully taken into account by the provisions on the consolidation ofbanking groups, and vice versa the rules on the supplementary supervision of insuranceundertakings in insurance groups concentrate on supervision only in this sector.
5. Since the first financial conglomerate engaged both in banking and insurance business
commenced operations in Finland, the two Finnish supervisory authorities have agreed by wayof a memorandum of understanding on key principles to facilitate their coordinated supervisionof such financial conglomerates. However, according to the proposal, urgent legislativemeasures are needed in order to establish a firm legal basis for supervision of theconglomerates. Therefore, the proposal introduces a new law on the supervision of financialconglomerates. This draft Law would be based to the extent possible on the existing powers anddistribution of tasks of the two respective supervisory authorities. The ECB takes note of thefact that the draft Law would thus not establish a single authority responsible for the overallsupervision of financial conglomerates. The rights and obligations of the two supervisoryauthorities in their respective sectors would not be restricted or modified. The draft Law intendsonly to enhance and strengthen the gathering of information concerning a financialconglomerate as a whole in order to avoid loopholes and opportunities for regulatory arbitrage.
6. The ECB takes note that the draft Law regulates the matter of supplementary supervision of
financial conglomerates on which the Commission has presented a proposal for a Communitydirective on the supplementary supervision of credit institutions, insurance undertakings and
3investment firms in a financial conglomerate2 (hereinafter referred to as the draft Directive).
According to the proposal, the adoption of the draft Law is urgent and therefore the proposaldoes not intend to fully comply with the draft Directive. As a consequence, once the draftDirective has been adopted, Finnish legislation would have to be amended in order to bebrought in line with the provisions of the future Directive.
7. The draft Law would provide rules concerning: (i) the definition of a financial conglomerate;
and (ii) the identification of one of the two supervisory authorities to act as a coordinatingsupervisor; and (iii) the tasks and rights of this coordinating supervisor; and (iv) the rules on thecooperation and exchange of information between the two supervisory authorities. 
8. The ECB observes that the definition of a financial conglomerate in the draft Law differs from
the definition of a financial conglomerate in the draft Directive. The ECB notes that the draftDirective considers the definition of a group as a core concept, which in turn is based on theconcept of close links as introduced by the so-called post-BCCI Directive
3. In contrast, the
definition in the draft Law is mainly based on the concept of dominant influence as defined inthe Accounting Act ( kirjanpitolaki  1336/1997). This may eventually cause confusion regarding
the conformity of the draft Law with the draft Dire ctive. In this respect, the proposal states that
revision of the definition of a financial conglomerate is foreseen once the draft Directive hasbeen adopted. Therefore, the ECB submits that the draft Law should be brought in line with thefuture Directive as soon as an agreement in the EU Council has been reached on the contents ofthe draft Directive.
The ECB further notes that the proposal complies with the draft Directive in respect of thethresholds for determining a financial conglomera te i.e. whether the activities of a group consist
mainly in providing financial services and whether its cross-sectoral activities are significantwithin the meaning of the Directive.
9. According to the draft Law, a holding comp any of a financial conglomerate is under an
obligation to notify the FSA or the Insurance Supervisory Authority immediately upon creationof a financial conglomerate. The ECB welcomes this provision. However, the ECB does not seewhy the obligation to notify cannot be extended to cover also the entities comprising such aconglomerate, and therefore submits that such an obligation should be included in the draft Law.
10. According to the draft Law, a financial conglomerate would always have one coordinating
supervisor. The draft Law provides the criteria according to which the coordinating supervisor isidentified: the coordinating supervisor would be the supervisory authority which is responsiblefor the supervision of the parent undertaking of a financial conglomerate; in other words theFSA would be the coordinating supervisor, if the parent undertaking of a conglomerate is a
                                                     
2Proposal for a directive of the European Parliament and of the Council on the supplementary supervision of credit
institutions, insurance undertakings and investment firms in a financial conglomerate and amending other relevant
Directives (COM/2001/0213 final).
3Directive 95/26/EC of the European Parliament and of the Council of 29 June 1995, OJ L 168, 18.7.1995, p. 7.
4credit institution or an investment company a nd the Insurance Supervision Authority would in
turn act as the coordinating supervisor, if the parent company is an insurance company. 
In a case where the parent company is a holding company supervised by neither  the FSA nor
the Insurance Supervision Authority, the coordinating supervisor would be defined andidentified on the basis of the principal sector of business (banking or insurance sector) of theconglomerate. The proportional share of each sector in a financial conglomerate would becalculated and the coordinating supervisor identified on the basis of this calculation.
The draft Law also contains an exception to the above-mentioned quantitative criteria foridentifying the coordinating supervisor. The identi fied coordinating supervisor would be able to
waive its tasks as a coordinating supervisor if the other supervisor has agreed to takeresponsibility for these tasks, for example in cases where a certain degree of continuity isneeded.
The ECB welcomes the fact that the above-mentioned objective criteria prevails over thediscretion of the competent authorities to reach an ad hoc agreement on the coordinator, since
the latter remains as an alternative solution. This is justified on the basis that objective criteriafor the appointment of the coordinator better serv e the requirements of transparency, clarity and
legal certainty regarding the supplementary supervision of financial conglomerates. 
11. According to the draft Law, the holding company of a financial conglomerate would have to
report regularly to the coordinating supervisor on the structure of the conglomerate, theconsolidated accounts, risk exposure and relevant intra-group transactions. In addition, thecoordinating supervisor would have the right to inspect and obtain information on the entitiesoutside the sectoral supervision but which belong to a conglomerate, such as holding companieswhich are not credit institutions, investment service companies or insurance undertakings. Thecoordinating supervisor would in addition have a right to obtain information from entities whichdo not belong to the financial conglomerate but which are linked to entities inside the financialconglomerate in a way which is relevant to the aim of supervision. These entities outside thefinancial conglomerate, such as pension insurance funds, would have an obligation to inform thecoordinating supervisor on inter alia  intra-group transactions. The coordinating supervisor
would also have the right to propose supervisory measures to be taken by the other authority,i.e. the one not being assigned as a coordinator,  in its respective sector. The ECB notes that in
the draft Law, the parent company is also required  to have in place its own internal control and
risk management systems that are adequate with regard to the operation of the whole financialconglomerate. The ECB welcomes these provisions.
12. In addition, the proposal seeks to harmonise the provisions in the banking and insurance
legislation in respect of the exchange of customer information between an insurance companyand a bank within the same financial conglomerate. Such exchange of information is notpermitted under existing laws, hampering thus the effective risk management within a financial
5conglomerate. The ECB welcomes these harmonisation intentions and notes that they are in line
with Article 11 of the draft Directive.
13. The ECB notes that the proposal does not address the capital adequacy of a conglomerate, one
of the key elements in the draft Directive. According to the proposal, it is not yet appropriate toprovide for rules on capital adequacy since the outcome concerning this issue in the draftDirective is uncertain. In other words, limits concerning capital adequacy and other substantiveissues requiring the harmonisation of calculation methods in the banking and insurance sectorare not provided; instead the proposal provides tools for the gathering of information on thefinancial position of a conglomerate and its assessment. Therefore the ECB submits also herethat the draft law should be brought in line with  the future Directive as soon as an agreement in
the EU Council has been reached on the contents of the draft Directive.
14. Finally, the ECB notes that the Treaty and the Statute of the European System of Central Banks
and of the European Central Bank (hereinafter referred to as the Statute) entrust theEurosystem
4 and Suomen Pankki, as its component member, with, inter alia, the task of
payment systems oversight in order to promot e the smooth operation of payment systems and
thus contribute to financial stability. The ECB and national central banks of the Eurosystemmay also provide facilities, and the ECB may make regulations, to ensure efficient and soundclearing and payment systems within the Commun ity and with other countries. Moreover, the
Treaty and the Statute provide that the Eurosystem shall contribute to the smooth conduct ofpolicies pursued by the competent authorities relating to the prudential supervision of the creditinstitutions and the stability of the financial system. The establishment, functioning,reorganisation and, in particular, possible failure of a financial conglomerate may haveimplications for the smooth functioning of payment systems and the stability of the financialmarket. Therefore, the ECB would welcome provis ion by the draft law of adequate means and
procedures for informing Suomen Pankki of any issue which may have such implications.
The ECB would like to draw attention to Article 9 of the draft Directive according to which thecompetent authorities may also exchange inform ation with central banks. This reference may
serve as an acknowledgment of the contribution by central banks to the prudential supervisoryframework for financial conglomerates. The central banks traditional focus on systemic risk,together with their knowledge of money and securities markets and market infrastructures andtheir function in the oversight of payment and settlement systems, places them in a uniqueposition to identify threats to the stability of th e financial system. In this context, information-
sharing with Suomen Pankki as a component member of the Eurosystem will contribute to themonitoring and pursuit of systemic stability in the Community.
                                                     
4The Eurosystem comprises the ECB and the national central banks of the Member States that have adopted the euro
as their single currency.
615. The ECB confirms that it has no objection to the competent national authorities making this
opinion publicly available at their discretion.
Done at Frankfurt am Main on 3 October 2001.
The President of the ECB
[signed]
Willem F. DUISENBERG