EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 16.8.2010 
SEC(2010) 981 final 
  
COMMISSION STAFF WORKING DOCUMENT 
 
 
Accompanying document to the 
 
Proposal for a 
 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
amending Directives 98/78/EC, 2002/87/ EC and 2006/48/EC as regards the 
supplementary supervision of financial entities in a financial conglomerate 
COM(2010) 433 
 SEC(2010) 979 
 
EN 2   EN COMMISSION STAFF WORKING DOCUMENT 
  
Accompanying document to the 
 
Proposal for a 
 
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 
 
amending Directives 98/78/EC, 2002/87/ EC and 2006/48/EC as regards the 
supplementary supervision of financial entities in a financial conglomerate 
 
EN 3   EN 1. B ACKGROUND  
The establishment and development of large, complex groups combining several banking and 
insurance licenses, was recognized in the ear ly nineties. Followi ng recommendations by the 
Joint Forum, the G10 body of supervisors,  the Financial Conglomerates Directive1 (FICOD) 
was adopted in 2002. It aimed at the supplementary supervision of regulated entities that form 
part of a financial conglomerate, by focusing on potential risks of double gearing (multiple 
use of capital) and on "group risks": the risks of contagion, management complexity, risk 
concentration, and conf licts of interest.  
Since 2002, markets have further developed in  a direction where th e distinction between 
banking business and insurance business is not always easily discernable and where the 
largest groups are activ e in many countries. Both the revi sion of the 1988 Basel Accord in 
2004, implemented in the EU by the Capital Requirements Directive (CRD)2 in 2006, and the 
introduction of a comprehensive set of regulati ons for insurance companies in Solvency II 
(S2)3 developed the regulatory framework but, as  regards conglomerates, only in so far as 
legal entities of a gr oup are active in the sa me sector - banking or insurance. The 
supplementary regulatory framework under FIC OD dealing with the additional complexity 
and risks stemming from combinations of licenses has not been evaluated yet.  
As of the end of 2009, the directive covered 69 European groups and 6 third country groups. 
About 35 of them are small and operate main ly domestically with a few licenses. Although 
the revision is also intended to simplify the supe rvision of small conglomerates, it specifically 
deals with the supervision of th e 30 or so biggest financial gr oups in Europe. Total assets of 
these at the end 2009 exceeded €25 trillion, representing a substantial share of the EU banking market of roughly €42 trillion assets and the EU insurance market of roughly €10 trillion 
assets.  A typical large conglomerate has over 400 licen ses in several jurisd ictions and several 
sectors: banking, life and/or non-lif e insurance, asset management.  
2. S
TAKEHOLDER CONSULTATION  
The Commission discussed possible improvements to the current legislative text three times at 
the European Financial Conglomerates Committee (EFCC)4 and three times in its FICOD 
working group. The FICOD review benefited fr om two earlier evalua tion exercises with 
respect to financial conglomerates regulation conducted by the so-called Mixed Technical 
Group  in 2005 and by the Interim Working Committee on Financial Conglomerates, a 
predecessor to the Joint Committee on Financial Conglomerates (JCFC),5 in 2008 ("the 
Capital Advice "). In April 2008 the EFCC approved the la unch of the required review of the 
FICOD with a Call for Advice  to the JCFC. 
                                                 
1 Directive 2002/87/EC on the supplementary supervis ion of credit institutions, insurance undertakings 
and investment firms in a financial conglomerate 
2 Directive 2006/48/EC relating to the taking up an d pursuit of the business of credit institutions and 
directive 2006/49/EC on the capital adequacy of investment firms and credit institutions 
3 Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance 
(Solvency II) (recast), but until Solvency II is im plemented, the FICOD supplements the insurance 
directives presently in place 
4 Advisory committee for financial conglomerates. 
5 Lamfalussy level 3 committee for financial conglomerates 
 
EN 4   EN The industry has been involved - by means of th e EFCC first newsletter  and dialogues - since 
May 2008, and has also expressed its view s on four public occasions since then. 
After receiving the final JCFC Advice  in October 2009, a pub lic consultation on the 
remaining questions and potenti al policy alternatives unde r consideration ran from 6 
November 2009 until 15 January 2010. Re sponses to the public consultation6 from a variety 
of both bank- and insurance-led conglomerates of a range of sizes re vealed a broad support 
for the Commission services' suggestions. 
3. P ROBLEM DEFINITION  
3.1. Supervision at the holding company level 
Supervision at the level of th e holding company is governed by th e combination of the current 
provisions of the FICOD, the CRD and the Insurance Groups Directive7 (IGD). These 
directives refer to 'mixed financial holding co mpanies' (MFHC), 'financial holding companies' 
(FHC) and 'insurance holding companies' (IHC) , respectively. The superv isory tools that can 
be applied at the top level change when the top level becomes an MFHC and ceases to be a FHC or an IHC. Figures 1 and 2
8 below demonstrate that the identification of a financial 
conglomerate can affect the application of s ectoral group supervision differently, depending 
on the structure of the group.  
Figure 1: FICOD supplements and partly replaces sectoral supervision if a banking or 
insurance group becomes a conglomerate. Before  acquisition by a holding company, a bank or 
an insurer is subject to consolidated supervision as laid out in either the CRD or the IGD. After the acquisition, consolidated  supervision can only be applie d to a top level banking or 
insurance entity. FICOD supplements that consolidated supervision. 
 
 
Bank 
 
Bank A 
  
Bank B Bank 
Bank A Bank B Insurer X 
  
Figure 2:  FICOD replaces sectoral supervision at a group level. If a MFHC replaces a FHC 
and/or an IHC and if there is no top level ba nking or insurance entity  (i.e., all licenses are 
owned directly by an MFHC), sectoral group su pervision provisions can no longer be applied.  
                                                 
6 http://ec.europa.eu/internal_market/consultations/docs/2009/ficod/feedback_document_en.pdf 
7 Directive 98/78/EC on the supplementary supervision of insurance undertakings in an insurance group 
8 Figures 1 and 2 use the example of a banking group for the purposes of illustration, but the same is true 
for insurance groups, with reference to the application of the CRD replaced by the IGD 
 
EN 5   EN  
 
FHC 
 
Bank A  
Bank B MFHC 
Bank A Bank B Insurer X 
CRD / insurance rules at solo level ON TOP:
FICOD 
ONLY 
 
As a result of the interaction depicted in Figure 2, certain tool s of sectoral group supervision 
that can be applied at the leve l of a FHC or an IHC can not be applied to the whole group 
when the holding company is a MFHC. Those t ools include the waiving of solo-supervision 
of subsidiaries, the application of provisions on disclosure (Pillar 3) and self-assessment and 
supervisory review (Pillar 2) on a consolidated ba sis. This leads to the anomalous result that a 
group which has acquired a license in the other s ector, so that the holding company becomes a 
MFHC, is subject to a regulatory regime which may not be as comprehensive as that which 
applied before the acquisition, even though the group has increased in size and complexity 
and may therefore represent a higher  risk to the financial system.  
As a consequence, the use by supervisors of a waiver in determini ng whether a group is a 
financial conglomerate is influenced by the a ssessment of whether the application of the 
sectoral supervision may be more prudentiall y sound. However, the continued application of 
sectoral supervision may not adequately address the additional prudential risks that arise from 
the increased size and complexity of the group - risks which would have been addressed by 
the supplementary aspects of the FICOD; a nd may result in differences in supervisory 
treatment (based on the structure rather th an on the risk profile) of conglomerates.  
3.2. Supervisory coordination 
FICOD supplements the CRD and insurance direct ives for additional s upervision at the top 
level of a group. To that end, it also cont ains provisions for coor dination among different 
supervisors of a group. FICOD defines who is a relevant competent authority (RCA), and 
requires the coordinator (the top level supervisor) to consult RCAs on certain supervisory 
questions. However, the curren t provisions leave room for va rying interpretations of the 
authorities that qualify as RCAs. A broad interp retation results in a high number of RCAs that 
must be consulted by the coor dinator at the financial c onglomerate level, which may 
undermine the effective and efficient coordina tion of the work to be carried out by the 
"college" of a coordinator and RCAs. 
3.3. Identification 
Provisions governing the identific ation of financial conglomerate also give rise to three sub-
problems.  
First, the directive does not require the inclus ion of asset management companies (AMCs) in 
the threshold tests, because UCITS were exclud ed from sectoral prude ntial supervision in 
 
EN 6   EN 2002, although it does require that AMCs be in cluded in the scope of supplementary 
supervision. Second, the threshol d tests can be based on different  parameters with respect to 
assets and capital requirements but the provision s are ambiguous as to how calculate the tests 
arising from, for example, different accounting treatments of assets, or parts of the group 
which do not always have a solvency requireme nt. Third and most importantly, the threshold 
conditions, given their fixed amounts, are not risk-based, and the noti on of expected group 
risks is not addressed by the th reshold test. This implies that  very small groups with a few 
licenses in each sector are subject to supplem entary supervision, while the largest most 
complex groups can technically be identified as  not being a conglomerat e. As a result, the 
current provisions on identification may un dermine the effective achievement of the 
underlying objectives of the directive. 
3.4. Participations 
The consistent treatment of participations in day-to-day supplemen tary supervision is 
hampered by the lack of relevant information to assess group risks, which is not so straightforward when participations are held in  listed firms. Compa ny law may prohibit one 
minority shareholder from receiving more info rmation about that firm than its other 
shareholders. For example, if information about  risks with respect to  participations in 
insurance and reinsurance companies cannot be obtained by bank-led conglomerates, they 
cannot provide their supervisors with the evidence of a satisfact ory level of integration of 
management and internal control with these entiti es that is necessary for consolidation and the 
right to deduct such partic ipations from their capital that consolidation entails.  
4. O
BJECTIVES  
The over-arching objective of this initiative is  to ensure that the effectiveness of the 
supplementary supervision of large and co mplex groups in the EU under the FICOD is 
enhanced, while maintaining the competitive positi on of these groups. This translates into the 
following three general policy objectives to:  
– Enhance financial stability; – Enhance safeguarding of credit or and policyholder interests; 
– Ensure international competitiveness of EU financial groups. In light of the problems presented above, th ree sets of operational objectives have been 
identified to address the specific problem driv ers. Effective realization of such operational 
objectives should contribute to the achievement of the longer-term specific policy objectives 
aimed at enhancing the effec tiveness of supplementary supe rvision, reinforcing the risk 
management of financial conglomerates, elimin ating opportunities for regulatory arbitrage , 
reducing the burden of compliance and enhanc ing the level playing field, supervisory 
cooperation and convergen ce, and legal clarity. 
 
EN 7   EN 5. P OLICY OPTIONS AND THEIR IMPACT  
Altogether, seventeen policy options have been  designed, impact-assessed and compared with 
a view to addressing the issues identified in th e analysis. This section describes the expected 
impacts of preferred policy measures in each area. 
5.1. Supplementary supervision on holding company level and supervisory 
coordination 
In order to align supervisory powers at the top level of a c onglomerate, to prevent both the 
loss of powers when a group structure changes and the duplication of supervision at the 
conglomerate level, and to facilitate coordina tion by the most releva nt supervisors, the 
following targeted amendments will be introduced:  
– end the exclusion of top level holding compan ies of a banking or an insurance group that 
are classified as a MFHC, so that provisions and powers that applied to the former FHC or 
IHC do not disappear when the classification of a group and its holding company changes 
as a result of an acquisition in the other sector;  
– narrow the definition of RCA to include only su pervisors of ultimate parent entities within 
individual sectors and any other competent aut horities that the supervisors of the ultimate 
parent entities cons ider are relevant. 
5.2. Identification of financial conglomerates 
To address the problem outlined in section 3.3 regarding the inclusion of AMCs in 
supplementary supervision, the inclusion of AMCs  at all times, complemented with guidance 
on indicators for inclusion, will be proposed. 
In order to tackle the ambiguity regarding parameters and the lack of a risk-based 
identification of conglomerates, technical standa rds on the application of  the "waiver option" 
for larger groups in Article 3(3) of the FICOD will be proposed, and an option will be 
introduced to waive supplementa ry supervision for groups wh ere the assets held by the 
smallest sector are below the ab solute threshold of €6 billion. 
5.3. Participations 
The problem of the day-to-day treatment of participations under supp lementary supervision, 
which is aggravated by the fact that comp any law may prohibit a minority owner from 
accessing information which is not accessible to other shareholders, will be alleviated by 
technical standards with respect to treatment  of participations in  various situations. 
5.4. Impact of preferred policy options 
The proposed policy changes are expected to render the supplementary supervision 
framework more robust, leading to more effect ive risk management incentives and practices 
which, in turn, should also help to enhance th e international competitiv eness position of EU 
financial groups. The proposals should contribute  positively to containing the risks to the 
financial stability and the concomitant costs to society. At the level of  individual stakeholder 
groups and systemic concerns, expected impacts of the proposals are as follows: 
 
EN 8   EN – Certain smaller EU financial groups  with a simple structure and not more than a few 
licenses in both sectors may be excluded from supplementary supervision and would 
therefore benefit from savings in compliance costs. This may be available to some ten 
smaller financial groups with combined asse ts of approximately €69 billion. Compliance 
costs for several larg e bank-led conglomerates  that have hundreds of licenses and are 
active in both sector s, on the other hand, should increase as several such groups, 
representing up to €9 trillion assets in the fina ncial sector, may be included in the scope of 
the supplementary supervision.  Increased compliance costs would also be incurred by 
those financial groups whose structure includes asset management business  and that will be 
identified as financial conglomerates follo wing proposed changes to the conglomerate 
identification process. Compliance costs for fi nancial groups that are newly included in the 
scope of the supplementary supervision should, given their overall size,  be immaterial in 
relative terms. Furthermore, they should be offs et with benefits arising from more effective 
risk management practices, induced by incenti ves implicit in this legislative proposal. 
Another positive impact can be expected from a greater visibility and trust in the markets 
that should result from identification as a c onglomerate. These benefi ts should enhance the 
international competitiveness of large EU groups, given in itiatives in the area of 
supplementary supervision that are being pursued  in other major intern ational jurisdictions. 
– The aforementioned changes to the conglomer ate identification process will make the 
scope of the supplementary supervision more appropriate and should therefore enhance the 
effectiveness of supervisors ' monitoring of the risks to which financial groups are exposed. 
Combined with a more streamlined supervisio n at the top level of conglomerates and an 
improved supervisory toolkit for detection of contagion, concentration, complexity issues 
and conflicts of interests in firms connected to a conglomerate through participations, this 
should make a positive contributi on to the financial stability.  
– The enhanced clarity of provisions govern ing the inclusion of asset management 
companies  in the identification and supplementary supervision should provide a more level 
playing field in this area. 
– As regards clients  of the affected financial groups, the impact is expected to be negligible 
given the overall level of materiality of the ne t incremental effect of this proposal on those 
groups. Moreover, clients might not be awar e of differences betw een the regulatory 
treatment of banks, insurers and conglomerates: they simply  trust that the supervisory 
framework is comprehensive and prudent, a nd this revision is especially aimed at 
reinforcing that framework and so justifying that trust.  
6. M ONITORING AND EVALUATION  
It is expected that the proposed amendmen ts will enter into force in 2011. The proposed 
amendments are closely linked with a recen t proposal of the Commission for the Omnibus 
Directive, amending the financial services directives to take account of the introduction of the 
new European Supervisory Authorities. They also are likely to be followed by a more 
fundamental review of the FICOD that may include provisions on the quality of capital 
buffers and scope as regards non-regulated entiti es. Therefore, it might be sensible to conduct 
a comprehensive evaluation based on the entirely overhauled le gislative framework, for which 
a target date should be set in line with the evaluations of these other directives.