Opinion of the Economic and Social Committee on the "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 Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and the Council"
Date: 2001-10-17
Institutions: European Economic and Social Committee
Subjects: approximation of laws, credit institution, insurance company, investment company, provision of services

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II

(Preparatory Acts)

ECONOMIC AND SOCIAL COMMITTEE

Opinion of the Economic and Social Committee on the ‘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 Council Directives
73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives
98/78/EC and 2000/12/EC of the European Parliament and the Council’

(2002/C 36/01)

On 11 May 2001, the Council decided to consult the Economic and Social Committee, under Article 47 (2)
of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 26 September 2001. The rapporteur was
Mr Ravoet.

At its 385th plenary session on 17 and 18 October 2001 (meeting of 17 October), the Economic and
Social Committee unanimously adopted the following opinion.

1. Summary of the Commission’s document

The Lisbon Council has taken a strong commitment to
1.1.
integrate European financial markets and set a deadline of
2005 for the implementation of the Commission’s Financial
Services Action Plan (1)
(FSAP). The FSAP announces the
Directive for the beginning of 2001.

1.2.
The Directive will implement the recommendations of
the G-10 Joint Forum of February 1999 on monitoring
financial conglomerates, and its additional recommendations
issued in December 1999 on intra-group transactions and
exposures and risk concentrations.
It will also take into
account the conclusions of the Brouwer Report on Financial
Crisis Management, published by the European Economic and

(1) COM(1999) 232 final of 11.5.1999.

Financial Committee on 21 April 2001 (30 pages). The
directive will have a part to play in the development of an
integrated world financial market. Consequently, there will be
a need to harmonise the rules governing its operation; other
initiatives work along the same lines, such as the intention to
adopt international accounting standards in the EU, developed
in conjunction with the International Accounting Standards
Committee (IASC).

1.3.
Current EU financial regulation is mainly sector-based
and addresses primarily homogeneous financial groups, whose
activities are limited either to banking and investment in
securities or to insurance. However, within financial conglom-
erates (groups combining insurance companies, banks and
investment firms) existing risks in one specific sector may be
amplified, or new risks may be created. These risks should be
adequately supervised.

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1.4.
The draft Directive therefore introduces rules for
cross-sector holdings in undertakings as well as group-wide
supervision of financial conglomerates. Financial conglomerate
supervision supplements the existing sectoral rules for credit
institutions,
insurance undertakings and investment firms.
Thus the proposed directive will (under Articles 18 to 25)
amend existing directives in the following areas: ‘the taking-up
and pursuit of the business of credit institutions’ (2000/12/EC),
‘capital adequacy of investment firms and credit institutions’
(93/6/EEC),
field’
services
(93/22/EEC), ‘coordination of laws, regulations and adminis-
trative provisions relating to direct assurance other than
(73/239/EEC), amended by the ‘third non-
life assurance’
life insurance directive’ (92/49/EEC),
‘coordination of laws,
regulations and administrative provisions relating to the
taking-up and pursuit of the business of direct life assurance’
(79/267/EEC), amended by the ‘third life assurance directive’
(92/96/EEC), and the ‘supplementary supervision of insurance
undertakings in an insurance group’ (98/78/EEC).

in the securities

‘investment

1.5.

The main objectives of conglomerate supervision are:

2.2.
Article 1 lays down that credit institutions, insurance
undertakings and investment firms, are subject to conglomer-
ate supervision if they are part of a financial conglomerate.
The general definition of the latter is to be found in Article 2
(definitions), whereas the relevant thresholds to be applied are
laid down in Article 3.

According to this definition and these thresholds, a

2.3.
financial conglomerate is a group:

— whose activities mainly consist in providing financial
services in the financial sector (exceeding 50 % on the
basis of the annual accounts), and

— which comprises at least one insurance or reinsurance
undertaking, and at least one other entity of a different
financial sector,

— to ensure that the financial conglomerate has adequate
capital, in particular by preventing the same capital being
counted twice over and so used simultaneously as a buffer
against risk in different entities (‘multiple gearing’);

— whose cross-sectoral activities are significant. The ratio of
the smallest financial sector should exceed 10 % of the
balance sheet total and the solvency requirements of the
group.

— to introduce methods for calculating a conglomerate’s

overall solvency position; and

— to deal with the risks of transactions within groups, risk
the suitability and professionalism of

concentration,
management at financial conglomerate level.

However, the competent authorities may agree to
2.4.
lower these ratios to avoid frequent regime shifts for firms
operating close to the ratio limits or consider income structure
or off-balance-sheet activities instead of the balance sheet total
[Article 3 (3)].

2. Details of the Proposal

The existing sectoral rules for credit

institutions,
2.1.
insurance undertakings and investment firms (regulated en-
tities) are supplemented by provisions to avoid an unlevel
playing field or regulatory arbitrage between the sectoral rules
(Article 18-25). Among these is introduced an obligation to
deduct, for supervisory purposes, cross-sector holdings in
undertakings amounting to 10 % of their own funds/solvency
margin or of 10 % of the holding’s own funds/solvency margin
(Article 18 No 3, 19 No 3, 25 No 5) from the respective own
funds/solvency margin. Member states may however opt not
to deduct such holdings, when the undertakings are subject to
conglomerate supervision.

2.5.
Besides meeting the existing sectoral capital require-
ments, regulated entities in a financial conglomerate must
provide sufficient own funds at the level of the financial
conglomerate (Article 5). Technical annex I on capital adequacy
provides three different methods for carrying out the calcu-
lation of the supplementary capital adequacy. The competent
authorities may apply any one of these methods alone or in
combination.

2.6.
For the purposes of these calculations, only own funds
elements that are eligible according to each of the sectoral rules
(‘cross-sector capital’) may be considered, thereby excluding a
number of sector-specific own funds elements. The own funds
at conglomerate level are sufficient, if aggregated own funds
are higher than total sectoral capital requirements, if need be
taking into account the book value of the holdings in other
entities of the group (Annex I).

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in order

2.7.
Regulated entities within a conglomerate have to
establish adequate risk management processes and internal
to appropriately identify,
control mechanisms
measure, monitor and control the transactions within the
financial conglomerate (i.e. between the entities which make
up the conglomerate) and the risk concentration at the level of
the financial conglomerate [Article 6 (2)]. On a regular basis,
they have to report all significant internal transactions to the
supervisory authorities, as well as any risk concentration which
is significant to the conglomerate [Article 6 (3)].

2.8. Member States may set quantitative limits with regard
to internal transactions within a financial conglomerate and
its risk concentration [Article 6 (4)].

2.9.
Articles 7 to 13 set rules for co-operation and infor-
mation exchange among the competent authorities involved
in the supervision of the regulated entities within a financial
conglomerate (Article 7). The central issue is the identification
of one competent authority as ‘coordinator’, responsible for
exercising the supplementary supervision. This is supposed to
facilitate the co-operation amongst the supervisors involved
and to clarify roles among them.

2.10.
Other articles relate to adequate internal control
mechanisms for the provision of data (Article 10), access to
information (Article 11)
verification
(Article 12). Article 13 relates to additional powers of the
competent authorities, who are given the power to take any
supervisory measure necessary to deal with the circumvention
of sectoral rules (Article 14).

and on-the-spot

Article 14 provides for the application (by analogy)
2.11.
of the rules on conglomerate supervision to regulated entities
inside the EU but belonging to a ‘non EU’ group (i.e. whose
headquarters are located outside the EU),
if not equally
supervised.

Clarification of the definitions in Articles 2 and 3, the
2.12.
alignment of terminology and framing of definitions as a
consequence of future legislation, the clarification and adap-
tation of
the capital adequacy requirements in Article 5
and Annex I may be undertaken by ‘comitology procedure’
(Article 16). The latter requires a Commission proposal and
the consent of a future ‘Financial Conglomerates Committee’.

3. General Comments

3.1.
The Economic and Social Committee supports the
objective of the proposed Directive, i.e. to establish an EU-
wide framework for an effective supplementary supervision of
credit institutions,
insurance undertakings and investment
firms in a financial conglomerate. Financial conglomerates
number among the biggest financial groups worldwide. If
financial conglomerates, and in particular credit institutions,
investment firms and insurance undertakings that are part of
such a conglomerate, were to face financial difficulties, these
could seriously destabilise the financial system worldwide and
affect
insurance policy holders and
investors.

individual depositors,

For the ESC, this proposal presents the right approach
3.2.
to prevent situations in which the same capital
is used
simultaneously as a buffer against risk in two or more entities
in the same financial conglomerate (‘multiple gearing’), and
situations where a parent issues debt and down-streams the
proceeds as equity to its regulated subsidiaries (‘excessive
leveraging’).

3.3.
Even though, in the opinion of the ESC, this proposal
represents an important step forward towards an integrated
European financial market and enhanced financial stability, it
has to be recognized that its approach is imperfect. Since it is
based on the supervisory framework for the different regulated
entities, there is no aggregated view on risks, and the effects of
diversification and the fact
that some activities are not
correlated cannot be taken into account. International research
underlines the benefits and positive impact of cross-sector
diversification. For this reason, the ESC feels that there is a
need to debate and further develop risk assessment techniques
for financial conglomerates within the regulatory community
and with the sectors and other parties concerned. The ESC is
therefore of the opinion that rules should be introduced into
the Directive which favour the effects of diversification and
non-correlated activities, and thus provide incentives for
conglomerates to enhance their risk measurement and man-
agement capabilities.

Unlike the method which the Basle Committee fol-
3.4.
lowed, there does not seem to have been either a quantitative
analysis using simulations or an assessment of the specific
risks associated with financial conglomerates, when this draft
directive was being prepared; if there have been any, then the
ESC is not aware of its results. The European Commission has
been informed of these calculations which were carried out at
the initiative of the Joint Forum of Supervisors of financial
establishments (established at
the Bank for International
Settlements, including the Basle Committee for monitoring
banks,
the International Organization of Securities Com-
missions (IOSCO) as regards investment companies and the

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International Association of Insurance Supervisors (IAIS); the
Committee regrets the fact that the results of these calculations
have not been made available to it, since this would allow it to
express its opinion with a much fuller knowledge of the facts.
These results may raise a question mark over the quantitative
technique of deducting holdings. As a consequence, a choice
must be made between the speedy adoption of a directive
which is basically qualitative in nature, and a directive contain-
ing quantitative provisions following more in-depth examin-
ation of
the actual circumstances and in so far as the
simulations to be carried out would warrant it.

3.5.
The proposed concept for co-operation and co-ordi-
nation among supervisory authorities represents considerable
progress; achieving this will constitute a significant step
towards establishing a properly organised EU-wide supervisory
overview. It will not only improve the flow of information and
the quality of supervision, but will also reduce the workload of
all parties considerably. The identification of a ‘Coordinator’
will help to prevent conflicts of competence between the
various national supervisors and make supervision more
effective. In particular it will be essential for the regulated
entities to report to their sectoral authority only, and for
the coordinator to provide for the communication and co-
ordination between the various authorities.

Therefore, as a general rule,

3.8.
the Committee rec-
ommends reducing national options in the Directive, especially
those that might have a serious impact.

Furthermore,

the ESC underlines the necessity of
3.9.
achieving convergence of the discretionary decisions of the
supervisory authorities. For many questions the proposal gives
little guidance e.g. the selection of a calculation method for the
capital ratio. Those methods may produce results that diverge
considerably. Therefore, as a first step, general principles of
law should be taken into account when exercising these
discretionary powers, and first of all the principle of pro-
portionality. Thus, as a general rule, supervisors should only
apply the least restrictive measures necessary to achieve the
envisaged supervisory aims.

it

However,

is the firm belief of

3.10.
the Economic
and Social Committee that guidelines for the execution of
discretion need to be developed. The law and its application
have to be transparent and predictable. Therefore, appropriate
measures should be taken, e.g. the publication of decisions and
findings, including general conclusions relating to individual
cases. On the basis of such decisions, calculation methods may
be refined and guidelines may be drafted and introduced to the
Directive via the comitology procedure.

3.6.
The proposal, as a legal text, is designed as a framework
directive, confining itself to the minimum required. There are
few precise benchmarks, as minimum standards, many poss-
ible derogations and a very high degree of discretion is given
to the Member States and their supervisory authorities. It will
be up to the future Financial Conglomerates Committee and
the Commission to refine supervisory practice and clarify the
terms of the Directive. At a later stage, a convergence of
sectoral regulations might be considered. Due to the high
complexity of the issues involved and a limited degree of
empirical experience in conglomerate supervision, the ESC
favours such a flexible approach to conglomerate supervision.
It will allow appropriate practice and methods to develop that
can be quickly adapted to supervisory standards.

3.11.
The ESC stresses the importance of collaboration
and dialogue of supervisors within the ‘future’ Financial
Conglomerates Committee. This will be very important for the
development of converging supervisory practices.

3.12.
Convergence will also flow from experience backed
up by as extensive a dialogue as possible between the
supervisory authorities and the firms concerned, each at its
own level, and especially between the main coordinator
and the conglomerate concerned. Actively seeking the most
suitable solutions, taking into account previous experience
with convergence, will provide a powerful force for conver-
gence, in particular by publishing the guidelines which are
applied, as indicated above.

3.7.
However, it has to be noted that the very high degree
of discretion given to Member States and their supervisors,
even concerning many key aspects, creates the possibility of
an enormous bandwidth of national supervisory rules and
practices. This could create major competitive distortions, if
steps are not taken early enough to achieve convergence.

3.13. With regard to the legislative powers of the European
Commission, assisted by the future Financial Conglomerates
Committee, the ESC also suggests establishing procedures for
consultation, in particular of the relevant sectors and other
interested parties, with the aim of creating an on-going
dialogue. Such procedures should oblige the Commission and

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the Financial Conglomerates Committee to invite interested
parties for consultation, take notice of the presentations given
and give reasons for their decisions where appropriate. When
combined with similar committee procedures, coordinators’
contacts with conglomerates and the contacts which sectoral
supervisory authorities have with the firms they are monitor-
ing, this approach is likely to provide consistent momentum
towards much-needed gradual convergence.

3.14.
Even though conglomerates originated in Europe and
have to date expanded in this part of the world in particular,
they now seem to be expanding elsewhere, such as in the
United States. Introducing a strict supervisory framework in
the EU alone would mean seriously distorting competition, to
the detriment of its own financial institutions; for this reason
the rules should not initially be too strict. It is all the more
important for the EU to begin — as soon as the directive is
adopted — by consulting the Basle Committee on the need to
introduce comparable rules in the other member countries
represented on this committee. It is, moreover, a good sign
that the Basle Committee has proved to be highly active on
forum in drafting rules to govern cooperation
the joint
between supervisory authorities on conglomerates. The Basle
Committee has nevertheless stressed that it has no powers to
make the insurance industry adopt international rules on own
funds; that is one reason why European rules will not initially
be too demanding. The Basle Committee should also be
brought into the moves to encourage convergence.

4. Specific Comments

4.1.
According to the proposal, a holding above a given
threshold in an entity belonging to a sector for which
deduction of the holding is not stipulated in the current rules
has to be deducted from the respective own funds/solvency
margin of a regulated entity (Article 18 No 3, 19 No 3,
25 No 5). However, when passing the threshold for such a
deduction, regulated entities will not necessarily have the right
to calculate own funds according to the financial conglomerate
rules, because as a group they may not be a financial
conglomerate according to Articles 2 and 3. This may, in some
cases, imply serious disadvantages for a financial group and
cause competitive distortions. Therefore, the ESC is of the
opinion that there should be an option to apply the capital
adequacy rules for conglomerates whenever thresholds for
deduction are passed, but not those for qualifying as a financial
conglomerate.

4.2.
For the ESC it seems essential that financial conglomer-
ates report to one authority only, that is to say that one
coordinating body should be their single, direct point of
contact.

4.3.
For the definition of a conglomerate, the Committee
recommends considering not only the aspects laid down in
Articles 2 and 3. The best solution might be to take a flexible
approach allowing several criteria to be taken into account,
such as income, capital, balance sheet total or possibly other
parameters.

4.4.
According to Annex I, only those sectoral own funds
shall qualify for the calculation of the conglomerate solvency
requirements that are eligible according to each of the sectoral
rules (cross-sector capital). Furthermore,
the eligibility of
certain own funds as well as the effectiveness of the transfer-
ability and availability of the own funds shall be taken into
account. Such restrictions may cause serious disadvantages
vis-à-vis competitors not subject to conglomerate supervision.
Even sector capital may serve as a buffer within the conglomer-
ate and contribute to the reduction of any ‘contagion risk’.

4.5.
The proposal considers minority interest on a pro-
portional basis only under the first calculation method (as
indicated in Annex I). This would, among other aspects, create
a considerable disadvantage for those entities that are subject
to supplementary supervision under the other methods. In
order to avoid such an imbalance, the Committee suggests
sticking to the current rules and allowing full consideration
under the two other calculation methods as well.

4.6.
Article 6(4) empowers the Member States or the
national supervisors to set quantitative limits for transactions
internal to the group or to take other supervisory measures
that have the same effect. However, there are already a number
of sectoral limits. Furthermore, the relevance of transactions
within the group and risk concentration is specific to each
conglomerate. Therefore the ESC suggests a more flexible
approach in this regard and recommends qualitative criteria.

In order to determine the own funds needed for
4.7.
covering risks which the conglomerates actually run, the
directive ought to take better account of the risk reductions
flowing from diversification and from techniques created for
this purpose, such as hedging. Initially there will probably be
frequent major technical obstacles, but that should not prevent
a clear objective being defined and a number of stages being

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completed, such as cross-sector hedging of foreign exchange
positions taken by different companies belonging to the
conglomerate.

level. Therefore the ESC recommends that

soon introduce corresponding rules for international banks at
a global
this
Directive should be implemented at least a year after its
publication in the Official Journal, but not earlier than in
2005, when the Basle Agreement will have to be implemented.

4.8.
According to the proposal, a regulated entity may be
part of several financial conglomerates, as shareholdings of
less than 50 % are sufficient to exercise significant influence.
However, in order to avoid any useless restraints, the ESC
recommends defining transactions within the group on a
narrower base and only including entities where a dominant
influence can be exercised by the conglomerate.

The future directive on conglomerates also aims to
4.9.
improve directives relating to other groups, inter alia insurance
groups, while ensuring a certain consistency with the measures
it is introducing on conglomerates. As regards the calculation
of the solvency margin for an insurance group (i.e. basically its
own funds), the draft directive stipulates (in Article 24 (5)
amending the Directive on the supplementary supervision of
insurance undertakings in an insurance group) that national
supervisory authorities be delegated the power to determine
which proportional share of this margin must come from the
undertakings in an insurance group, where there are no capital
links between them. Any such absence of financial links means
that reciprocal commitments between these companies can
only flow from agreements reached between them. This being
the case the ESC proposes:

— the undertakings concerned should preferably determine
themselves what this proportional share should be and
the onus should be on them to justify their decision at
the request of the supervisory authorities;

— failing that, these authorities should take into account
any such reciprocal agreements and commitments when
setting this proportional share, so as not to commit the
undertakings to more than anything that
is legally
provided for. In this case, the directive could simply align
the wording of this paragraph on the corresponding part
of Annex I of the proposal (Section I.1, fourth paragraph).

4.10.
involve
The implementation of the Directive will
considerable efforts by the regulated entities as well as by
the supervising authorities as far as organisation, reporting
procedures and information technology are concerned. Fur-
thermore, it has to be noted that the new Basle Agreement will

5. Conclusions

The Committee finds this draft directive valuable

5.1.
because:

— it has a suitable role to play in the globalisation of
financial markets and fulfils the consequent need for
harmonisation adjusted to circumstances;

— it provides better protection for consumers, meaning here
depositors, investors and insurance policy holders;

— it establishes a general framework to cover the currently
very different situations between countries, enabling them
to draw closer together.

The mechanism set out in the directive can be expected
5.2.
to entail a marked increase in the own funds of conglomerates.
Given the cost of capital, but also the growth in internal
services flowing from additional prudential rules and the
concomitant increase in the cost of operating these conglomer-
ates and their constituent undertakings, the increase in own
funds should lead to some rise in the final cost of the services
the conglomerates provide. It is therefore important to have in
advance enough of an idea of the specific risks involved and
their extent, as well as an idea of the own funds needed to
cover them, before adopting cumbersome techniques such as
the deduction of own funds.

5.3.
A choice must be made between the speedy adoption
of a directive which essentially adopts a qualitative approach
and a directive containing quantitative provisions — such as
the deduction of own funds — following more in-depth
examination of the actual circumstances and insofar as the
simulations to be carried out would warrant it. The ESC
advocates a directive adopting a qualitative approach.

5.4.
As soon as possible procedures will have to be put in
place for launching, maintaining and gradually stepping up
moves towards convergence,
in view of the considerable
leeway initially allowed to the Member States which is at first
probably inevitable up to a certain point. However, such
leeway must be as restricted as possible. The above-mentioned
procedures will have to guide relations between the supervisory
authorities themselves and also between these authorities and
the financial conglomerates. Too little convergence would
cause major distortions of competition.

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Since

soon as

conglomerates

are
in non-member
is
directive

up
and
5.5.
the EU must,
expanding fast
on
impress
as
the Basle Committee the need to have similar binding
rules introduced and start a process of convergence at its own
the EU’s financial conglomerates would
level. Otherwise,

being
states,
adopted,

the

set

Brussels, 17 October 2001.

suffer a major competitive disadvantage vis-à-vis their non-EU
counterparts.

5.6.
Consultation of the supervised sectors will be a vital
component in the comitology procedure in order to end up
with rules that are as efficient as possible.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Communication from the Commission
relating to the revision of the 1997 notice on agreements of minor importance not covered by
the provisions of Article 81(1) of the EC Treaty’

(2002/C 36/02)

On 16 May 2001 the Commission decided, under Article 262 of the Treaty establishing the European
Community, to consult the Economic and Social Committee on the above-mentioned communication.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 26 September 2001. The rapporteur was
Mr Pezzini.

At its 385th plenary session (meeting of 17 October 2001) the Economic and Social Committee adopted
the following opinion unanimously.

1.

Introduction

2. Comments

1.1.
The process of modernising the competition rules and
the approach of decentralising responsibilities, adopted as a
result of the debate initiated by the Green Paper, are proceeding
smoothly together in the Commission’s work and can also
be found in the Communication under consideration. The
Commission, in tackling this review of agreements of minor
importance, takes account of the judgments issued by the
Court of Justice in recent years and of the need — to which
the ESC has referred earlier — to provide judges and authorities
in the Member States with guidelines (not necessarily binding
ones).

2.1.
The new Commission Notice relating to the revision of
the 1997 Notice on Agreements of Minor Importance is to be
welcomed. It contains a number of significant improvements
upon its predecessor. Yet the Committee thinks it desirable to
emphasise and bring out certain points of special interest.

2.2. Market share maxima

1.2.
It should also be emphasised that the present Com-
munication, although it covers ‘agreements of minor import-
ance’, still has considerable significance, both in terms of the
enormous number of cases covered and in terms of the
complex task of identifying the nature of the agreements.

In the 1997 Notice, the Commission had introduced
2.2.1.
a distinction between ‘horizontal’ and ‘vertical’ agreements and
stated that since vertical agreements posed less of a threat to
and risk for competition in the internal market they can be
treated more leniently than horizontal agreements. The 1997
Notice defined ‘vertical’ agreements as agreements between
undertakings at different levels of production or distribution