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)
Date: 2001-10-03
Institutions: European Central Bank
Subjects: Eurosystem, Finland, conglomerate, credit institution, financial stability, financial supervision, holding company, insurance company, investment company, payment system

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  on

the  supervision  of  financial  conglomerates  (hereinafter  referred  to  as  the  “proposal”).  The

proposal  intends  to  introduce  in  Finland  a  new  law  on  the  supervision  of  financial

conglomerates (hereinafter referred to as the “draft Law”). In addition, the proposal intends to

introduce  certain  other  revisions  to  existing  related  laws.  The  proposal  intends  to  clarify  the

powers of the Finnish supervisory authorities in respect of financial conglomerates in order to

ensure that the financial conglomerates do not give rise to risks which might distort the stability

of  financial  market  or  payment  and  settlement  systems  and  thus  endanger  the  position  of

depositors 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 and

sixth indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation

of  the  ECB  by  national  authorities  regarding  draft  legislative  provisions1,  as  the  proposal

contains  provisions  concerning  payment  and  settlement  systems  as  well  as rules applicable  to

financial institutions which could materially influence the stability of financial institutions and

markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the

European Central Bank, this opinion has been adopted by the Governing Council of the ECB. 

3. 

According to Finnish legislation, the Finnish Financial Supervision Authority (FSA), which is

functionally  independent  but  operates  in  connection  with  Suomen  Pankki,  supervises  the

financial markets and entities operating therein. The powers and tasks of the FSA are governed

by the Act on the Financial Supervision Authority (rahoitustarkastuslaki 503/1993). 

1 

OJ L 189, 3.7.1998, p. 42.

                                                     
Separate  legislation  applies  to  the  supervision  of  insurance  and  pension  institutions  that  are

supervised  by  the  Finnish  Insurance  Supervisory  Authority.  The  Insurance  Supervisory

Authority operates under the control of the Ministry of Social Affairs and Health and the rules

on  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  the

system  outlined  above,  it  follows  that  in  Finland  two  separate  authorities  will  supervise  the

entities  belonging  to  a  financial  conglomerate.  Such  divided  supervision  does  not  necessarily

cover the conglomerate as a whole, in particular because the scope of application of the sectoral

supervision provisions is focused only on the entities which are subject to authorisation for their

activities.  Although  the  provisions  on  the  consolidation  of  banking  groups  and  on  the

supplementary  supervision  of  insurance  undertakings  in  insurance  groups,  both  based  on  the

respective Community directives, provide rules for additional group supervision, this does not

cover a financial conglomerate as such. In other words, insurance undertakings belonging to a

financial conglomerate are not fully taken into account by the provisions on the consolidation of

banking  groups,  and  vice  versa  the  rules  on  the  supplementary  supervision  of  insurance

undertakings 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 way

of a memorandum of understanding on key principles to facilitate their coordinated supervision

of  such  financial  conglomerates.  However,  according  to  the  proposal,  urgent  legislative

measures  are  needed  in  order  to  establish  a  firm  legal  basis  for  supervision  of  the

conglomerates.  Therefore,  the  proposal  introduces  a  new  law  on  the  supervision  of  financial

conglomerates. This draft Law would be based to the extent possible on the existing powers and

distribution of tasks  of  the  two  respective  supervisory  authorities.  The  ECB  takes  note  of  the

fact  that  the  draft  Law  would  thus  not  establish  a  single  authority  responsible  for  the  overall

supervision  of  financial  conglomerates.  The  rights  and  obligations  of  the  two  supervisory

authorities in their respective sectors would not be restricted or modified. The draft Law intends

only  to  enhance  and  strengthen  the  gathering  of  information  concerning  a  financial

conglomerate 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 Community

directive  on  the  supplementary  supervision  of  credit  institutions,  insurance  undertakings  and

2

investment 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  proposal

does  not  intend  to  fully  comply  with  the  draft  Directive.  As  a  consequence,  once  the  draft

Directive  has  been  adopted,  Finnish  legislation  would  have  to  be  amended  in  order  to  be

brought 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  coordinating

supervisor; and (iii) the tasks and rights of this coordinating supervisor; and (iv) the rules on the

cooperation 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  draft

Directive considers the definition  of a  group  as  a  core concept,  which  in turn  is  based  on the

concept  of  “close  links”  as  introduced  by  the  so-called  post-BCCI  Directive3.  In  contrast,  the

definition in the draft Law is mainly based on the concept of dominant influence as defined in

the Accounting Act (kirjanpitolaki 1336/1997). This may eventually cause confusion regarding

the conformity of the draft Law with the draft Directive. In this respect, the proposal states that

revision  of the  definition  of  a  financial  conglomerate  is  foreseen  once  the  draft  Directive  has

been adopted. Therefore, the ECB submits that 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.

The  ECB  further  notes  that  the  proposal  complies  with  the  draft  Directive  in  respect  of  the

thresholds for determining a financial conglomerate i.e. whether the activities of a group consist

mainly  in  providing  financial  services  and  whether  its  cross-sectoral  activities  are  significant

within the meaning of the Directive.

9. 

According  to  the  draft  Law,  a  holding  company  of  a  financial  conglomerate  is  under  an

obligation to notify the FSA or the Insurance Supervisory Authority immediately upon creation

of a financial conglomerate. The ECB welcomes this provision. However, the ECB does not see

why  the  obligation  to  notify  cannot  be  extended  to  cover  also  the  entities  comprising  such  a

conglomerate, 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 is

identified: the coordinating supervisor would be the supervisory authority which is responsible

for  the  supervision  of  the  parent  undertaking  of  a  financial  conglomerate;  in  other  words  the

FSA  would  be  the  coordinating  supervisor,  if  the  parent  undertaking  of  a  conglomerate  is  a

2

3

Proposal 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).
Directive 95/26/EC of the European Parliament and of the Council of 29 June 1995, OJ L 168, 18.7.1995, p. 7.

3

                                                     
credit institution or an investment company and 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  and

identified on the  basis  of  the  principal  sector  of  business (banking  or insurance  sector)  of the

conglomerate.  The  proportional  share  of  each  sector  in  a  financial  conglomerate  would  be

calculated and the coordinating supervisor identified on the basis of this calculation.

The  draft  Law  also  contains  an  exception  to  the  above-mentioned  quantitative  criteria  for

identifying the coordinating supervisor. The identified coordinating supervisor would be able to

waive  its  tasks  as  a  coordinating  supervisor  if  the  other  supervisor  has  agreed  to  take

responsibility  for  these  tasks,  for  example  in  cases  where  a  certain  degree  of  continuity  is

needed.

The  ECB  welcomes  the  fact  that  the  above-mentioned  objective  criteria  prevails  over  the

discretion 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 criteria

for the appointment of the coordinator better serve 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,  the

consolidated  accounts,  risk  exposure  and  relevant  intra-group  transactions.  In  addition,  the

coordinating supervisor would have the right to inspect and obtain information on the entities

outside the sectoral supervision but which belong to a conglomerate, such as holding companies

which are not credit institutions, investment service companies or insurance undertakings. The

coordinating supervisor would in addition have a right to obtain information from entities which

do not belong to the financial conglomerate but which are linked to entities inside the financial

conglomerate in  a  way  which  is  relevant  to the aim  of  supervision. These entities  outside  the

financial conglomerate, such as pension insurance funds, would have an obligation to inform the

coordinating  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 financial

conglomerate. 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 company

and  a  bank  within  the  same  financial  conglomerate.  Such  exchange  of  information  is  not

permitted under existing laws, hampering thus the effective risk management within a financial

4

conglomerate. 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 to

provide  for  rules  on  capital  adequacy  since  the  outcome  concerning  this  issue  in  the  draft

Directive is uncertain. In other words, limits concerning capital adequacy and other substantive

issues requiring the harmonisation of calculation methods in the banking and insurance sector

are  not  provided;  instead  the  proposal  provides  tools  for  the  gathering  of  information  on  the

financial position of a conglomerate and its assessment. Therefore the  ECB  submits  also  here

that 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  the

Eurosystem4  and  Suomen  Pankki,  as  its  component  member,  with,  inter  alia,  the  task  of

payment systems oversight in order to promote the smooth operation of payment systems and

thus  contribute  to  financial  stability.  The  ECB  and  national  central  banks  of  the  Eurosystem

may also provide facilities, and the ECB may  make regulations, to ensure efficient and sound

clearing and payment systems within the Community and with other countries. Moreover, the

Treaty  and  the  Statute  provide  that  the  Eurosystem  shall  contribute  to  the  smooth  conduct  of

policies pursued by the competent authorities relating to the prudential supervision of the credit

institutions  and  the  stability  of  the  financial  system.  The  establishment,  functioning,

reorganisation  and,  in  particular,  possible  failure  of  a  financial  conglomerate  may  have

implications  for  the  smooth  functioning  of  payment  systems  and  the  stability  of  the  financial

market. Therefore, the ECB would welcome provision 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 the

competent  authorities  may  also  exchange  information  with  central  banks.  This  reference  may

serve as an acknowledgment of the contribution by central banks to the prudential supervisory

framework  for  financial  conglomerates.  The  central  banks’  traditional  focus  on  systemic  risk,

together with their knowledge of money and securities markets and market infrastructures and

their  function  in  the  oversight  of  payment  and  settlement  systems,  places  them  in  a  unique

position to identify threats to the stability of the financial system. In this context, information-

sharing with Suomen Pankki as a component member of the Eurosystem will contribute to the

monitoring and pursuit of systemic stability in the Community.

4

The Eurosystem comprises the ECB and the national central banks of the Member States that have adopted the euro
as their single currency.

5

                                                     
15.  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

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