COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT   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
Date: 2010-08-16
Institutions: European Commission
Subjects: EU control, credit institution, financial control, financial solvency, holding company, investment company, provision of services, right of establishment

EN 

EUROPEAN COMMISSION 

Brussels, 16.8.2010 
SEC(2010) 979 

COMMISSION STAFF WORKING DOCUMENT 
IMPACT ASSESSMENT 

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 final} 
{SEC(2010) 981 final} 

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   EN 

 
 
  
 
 
 
 
 
This document commits only the Commission's services involved in its preparation and does 
not prejudge the final form of any decision to be taken by the Commission 

TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

3. 

3.1. 

3.2. 

3.3. 

Introduction .................................................................................................................. 4 

Procedural issues and consultation of interested parties .............................................. 7 

Consultation process .................................................................................................... 7 

Inter-services steering group ........................................................................................ 9 

Impact Assessment Board of the Commission............................................................. 9 

Problem definition...................................................................................................... 10 

Nature and size of the market..................................................................................... 10 

EU legislative and international frameworks............................................................. 12 

Problems..................................................................................................................... 13 

3.3.1.  Supervision at the holding company level ................................................................. 13 

3.3.2.  Supervisory coordination ........................................................................................... 17 

3.3.3. 

Identification .............................................................................................................. 18 

3.3.4.  Participations – identification and supervision .......................................................... 20 

3.3.5.  Problem tree ............................................................................................................... 21 

3.3.6.  Subsidiarity and proportionality of EU action ........................................................... 21 

4. 

Objectives................................................................................................................... 22 

4.1. 

Coherence of objectives with other initiatives of the Commission............................ 24 

5. 

5.1. 

Policy options, impact analysis and comparison........................................................ 27 

Supplementary supervision on holding company level and supervisory coordination
.................................................................................................................................... 27 

5.1.1.  Alignment of supervisory powers .............................................................................. 27 

5.1.2. 

Identification of RCAs ............................................................................................... 30 

5.2. 

Financial conglomerate identification process........................................................... 31 

5.2.1. 

Inclusion of AMCs in the identification process........................................................ 31 

5.2.2.  Risk-based identification............................................................................................ 33 

5.3. 

5.4. 

6. 

Participations.............................................................................................................. 37 

The package of preferred policy options and its impact ............................................ 40 

Monitoring and evaluation ......................................................................................... 42 

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7. 

8. 

9. 

Annex I: Acronyms .................................................................................................... 43 

Annex II: Glossary ..................................................................................................... 45 

Annex III: FICOD review process ............................................................................. 47 

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1. 

INTRODUCTION 

The establishment and development of large, complex groups combining licenses in various 
sub-sectors  of  the  financial  market,  and  in  particular  combining  insurance  business  with 
banking business, was recognized in the early nineties. The Joint Forum1 - the G10 body of 
supervisors which monitors and discusses financial market trends affecting banking, insurance 
and securities markets - observed a need for additional supervision of this kind of groups and 
published  their  principles  for  the  supervision  of  financial  conglomerates  in  1999.  These 
principles explain that such supplementary supervision should enable supervisors to monitor, 
ring-fence, limit or otherwise influence activities which may spread risks from one entity of a 
financial  conglomerate  to  another.  The  objective  of  this  supplementary  supervision  was  the 
control  of  potential  risks  of  double  gearing  (i.e.,  multiple  use  of  capital)  and  "group  risks", 
i.e., the risks of contagion, management complexity, concentration, and conflicts of interest, 
which arise incrementally when licenses for different financial services are combined under 
the  same  roof.  The  typical  supervisory  tools  for  this  kind  of  supervision  would  be  not  only 
monitoring  tools  such  as  reporting  of  intra-group  transactions,  but  also  requirements  for 
internal  governance  and  group-wide  risk  management,  and,  of  course,  supervisory 
cooperation  requirements.  Last  but  not  least  supervisors  would  need  exclusive  powers  to 
access information when approaching entities in a conglomerate. 

The Financial Conglomerates Directive2 (FICOD), a short directive of about 20 articles, was 
adopted in 2002 as a response to the need for supplementary supervision of complex groups 
laid out in those Joint Forum principles. The objective of supplementary supervision has been 
supported ever since by stakeholders when consulting on this initiative. 

FICOD supplements the two relevant sectoral directives: the Capital Requirements Directive 
(CRD)3 and the insurance directives. CRD provides for the prudential supervision of deposit-
taking  banks  and  electronic  money  institutions.  The  activities  of  such  firms  build  on  the 
leveraging of available capital,4 and the directive aims at the protection of depositors through 
ensuring  prudential  soundness.  The  capital  requirements  relate  to  bank-specific  risks,  which 
are  applicable  to  all  regulated  banking  entities,  stand  alone  and  in  a  group.  The  insurance 
directives, aimed at the protection of policyholders, provide for the prudential supervision of 
firms conducting insurance activities and whose activities build on the investment of paid up 
premiums  in  such  a  way  that  the  cashflows  from  these  investments  ensure  that  insurance 
claims can be paid out. To this end, insurance companies calculate how much provisions (the 
so-called technical provisions) they should keep for these claims. The capital requirements for 
insurance  companies  are  related  to  insurance-specific  risks,  more  specifically  to  the 
uncertainty  implicit  in  the  calculation  of  technical  provisions.5  CRD  and  the  insurance 

1 

2 

3 

4 
5 

Joint  G10  Committee  of  Basel  Committee  of  Banking  Supervisors,  International  Association  of 
Insurance Supervisors, and International Organization of Securities Committees 
Directive  2002/87/EC  on  the  supplementary  supervision  of  credit  institutions,  insurance  undertakings 
and investment firms in a financial conglomerate 
Directive  2006/48/EC  relating  to  the  taking  up  and  pursuit  of  the  business  of  credit  institutions  and 
directive 2006/49/EC on the capital adequacy of investment firms and credit institutions 
CRD Annex I contains a list of relevant activities. 
Solvency II Annex I contains a list of non-life insurance activities, Solvency II Annex II contains a list 
of life-insurance activities. 

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directives can be applied on a solo level to each licensed entity, and on a consolidated level so 
that all licensed legal entities subject to the same directive are aggregated. 

While  banking  and  insurance  directives  are  thus  aimed  at  calculating  sufficient  (capital) 
buffers  for  the  protection  of  depositors  and  policyholders,  FICOD,  on  the  other  hand,  is 
concerned  with  the  supplementary  supervision  of  group  risks,  which  are  not  bank-  or 
insurance  specific,  but  are  rather  inherent  in  controlling  a  group  of  many  regulated  entities 
that  operate  in  different  kinds  of  financial  markets.  This  implies  that  entities  which  have  a 
mutual  relationship  that  affects  the  risk  profiles  of  each  of  them  must  be  included  in  the 
supervisory  scope.  For  example,  if  a  group  were  to  invest  in  an  airport,  the  CRD  would 
require the bank in that group to determine a relevant exposure to the airport, if any, and keep 
sufficient  capital  for  it.  FICOD,  for  its  part,  would  require  the  conglomerate  to  assess  the 
potential contagion risks arising from difficulties or extreme stress scenarios experienced by 
the  airport,  and  have  contingency  plans,  ringfencing  alternatives  or  other  governance 
measures available.6 

(1) 

FICOD  envisaged  a  review  of  its  provisions  some  years  after  implementation.  In 
addition  to  this  formal  requirement,  a  review  of  the  effectiveness  of  the  directive  is 
also justified by the economic and supervisory environment. Markets have developed 
in a direction where the distinction between banking business and insurance business 
is  not  always  clear  and  where  the  largest  groups  are  active  in  many  countries.  The 
traditional  supervisory  perspective  of  monitoring  whether  a  single  authorized  legal 
entity complies with its obligations is no longer adequate for groups that contain more 
than 1,000 licenses in all sectors and in many countries. Both the revision of the 1988 
Basel Accord in 2004, and its European implementation by the CRD in 2006, and the 
introduction  of  a  comprehensive  set  of  regulations  for  insurance  companies  in 
Solvency II (S2)7 developed the regulatory framework but, as regards conglomerates, 
only  in  so  far  as  legal  entities  of  a  group  are  active  in  the  same  sector,  banking  or 
insurance.  The  regulatory  framework  to  address  the  additional  complexity  and  the 
additional risks stemming from combinations of licenses, as set out in the FICOD, has 
not  yet  been  evaluated.  This  review  of  the  FICOD  effectively  started  in  2008  and 
formed the basis of the legislative proposal that this impact assessment accompanies. 
A  couple  of  non-controversial  technical  issues  were  included  in  the  Commission's 
proposal  for  Omnibus  Directive8  in  October  2009,  accompanying  the  Regulations9 
establishing the new European Supervisory Authorities.  

6 

7 

8 

A typical example of the complexity caused by non-regulated entities in the financial conglomerate is 
the Macquarie group in Australia, which started with technology, aeroplanes and an airport. Now the 
group also has a bank and an insurer. This implies that the management of the group and the supervisor 
of the financial sector has to be aware of the effects of the safety on the airport (e.g. the possibilities of 
terrorist attacks) on consumers' behaviour vis-à-vis the bank – what is called reputation risk or franchise 
risk. Europe has no experience of this kind of conglomerate, but some American groups (GE, GM) do 
have (small) banking licenses that operate in the EU, which calls for a specific supervisory perspective. 
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  implemented,  the  FICOD  supplements  the  directives 
presently in place 
COM(2009) 576 final, proposal for a directive of the European Parliament and of the Council amending 
Directives 1998/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 
2005/60/EC,  2006/48/EC,  2006/49/EC,  and  2009/65/EC  in  respect  of  the  powers  of  the  European 
Banking  Authority,  the  European  Insurance  and  Occupational  Pensions  Authority  and  the  European 
Securities and Markets Authority 

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(2) 

(3) 

The  review  process  has  indicated  that  "group  risks"  arise  across  the  whole  financial 
sector, underscoring the importance of the supplementary supervision of links within 
financial  groups  and  between  financial  institutions.  While  the  Commission  Services, 
with  the  help  of  the  supervisors  gathered  in  the  Joint  Committee  on  Financial 
Conglomerates  (JCFC),10  were  reviewing  the  FICOD,  similar  initiatives  were 
undertaken  in  the  US11  and  Australia12  based  on  the  original  principles  published  by 
the Joint Forum.  

The  review  revealed  that  where  the  supplementary  supervision  was  applied  as 
intended,  objectives  of  the  FICOD  were  met.  However,  the  review  also  showed  that 
achievement  of  these  objectives  could  be  obstructed  by  issues  in  the  areas  of 
supervisory  scope,  including  supervision  at  the  holding  company  level,  and 
coordination,  financial  conglomerate  identification  and  supervisory  treatment  of 
participations. For instance, during the crisis several supervisors found themselves not 
being  able  to  simultaneously  apply  both  sectoral  consolidated  supervision  and 
supplementary supervision (see Section 3.3.1). This specific problem, which relates to 
the inclusion of "mixed financial holding companies" in the FICOD, the CRD and the 
Insurance  Group Directive  (IGD)13, calls for an immediate solution. Other issues for 
improvement  were  found,  in  the  areas  of  supervisory  scope  and  regulatory  capital, 
which need more time to mature because of international developments, especially in 
the Basel Committee and the Joint Forum, as well as ongoing debates about CRD and 
Solvency II. 

This report accompanies a legislative proposal to amend the FICOD which is primarily aimed 
at eliminating unintended consequences and technical omissions in the original directive that 
were  identified  during  the  review  and  ensuring  that  FICOD's  objectives  are  achieved  more 
effectively.  The  proposal  is  meant  as  a  quick  fix  for  these  unintended  consequences,  which 
need to be restored urgently. The other issues which were found during the review, e.g., in the 
areas  of  supervisory  scope,  especially  with  respect  to  the  non-regulated  entities  in  a  group, 
and regulatory capital, need to mature because of international developments, including those 
in  the  Basel  Committee  and  the  Joint  Forum,  and  ongoing  debates  about  the  sectoral 
directives (CRD III, CRD IV; S2).14 These issues are being investigated by the Commission 
services  and  discussed  with  stakeholders  publicly,  among  others,  in  a  Conference  of  7  June 
2010, already. 

9 

10 
11 

12 

13 
14 

COM(2009)  501  final,  proposal  for  a  regulation  of  the  European  Parliament  and  of  the  Council 
establishing  a  European  Banking  Authority;  COM(2009)  502  final,  proposal  for  a  regulation  of  the 
European Parliament and of the Council establishing a European Insurance and Occupational Pensions 
Authority;  COM(2009)  503  final,  proposal  for  a  regulation  of  the  European  Parliament  and  of  the 
Council establishing a European Securities and Markets Authority 
Advisory committee for financial conglomerates at Lamfalussy level 3 
The  Obama  Administration  proposed  to  Congress  that  supplementary  supervision  of  large,  complex 
financial  groups  should  be  carried  out  by  the  Federal  Reserve,  on  top  of  the  existing  license-based 
supervision  by  the  several  existing  authorizing  bodies.  The  proposal  does  not  distinguish  explicitly 
between  pure  banking  groups,  pure  insurance  groups  or  conglomerates.  It  acknowledges  that  large, 
complex financial groups can pose additional risks to society. 
The  Australian  Prudential  Regulation  Authority,  which  has  a  long  experience  of  integrated  and 
supplementary  prudential  supervision,  is  considering  how  to  oversee  the  contagion  arising  from  non-
regulated entities of financial groups. See http://www.apra.gov.au/media-releases/10_06.cfm  
Directive 98/78/EC on the supplementary supervision of insurance undertakings in an insurance group 
Regulatory capital is being discussed in the Basel committee, the inclusion of non-regulated entities is 
being discussed in the Joint Forum. 

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2.  PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1. 

Consultation process 

Consultation with three key groups of stakeholders - member states, supervisors, the industry 
- has been taking place since the first plans for the FICOD review in early 2008 (see Table 1 
for a chronological overview of main events in the consultation process; see Annex III for a 
more  detailed  overview  of  the  FICOD  review  process).  The  Commission  services  took 
stakeholder  responses  into  account  in  order  to  determine  which  issues  to  address,  which 
policy options to consider and assess for their impact.  

The  member  states'  regulators,  represented  by  the  European  Financial  Conglomerates 
Committee (EFCC)15, have been involved in the review since April 2008, and have been kept 
up-to-date  about  its  progress,  including  via  an  EFCC  newsletter  which  is  available  on  the 
Commission's website. 

The  supervisory  community,  represented  by  the  JCFC,  was  informed  and  involved 
immediately after the regulators had supported the Call for Advice of April 2008. The JCFC 
set up a FICOD review working group, consisting of about 20 supervisors from across the EU 
and meeting approximately once a month. The JCFC has been updating regularly the EFCC 
about the progress of its work. This impact assessment report and the legislative proposal that 
it accompanies build to a large extent on the JCFC's preparatory work.  

The industry has been involved since May 2008 by means of the EFCC first newsletter and 
dialogues.  It  was  invited  to  establish  an  industry  "mirror  group"  consisting  of  the  major 
financial  conglomerates  in  the  EU.16  The  mirror  group  of  bank-led  conglomerates  was 
facilitated by the European Banking Federation (EBF) and the mirror group of insurance-led 
conglomerates  by  the  Commission  Européenne  d'Assurance  (CEA).  Other  European 
associations such as the European Association of Co-operative Banks (EACB), the European 
Association of Savings Banks (EASB) and the European Association of Public Banks (EAPB) 
participated  in  the  hearings  and  consultations.  Also,  the  industry  presented  its  views  at  the 
EFCC meetings on several occasions. 

In  May  2008  a  Call  for  Evidence  to  the  industry  was  published  in  the  EFCC  newsletter. 
Several individual groups, national associations and European associations responded to this 
Call.  Industry's  main  messages,  as  expressed  at  the  Roundtable  on  8  September  2008  in 
Brussels  and  at  the  EFCC  meeting  on  22  January  2009,  and  confirmed  on  8  July  2009  in 
Frankfurt, were as follows: 

–  Harmonize the definition of capital across the sectoral directives (CRD and S2); 

–  Make the FICOD identification criteria more risk-based; 

15 
16 

Lamfalussy level 2 committee for financial conglomerates 
Some  or  all  of  the  following  usually  participate:  Deutsche  Bank,  ING,  BNP  Paribas,  (Fortis),  AXA, 
Allianz, British Bankers Association representing, among others, HSBC, HBOS, RBS, Barclays. Given 
the two different perspectives of the CRD and S2, the banking-led groups and the insurance-led groups 
tend to have specific positions. 

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–  Address  the  interaction  of  the  three  directives  to  ensure  a  predictable  level  playing  field 
and  converged  supervisory  practices,  particularly  with  regard  to  the  inclusion  and 
treatment of participations; 

–  Allow  for  a  supervisory  review  process  (i.e.,  Pillar  2),  including  assessment  of  internal 
group-wide risk strategies, model development, internal control and related policies at the 
top level; and 

–  Clarify which accounting rules should be applied to capital aggregation methods. 

–  Also,  the  industry  expressed  its  support  for  the  concept  of  supplementary  supervision  as 

defined in the FICOD for the purpose of supervising conglomerates. 

–  The  draft  proposal  to  amend  the  FICOD  reflects  the  industry's  views  with  respect  to  the 
identification  criteria  and,  by  allowing  for  guidelines,  with  respect  to  the  supervisory 
treatment  of  participations  and  methods  of  capital  aggregation,  as  well  as  alignment 
between  the  CRD,  S2  and  the  FICOD  in  order  to  to  allow  for  a  group-wide  supervisory 
review process. Any harmonization of the definition of capital will be proposed only after 
the  conclusion  of  sectoral  debates,  especially  on  the  amendments  to  the  Basel  II  bank 
capital framework that are currently ongoing at the Basel Committee. 

In  May  2009,  the  JCFC  published  their  review  findings  and  policy  recommendations  for  a 
consultation  which  ran  from  29  May  until  28  August  2009.  As  mentioned  above,  the  draft 
advice  was  discussed  with  the  industry  in  a  hearing  on  8  July  2009  in  Frankfurt.  A  public 
consultation  on  the  remaining  questions  and  potential  policy  alternatives,  considered  by  the 
Commission services, ran from 6 November 2009 until 15 January 2010. 

Both  consultations  were  targeted  at  both  member  states  and  the  industry.  Responses  to  the 
Commission's  public  consultation  from  both  large  and  small  bank-  and  insurance-led 
conglomerates,  revealed  a  broad  support  for  its  suggestions  in  four  main  areas:  restoring 
supervisory  powers  at  the  top  level  of  conglomerates,  risk-based  identification,  inclusion  of 
asset management companies and treatment of participations.17 

Table 1: Overview of main events and milestones in the consultation process 

Time 

Event / milestone 

Description 

Apr 2008  Call 

for  advice 

to 

Launch by EFCC 

JCFC 
Industry mirror group 

May 2008 
May 2008  Call  for  evidence  to 
the industry 

Set up 
Issued 

Sep 2008  Roundtable in Brussels  Discussion of main issues 
JCFC's 
Dec 2008  Public 

hearing 

in 

London 

Jan 2009  EFCC meeting 

May 2009  Draft advice of JCFC 

initial 

Discussion  of 
findings 
Discussion  of  interim  findings  of 
the JCFC and the industry 
Published 

Stakeholders involved 
Supervis
ors 
(JCFC) 

Regulat
ors 
(EFCC) 

Industry 

√ 

√ 

√ 

√ 

√ 

√ 
√ 

√ 

√ 

√ 
√ 

√ 
√ 

√ 

17 

http://ec.europa.eu/internal_market/consultations/2009/fcd_review_en.htm  

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Time 

Event / milestone 

Description 

Stakeholders involved 
Supervis
ors 
(JCFC) 

Regulat
ors 
(EFCC) 

Industry 

May - Aug 
2009 
Jul 2009 

Nov  2009 
- Jan 2010 

Consultation  on  draft 
JCFC advice 
JCFC  meeting 
Frankfurt 
Public  consultation  on 
policy alternatives 

in 

Consultation  conducted  by  the 
JCFC 
Discussion of JCFC's draft advice 

Consultation  conducted  by  the 
Commission services 

√ 

√ 

√ 

√ 

√ 

√ 

2.2. 

Inter-services steering group 

The Commission services' impact assessment steering group, chaired by Directorate-General 
for Internal Market and Services, was set up to follow progress and provide views from other 
services of the Commission,  including Directorates-General for  Competition,  Economic  and 
Financial  Affairs,  Employment,  Secretariat  General,  Legal  Services  and  Health  and 
Consumers. The group met three times in March and July 2009, and in April 2010. Before the 
launch  of  the  Commission  Services  consultation  in  October,  the  group  was  consulted  in  a 
round of written comments. 

2.3. 

Impact Assessment Board of the Commission 

The draft impact assessment was discussed with the Impact Assessment Board (IAB)18 on 19 
May  2010.  This  revised  impact  assessment  report  reflects  the  comments  of  the  IAB  as 
follows: 

–  Extent,  to  which  the  FICOD  achieved  its  objectives,  has  been  elaborated  by  further 
explaining how and in which specific areas the effectiveness of supplementary supervision 
has been compromised during the financial crisis and by including stylised examples; 

–  Presentation  of  economic  statistics  on  conglomerates  has  been  improved  by  including  an 
overview  of  their  market  share  (with  and  without  the  groups  that  have  been  waived  by 
national  supervisors  from  the  supplementary  supervision)  in  the  total  financial  sector, 
comprising both banks and insurers; 

–  The  rationale  behind  maintaining  the  materiality  thresholds  in  the  conglomerate 

identification process has been clarified; 

–  A  more  detailed  overview  of  the  several  other  policy  initiatives  related  to  financial 
conglomerates, including the Omnibus Directive, the Crisis Management Communication 
and the upcoming fundamental review of FICOD has been included; 

–  A list of acronyms and a glossary have been added, use of technical language reduced and 
a number of other more detailed comments by the IAB have been reflected throughout the 
report. 

18 

The IAB is an independent internal body of the Commission set up to ensure more consistent and higher 
quality of impact assessments prepared by various Commission departments. The IAB works under the 
direct authority of the Commission President. Its members are appointed in their personal capacity and 
on the basis of their expert knowledge. 

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3.  PROBLEM DEFINITION 

3.1. 

Nature and size of the market 

The  current  directive  covers  69  European  groups  (end  2009  figures)  and  6  third  country 
groups,  which  are  identified  as  a  financial  conglomerate.19  About  35  of  them  are  small  and 
operate  mainly  domestically  with  a  relatively  small  number  of  licenses.20  Although  the 
revision  is  also  intended  to  simplify  the  supervision  on  the  smallest  conglomerates,  it 
specifically  deals  with  the  supervision  of  the  30  or  so  biggest  financial  groups  in  Europe. 
These are engaged in both the banking and insurance businesses, and the majority also carry 
on  asset  management  business.21  A  typical  large  conglomerate  has  over  400  licenses  in 
several  jurisdictions  and  several  sectors  (banking,  life  and/or  non-life  insurance,  asset 
management). The biggest conglomerates may have over 900 legal entities or licenses. Total 
assets  of  the  30  largest  financial  groups  as  of  end  2009  exceeded  €25  trillion,22  which  is 
equivalent  to  about  208%  of  the  EU  GDP  and  represents  a  substantial  share  of  the  EU 
banking market of roughly €42 trillion assets23 and the EU insurance market of roughly €10 
trillion  assets.24  Since  the  total  assets  of  the  remaining  39  groups  make  up  a  considerably 
smaller amount, the total assets of all 69 groups covered by the directive can be assumed to be 
also equal to €25 trillion while their share in the combined EU banking and insurance market 
of €52 trillion can be approximated to 48%. 

Chart 1 below shows the distribution of these financial conglomerates - both bank- or insurer-
led – in terms of size. The Y-axis shows the arithmetic average of two ratios: i) balance sheet 
total  of  the  smallest  sector  to  the  consolidated  balance  sheet  total,  and  ii)  regulatory  capital 
requirements  of  the  same  sector  to  total  regulatory  capital  requirements  of  the  group.  It 
indicates  the  proportional  shares  of  the  respective  sectors  within  a  conglomerate  can  vary 
substantially.  It  also  shows  that  insurer-led  conglomerates  are  smaller  in  general.  This  is 
because  the  economic  impact  of  insurance  groups  is  usually  measured  in  terms  of  total 

19 

20 

21 

22 
23 
24 

A financial conglomerate is broadly defined as a group that has at least one entity in the banking sector 
and  one  entity  in  the  insurance  sector,  and  whose  activities  in  the  smallest  sector  (either  banking  or 
insurance) according to Article 3 is more than 10% of the group. The 10% threshold is the average of 
the part of the smallest sector in i) total assets and ii) total solvency requirement. Article 3 also defines a 
financial conglomerate if the absolute threshold of €6 billion of assets in the smallest sector is met, but 
allows  for  a  waiver  if  the  aforesaid  10%  threshold  is  not  met.  These  provisions  were  intended  to 
examine whether the group is sufficiently cross-sectoral to constitute a financial conglomerate. 
A license is a legal entity that is authorized by a competent (supervisory) authority to conduct a range of 
business  activities  in  a  specifically  defined  and  confined  part  of  the  financial  sector,  for  example,  a 
banking license, a life-insurance license. In some countries, licenses can be restricted to a specific set of 
activities, e.g. a mortgage bank license, or a savings bank license. Each jurisdiction authorizes its own 
legal  entities,  but  the  European  passport  allows  financial  institutions  to  provide  financial  services 
throughout the internal market while being authorized in one of its member states. Groups usually make 
sure  they  have  authorization  to  conduct  all  the  kinds  of  businesses  in  financial  services  their  clients 
might ask for, in several member states, as well as outside the EU. 
The net list, the list without waived groups, is published: http://ec.europa.eu/internal_market/financial-
conglomerates/docs/200907_conglomerates_en.pdf  
Including assets of non-regulated parts/entities of these groups 
As of end 2008, source: ECB 
Whereas  gross  insurance  premiums  written  by  these  30  groups  constituted  almost  a  half  of  the  EU 
insurance market of €1 trillion gross premiums in 2008 

EN 

10 

   EN 

                                                 
premiums collected, which is not plotted in this chart.25 Also, current identification provisions 
for  financial  conglomerates  do  not  clearly  cover  asset  management  companies.  As  a  result, 
practices  as  to  the  inclusion  of  asset  management  companies  vary,  with  the  result  that  the 
conglomerates  plotted  in  the  Chart  are  not  fully  comparable  (more  about  this  problem  in 
section 3.3.3).  

Chart  1:  Distribution  of  EU  financial  conglomerates in  terms  of  size  of  the  smallest  sector 
within a group as of 2007 

%

,
r
o
t
c
e
s
t
s
e
l
l
a
m

s
e
h
t

f
o
e
z
i
s
e
v
i
t
a
l
e
R

50%

40%

30%

20%

10%
0

0%

100

200

300

Balance sheet of the smallest sector, € billion 

Bank-led groups

Insurer-led groups

Source: JCFC 

As  to  the  drivers  for  establishing  a  conglomerate  business  model,  academics  claim  that 
conglomerates  are  set  up  for  commercial  reasons:  new  businesses  and  markets  can  be 
accessed  by  combining  banking  and  insurance  and  by  exploiting  existing  distribution 
channels,  but  that  this  combination  results  in  extra  risks  that  are  discounted  by  the  market. 
Knot  &  Van  Lelyveld26  and  Schmid  &  Walter27  show  how  large  and  complex  financial 
institutions  (LCFIs)  are  valued  at  a  discount,  in  their  view,  probably  for  various  group  risk 
related reasons. Bigger groups that combine many activities suffer from a perception of higher 

25 

26 

27 

Comparing  insurance  and  banking  business  based  on  their  asset  size  is  not  a  fair  exercise,  since 
importance of insurers is usually gauged by the size of their paid up premiums, while banking business 
is  based  on  leveraging  the  capital  base.  Based  on  balance  sheet  figures  only,  the  banking  activities 
would by definition be over-stated compared to insurance activities. 
Knot K., Van Lelyveld I., Do financial conglomerates create or destroy value? Evidence for the EU, 
Journal of Banking & Finance, 2009 
Schmid  M.,  Walter  I.,  Do  financial  conglomerates  create  or  destroy  economic  value?,  Journal  of 
Financial Intermediation, 2009 

EN 

11 

   EN 

 
 
 
 
 
 
 
                                                 
complexity  and  opaqueness.  Völz  &  Wedow28,  on  the  other  hand,  find  a  premium  for 
potential bail outs (the too big to fail premium) which decreases the discount for groups which 
are  regarded  as  systemically  important.  Thus,  although  the  markets  know  that  LCFIs  face  a 
risk management challenge, they consider the same groups of such systemic importance that 
they factor in the 'inevitability' of government rescue.29 Both views, however, would confirm 
that  LCFIs  contain  additional  risks  (complexity  and  systemic)  on  top  of  the  specific  sector-
related risks, and that supplementary supervision is justified. 

3.2. 

EU legislative and international frameworks 

As  said  in  the  introduction,  FICOD  supplements  the  two  sectoral  directives,  the  CRD  and 
insurance  directives.  A  consolidated  picture  of  entities  authorized  under  one  directive  is 
usually referred to as a sector-silo, or a 'silo'. Supplementary supervision comes on top of the 
silo-supervision. 

In 2008, the Joint Forum evaluated its principles of 1999 identifying the following concerns: 

–  Regulatory arbitrage possibilities due to misalignment of sectoral capital definitions; 

–  Pillar  2  supervision  (part  of  the  Basel  II  framework)  is  equally  justified  for  non-banking 

entities in conglomerates, both regulated and non-regulated; 

–  Funding liquidity under stress circumstances, and  

–  Lack  of  legal  certainty  when  capital  needs  to  be  transferred  between  entities  located  in 

different jurisdictions (i.e., asset transferability problem).  

The first problem must be dealt with by aligning capital eligibility provisions in the CRD and 
S2, however, sectoral debates would have to be completed first. Regulatory arbitrage is also 
possible when a group structures itself as a holding company, acquires significant activities in 
another sector, and thus escapes consolidated sectoral supervision at the ultimate parent level 
(see  Section  3.3.1).  The  second  concern  was  part  of  this  review  but  relates  to  a  more 
fundamental  question  of  regulatory  scope,  and  will  be  addressed  in  the  fundamental  review 
following  this  initiative  (FICOD  II).  The  third  concern  is  assessed  by  the  EU  stress  testing 
exercise  and  a  possible  proposal  of  the  Commission  to  introduce  a  new  global  standard  for 
bank 
the  Commission's 
Communication30 published in October 2009 and its follow up in 2010 and 2011 . Although 
this initiative  focuses on banks, the character of the  crisis-related  problems,  as  well  as  their 
solutions,  are  not  bank-specific,  which  implies  that  solutions  presented  by  the  Commission 

liquidity  risk,  whereas 

the  fourth  one 

is  dealt  with 

in 

28 

29 

30 

Völz M., Wedow M., Does banks size distort market prices?: evidence for too-big-to-fail in the CDS 
market, Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, 2009 
The  crisis  prompted  a  discussion  on  systemically  important  financial  institutions  (SIFIs),  for  which 
supplementary  supervision  as  well  as  additional  capital  requirements  would  be  justified.  The  groups 
which  are  mentioned  in  this  debate  regard  part  of  theidentified  conglomerates  in  the  EU.  Of  the  13 
European bank-led SIFIs mentioned by the Financial Times, 12 are conglomerates under this directive 
(Standard Chartered is not), while of the 6 insurer-led SIFIs, 5 are conglomerates (Aviva is not). Some 
important conglomerates were not in the FT's list, such as Generali and Credit Agricole. 
COM(2009) 561 final, an EU Framework for Cross-Border Crisis Management in the Banking Sector, 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic and Social Committee, the European Court of Justice and the European Central Bank  

EN 

12 

   EN 

                                                 
may become applicable to conglomerates as well. The Joint Forum's evaluation thus revealed 
four  fundamental  issues  which  cannot  be  solved  in  a  straightforward  technical  revision. 
Therefore,  this  revision  of  the  FICOD  will  have  to  be  followed  up  by  a  more  fundamental 
debate on scope and capital quality, and how the FICOD interacts with the two silo-directives. 

3.3. 

Problems 

The  FICOD  review  showed  that  the  achievement  of  its  objectives  is  mostly  obstructed  by 
issues in the areas of supervisory scope, including supervision at the holding company level, 
and  coordination,  financial  conglomerate  identification  and  supervisory  treatment  of 
participations. The remainder of section 3.3 elaborates on these issues in more detail31. At the 
end  of  the  section,  a  "problem  tree"  is  presented  to  visually  illustrate  linkages  between 
problem causes and drivers, and the actual problems that they result in for various stakeholder 
groups. 

3.3.1. 

Supervision at the holding company level 

Supervision at the level of the holding company is affected by the combination of the current 
provisions  of  the  FICOD,  the  CRD  and  the  IGD,  referring  to  'mixed  financial  holding 
companies' (MFHC), 'financial holding companies' (FHC) and 'insurance holding companies' 
(IHC),  respectively.  The  supervisory  tools  that  can  be  applied  at  the  ultimate  parent  level, 
change when the ultimate parent level becomes an MFHC and can no longer be an FHC or an 
IHC.  Figures  1  and  2  below  demonstrate  that  the  identification  of  a  financial  conglomerate 
can  impact  the  application  of  sectoral  group  supervision  differently,  depending  on  the 
structure of a group.  

Figure 132: FICOD supplements and partly replaces sectoral supervision if a sectoral banking 
or  insurance  group  becomes  a  conglomerate.  Before  the  acquisition,  a  bank  or  an  insurer  is 
subject  to  consolidated  supervision  requirements,  as  laid  out  in  either  the  CRD  or  the  IGD. 
After the acquisition, consolidated supervision can only be applied to a top level banking or 
insurance entity, if there is such an entity on top of all banking and insurance licenses. FICOD 
supplements that consolidated supervision. 

        Bank 

    Bank A 

     Bank B CRD 

   Bank A 

    Bank 
     Bank B 

ON TOP: 
CRD + FICOD 

    Insurer X 

31 

32 

Annex 2 of the JCFC's Capital Advice contains a detailed explanation of the existing legal provisions 
and their consequences 
The same is true for insurance groups, with reference to the application of the CRD replaced by the IGD 

EN 

13 

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Figure  2:  FICOD  replaces  sectoral  supervision  at  the  ultimate  parent  level.  If  an  MFHC 
replaces an FHC and/or an IHC and if the ultimate parent is not a banking or insurance entity 
(i.e.,  all  licenses  are  owned  directly  by  an  MFHC),  consolidated  or  group  supervision 
provisions  can  no  longer  be  applied.  Solo  and  sub-consolidated  supervision  remains  for  the 
licenses. 

CRD/insurance rules at solo level 

      FHC 

  Bank A 

     Bank B 
CRD 

   Bank A 

   MFHC 
    Bank B 

ON TOP: 
FICOD ONLY 

   Insurer X 

A stocktake among supervisors identified the following sub-problems which result from the 
interaction  between  the  FICOD  and  the  provisions  for  supervision  at  the  holding  company 
level in the CRD and the IGD: 

–  Certain tools of sectoral group supervision that can be applied at the level of an FHC or an 
IHC can not be applied to the whole group when it is determined an MFHC (see Figure 2). 
This  regards,  among  other  things,  the  waiving  of  solo-supervision  on  subsidiaries,  the 
application  of  provisions  on  disclosure  (Pillar  3)  and  the  internal  capital  adequacy 
assessment  process  and  supervisory  review  (Pillar  2)  on  a  consolidated  basis.  In  other 
words,  the  application  of  sectoral  or  supplementary  group  supervision  is  determined  by 
group structure; acquiring a license in the other sector and becoming an MFHC, can result 
in a group which has increased in size and complexity, and therefore representing a higher 
risk to the financial system, being subject to regulations (solo and FICOD) which may not 
be as comprehensive as before the acquisition.  

In  practice,  structure-related  problems  as  described  with  Figure  2  can  also  appear  at  sub-
consolidated  conglomerate 
to  additional  complications  for  effective 
supplementary  supervision.  The  AIG  case  was  a  typical  example  of  consolidated  sectoral 
supervision disappearing because of holding structures as illustrated by Figure 3:  

leading 

levels, 

EN 

14 

   EN 

 
Figure  3:  Impact  on  consolidated  sectoral  supervision  in  case  of  groups  with  complex 
structures: 

Source: JCFC 

The  JCFC  expects  that  almost  all  of  the  approximately  30  largest  international 
financial conglomerates have an MFHC at the ultimate parent level, but this information is not 
confirmed. 

–  As a consequence, the use of a waiver33 by supervisors in determining whether a group is a 
financial conglomerate, is influenced by the assessment of whether the application of the 
sectoral supervision may be more prudent (see Figure 4). This happened to at least 8 large 
banking  groups  in  Europe  whose  combined  assets  constituted  some  €9  trillion  in  2009, 
effectively reducing the relative size of EU banking and insurance market covered by the 
scope  of  the  FICOD  by  a  third,  i.e.,  from  48%  as  indicated  in  section  3.1  to  31%. 
Application of the waiver may result in: i) additional prudential risks due to the increase of 
the  group  in  size  and  complexity,  which  would  otherwise  have  been  addressed  by  the 
supplementary aspects of the FICOD, that translated into risks to the financial stability and 
impairment of the intra-EU and international competitiveness position of groups that have 
suffered  financial  losses  as  intra-group  contagion  risk  materialised;  and  ii)  differences  in 
supervisory  treatment  (based  on  the  structure  rather  than  on  the  risk  profile)  of 
conglomerates and thus an unlevel playing field among the largest players in the European 
financial sector.  

33 

Article 3(3) allows supervisors to apply this waiver for financial conglomerates where the balance sheet 
size of the smallest financial sector is in excess of €6 billion, but the smallest sector constitutes less than 
10% of the group in terms of its balance sheet and solvency requirement 

EN 

15 

   EN 

 
 
                                                 
Figure  4:  FICOD  replaces  sectoral  supervision  at  the  ultimate  parent  level,  which  is  why  a 
supervisor  chooses  to  waive  supplementary  supervision,  if  the  thresholds  allow  so.  If  an 
MFHC replaces an FHC and/or an IHC and if ultimate parent is not a banking or insurance 
entity  (i.e.,  all  licenses  are  owned  directly  by  the  holding  company),  supplementary 
supervision  may  be  waived  and  only  consolidated  or  group  supervision  remains.  Contagion 
and other cross-sectoral group risks cannot be controlled. 

  Bank A 

CRD/insurance rules at solo level 

      FHC 

ON TOP: 
CRD ONLY 
The recent financial crisis showed that "waived" conglomerates got into situations where their 
supervisors did not have powers to require the control of risk concentrations and intra group 
transaction-related risks coming from outside the (banking) sector, potentially contributing to 
the financial instability (see a stylised example in Box 1). 

   FHC 
    Bank B 

     Bank B 
CRD 

   Bank A 

   Insurer X 

Box 1: Example of the application of waiver under Article 3(3) 
Suppose a large bank, having more than 500 bank licenses in several countries as well as in 
the USA, and a few insurance licenses, has a financial holding company as its ultimate parent. 
The Board of executives in this holding company takes group wide decisions such as strategic 
decisions on the business model and markets it wishes to operate in, the gathering of capital, 
the allocation of capital to various businesses, the risk appetite and return targets, the internal 
governance  and  risk  management  functions,  etcetera.  The  group  is  supervised  as  a  banking 
group  on  a  consolidated  basis  subject  to  the  CRD.  Then  the  Board  decides  to  strategically 
expand  its  business  model  to  a  specialized  insurance  business,  for  which  its  banking 
experience  is  a  competitive  advantage,  especially  in  the  American  market.  It  acquires  this 
specialized insurance business and thus expands the number of licenses in the group to about 
800,  and  the  share  of  insurance  business  in  its  total  business  to  9%  .  The  holding  company 
becomes by definition a mixed financial holding company (MFHC). 

Now  the  supervisor  has  to  choose  to  either  apply  consolidated  banking  supervision  at  the 
ultimate  parent  level,  opting  for  a  waiver  in  the  conglomerates  directive,  or  to  apply 
supplementary  supervision  but  not  the  consolidated  banking  supervision  to  the  MFHC. 
Finding themselves between Scylla and Charybdis, they chose the first. This ensures that they 
keep the full picture of the banking entities at the level where strategic decisions are taken, but 
it  implies  that  they  forego  the  tool  to  monitor  or  control  the  impact  of  the  specialized 
insurance business on the bank, and its contagion coming from the US. Now the business in 
the  US  turns  out  to  be  not  only  disappointing,  but  also  contagious  to  the  banking  business. 
The supervisor is left barehanded. Had the consolidated banking supervision been possible at 
the  level  of  the  MFHC,  they  would  have  had  a  tool  to  monitor  and  control  the  contagion 
coming  from  this  insurance  business  to  the  banking  activities,  supplementary  to  the 
consolidated picture of banking business. 

–  The  discretion  to  exempt  a  subgroup  that  is  a  financial  conglomerate  within  a  larger 
financial  conglomerate  from  supplementary  supervision  under  the  FICOD34  presents  a 
challenge  in  avoiding  duplication  and  unnecessary  costs  arising  from  applying  sectoral 
group requirements at multiple entities of a group.  

For instance, insurance rules permit supervisors to waive insurance sub-groups of an 
insurance group from sectoral group supervision, and supervisors have applied this waiver in 

34 

Article 5 

EN 

16 

   EN 

 
 
                                                 
order to avoid regulatory duplication that would arise if the same insurance directive were to 
be applied at multiple levels of the same group. However, while supervisors are able to apply 
this waiver to sub-groups of an insurance group with a regulated entity on top or an IHC, they 
are no longer able to apply the waiver if the group had an MFHC as the parent. If an insurance 
group  has  ten  such  sub-groups  before  becoming  a  conglomerate,  it  could  go  from  being 
subject to one IGD consolidation requirement to ten such requirements under the IGD upon 
becoming an MFHC.  

This would subject the group to a significantly greater supervisory burden that would 
generate few additional benefits, which is an unintended effect of the interaction between the 
FICOD  and  sectoral  group  directives.  This  is  further  complicated  when  the  sectoral  sub-
groups  are  located  in  different  jurisdictions,  for  example,  if  a  pan-European  group  were 
identified  as  a  financial  conglomerate  and  had  sectoral  sub  groups  located  in  different 
European jurisdictions. 

JCFC's confidential stocktake in 2006 revealed that identification practices varied enormously 
among supervisors. The exercise also showed that supervisors usually tried to apply consistent 
group  supervision  within  a  sector  within  a  jurisdiction  (for  example  to  all  French  bank-led 
groups). Most importantly, the stocktake revealed that all supervisors sought the most prudent 
outcome  when  applying  group  supervision  and/or  supplementary  supervision.  Although  the 
objective  was  the  same  for  all  banking  or  insurance  or  integrated  national  supervisors,  the 
identification  choices  were  made  to  avoid  unintended  consequences  of  combinations  of 
directives and keep as much prudence as possible.  

The application of group supervision and supplementary supervision at the right level from a 
prudential  point  of  view,  i.e.,  the  ultimate  parent  level  of  a  financial  group,  is  what  is 
requested  now  by  the  JCFC  in  its  advice.  During  the  consultation,  this  was  echoed  by  the 
industry  who  acknowledged  the  unlevel  playing  field  problem  and  called  for  a  more 
predictable application of supervision at the holding company level. 

3.3.2. 

Supervisory coordination 

FICOD  supplements  the  CRD  and  insurance  directives  for  additional  supervision  at  the 
ultimate  parent  level  of  a  group.  To  that  end,  it  also  contains  provisions  for  coordination 
between different supervisors of a group, a necessity that was already recognized in the IGD 
which dealt with group risks in insurance groups.  

FICOD  defines  who  is  a  relevant  competent  authority  (RCA),  providing  for  obligatory 
consultation by the coordinator (the ultimate parent level supervisor) with respect to several 
supervisory  questions.  Other  competent  authorities  who  granted  licenses  to  parts  of  the 
conglomerate  are  in  those  cases  not  consulted.35  The  directive  describes  which  elements 
should  be  covered  by  the  coordination.  The  coordination  is  carried  out  mainly  by  means  of 
information  exchange  and  consultation  within  the  "college"  of  a  coordinator  and  RCAs. 
FICOD  coordination  provisions  regarding  supervisory  arrangements  are  thus  clear  that  they 
were  copied  into  S2  and  the  CRD,  albeit  extended  with  other  elements  of  coordinated 
supervision.  The  coordination  provisions  are  found  to  be  supportive  of  the  FICOD's 

35 

The coordinator and the RCAs are published in the list of identified conglomerates on the Commission's 
website: 
http://ec.europa.eu/internal_market/financial-
conglomerates/docs/200809_conglomerates_en.pdf  

EN 

17 

   EN 

 
                                                 
objectives, although the JCFC's stocktake showed that coordination practices may vary with 
respect  to  determination  of  RCAs.  The  current  provisions  leave  room  for  various  RCA 
interpretations, for instance, both the combination of a subsidiary with a foreign branch and 
all subsidiaries within a country could be considered as a group. Any supervisor of more than 
one authorized entity in his jurisdiction could knock on the coordinator's door and ask to be 
granted  an  RCA  status  despite  the  additional  indicators  (market  size  and  importance  in  the 
group) in the same provision. As a result, the number of RCAs who should be consulted by 
the  coordinator  at  the  financial  conglomerate  level  could  become  rather  high,  which  is  not 
conducive for an effective and efficient coordination of the work to be carried out by a group 
of  RCAs.  Considering  that  the  FICOD  is  a  supplementary  directive  to  the  CRD  and  the 
insurance directives, also the college for the assessment of group risks and multiple gearing of 
capital  throughout  the  group  should  be  supplementary  to  the  sectoral  colleges,  and,  thus, 
proportionally composed, i.e., not duplicating their work but effectively adding value. 

3.3.3. 

Identification 

Another problem area regards the application of the conglomerate identification provisions in 
combination  with  the  directive's  definition  of  “a  financial  sector”.36  The  analysis  of  the 
findings of the MTG and the stocktake of the JCFC showed that provisions on thresholds and 
the scope for differences in their application present three sub-problems: 

–  The  directive  does  not  require  the  inclusion  of  asset  management  companies  (AMCs)  in 
the threshold tests, because UCITS were excluded from sectoral prudential supervision in 
2002,  however,  it  requires  including  AMCs  in  the  scope  of  supplementary  supervision. 
They were added to the scope at the very end of the negotiation process, without sufficient 
clarity  as  to  how  and  when  they  should  be  included  in  either  the  identification  or  the 
supervision, or both.  

AMCs can facilitate the asset management of a banking or an insurance silo, or both, 
which  may  increase  potential  group  risks,  but  the  directive  is  silent  on  whether  that  should 
make  the  group  a  conglomerate.  If  an  AMC  is  part  of  a  banking  or  an  insurance  silo,  it  is 
consolidated  automatically,  but  if  it  is  structured  outside  the  silo,  it  can  be  excluded.  Some 
supervisors include them, others do not. AMCs can also be part of MiFID37 investment firms 
or AIFM38 firms, which may not be subject to the CRD. In general, the different scopes of the 
CRD,  insurance  directives,  the  MiFID  and  the  proposal  for  a  directive  on  AIFM39  leave 
regulatory  arbitrage  opportunities  to  keep  entities  out  of  the  scope  of  supplementary 
supervision  under  the  FICOD  and  give  rise  to  unlevel  playing  field  among  AMCs.  More 
specifically,  if  groups  structure  their  AMCs  directly  under  the  ultimate  parent  holding 
company,  they  can  escape  supplementary  supervision  of  the  combination  of  asset 
management  business  on  the  one  hand  and  banking  or  insurance  business  on  the  other,  or 
escape being identified as a conglomerate altogether (see Box 2 for a stylised example). 

Box 2: Example of regulatory arbitrage in identifying conglomerates with an AMC  

36 

37 
38 
39 

The definition of ‘financial sector’ in Article 2.8 (a) and (c) FICOD states that all financial institutions 
fall within the bank / investment firm sector and not within the insurance sector. Article 2.8 (b) refers to 
insurance companies as a separate sector.  
Markets in Financial Instruments Directive 
Alternative Investment Fund Managers 
COM(2009)  207  final,  proposal  for  a  directive  of  the  European  Parliament  and  of  the  Council  on 
Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC 

EN 

18 

   EN 

 
                                                 
A  large  European  insurance-led  group  is  providing  pension  funds  products,  by  using  an 
investment subsidiary which invests the pension fund assets of policyholders. The legal entity 
of the investment subsidiary is owned directly by the ultimate parent holding company. The 
funds  under  management  are  formally  structured  as  off  balance  sheet  assets,  but  the 
supervisor  regards  them  as  bank  business  assets  and  wishes  to  identify  the  group  as  a 
conglomerate.  The  supervisor cannot  regard  the  group  as  a  conglomerate,  because  it  cannot 
include the asset management entities in the insurance subgroup. The pension fund business is 
left  outside  the  supervisory  scope  and  potential  contagion,  concentration  or  conflicts  of 
interest  between  the  insurance  business  and  the  investment  services  business  cannot  be 
monitored or controlled by the supervisor. 

–  The threshold tests can be based on different parameters with respect to assets and capital 
requirements and the current directive is ambiguous as to how to calculate the tests arising 
from, for example, different accounting treatments of assets.  

Also,  some  financial  institutions,  e.g.,  brokers  that  are  not  part  of  a  banking  group 
which is supervised on a consolidated basis, do not always have a solvency requirement. As a 
result, the significance of activities within the banking / investment firm sector versus those 
within the insurance sector have to be determined based on numbers that are not necessarily 
available or "fair".  

Third,  insurer-led  conglomerates  are  identified  with  the  same  indicators,  assets  and 
capital, but the economic impact is usually measured against gross premiums, which is not yet 
included as an indicator in the identification process. 

–  The  threshold  conditions,  given  their  fixed  amounts,  are  not  risk-based.  The  notion  of 
expected  group  risks  is  not  addressed  by  the  threshold  test.  This  implies  that  very  small 
groups with a few licenses in each sector are subject to supplementary supervision, while 
the largest most complex groups can technically be identified as not being a conglomerate. 
For instance, the upper-left box in Chart 1 contains ten small groups, all of them smaller 
than  €11  billion  in  combined  banking  and  insurance  assets,  yet  included  in  the  current 
scope  of  the  directive.  The  lower-right  box  contains  seventeen  groups  which  could  be 
waived, because their smallest sector is smaller than 10% of total assets, even though that 
smallest sector can be as big as €123 billion. While some big bank-led groups are subject 
to  supplementary  supervision,  others  are  waived  (see  section  3.3.1);  of  the  insurer-led 
groups  only  one  smaller  one  is  waived.  The  lack  of  risk  sensitivity  of  the  conglomerate 
identification  process  with  respect  to  the  latter  sub-sample  of  financial  conglomerates, 
therefore,  may  have  significant  implications  both  for  the  protection  of  creditor  / 
policyholder interests and the financial stability. 

In  conclusion,  by  identifying  conglomerates  that  are  not  really  considered  as  such,  and  are 
therefore subject to additional supplementary supervision that may not be proportionate to the 
risks presented by a group, while not identifying others that might be considered as such when 
assessing  potential  group  risks,  the  current  provisions  on  identification  can  have  a  negative 
impact on the effective achievement of the underlying objectives of the directive. 

EN 

19 

   EN 

 
 
3.3.4.  Participations – identification and supervision 

two  elements 

The term "participation" is defined differently in the CRD, in the insurance directives and the 
FICOD40. They all refer to Article 17 (defining "participating interest") of the Fourth Council 
Directive41,  which  combines 
i) 
ownership/control, and ii) durable link. The specific definitions in the respective directives are 
fine-tuned  to  their  respective  objectives.  For  the  CRD  and  insurance  directives  this  is  the 
adequacy  of  capital  in  view  of  the  risks  taken  by  the  banking  and  insurance  entities, 
respectively. The definition in these directives needs to make clear at what entity-level capital 
must  be  held  for  the  risks  in  the  entities  below  a  parent  entity,  including  for  partially 
owned/controlled entities or entities on which significant influence is exercised.  

its  definition  of  participation: 

in 

As  said  in  the  introduction,  FICOD  is  about  the  supplementary  supervision  on  group  risks, 
which requires a broader scope of potential sources of group risks and thus a wider definition 
of participations. 

Therefore, the definitions in the three directives are justified by their specific objectives. The 
control-element (i) is more important for the sectoral supervision; the durable link concept (ii) 
is more important for the supplementary supervision. However, the interpretation of a durable 
link appears to vary quite a bit throughout the EU, which implies that supervisors include or 
exclude seemingly similar participations in/from the scope of supplementary supervision. The 
industry complains about the lack of clarity with respect to which entities they might expect to 
be  included  in  the  supervisory  scope.  They  add  the  inconsistency  with  international 
accounting standards as a complicating factor.42  

From  the  supervisory  perspective,  consistent  treatment  of  participations  on  the  day-to-day 
basis  is  hampered  by  the  lack  of  guidance  on  how  to  effectively  account  for  their 
heterogeneity  which  in  turn  is  driven  by  various  factors  such  as  relative  versus  absolute 
ownership figures or longer-term business contracts not accompanied by material ownership. 
The above lack of clarity has indirect negative effects for the industry as well. 

The  uncertainty  about  the  supervisory  treatment  is  related  to  the  lack  of  available  relevant 
information to assess group risks, which is not so straightforward when participations are held 
in listed firms. National company law may prohibit one minority shareholder from receiving 
more  information  about  that  firm  than  its  other  shareholders.  If  information,  for  instance, 
about  risks  with  respect  to  participations  in  insurance  and  reinsurance  companies  cannot  be 
obtained by bank-led conglomerates, they cannot provide their supervisors with evidence on 
the  satisfactory  level  of  integration  of  management  and  internal  control  with  these  entities 
and, subsequently, consolidate them, which gives rise to deduction of such participations from 
their own funds. After all, consolidation assumes the control of the risks, which is not assured 
if the parent cannot access the relevant risk management information. Article 59 of the CRD 

40 

41 

42 

Article  2(11)  of  the  FICOD  defines  participations  based  on  the  first  sentence  of  Article  17  of  Fourth 
Council  Directive 78/660/EEC  of 25  July  1978 on  the  annual  accounts of  certain  types  of  companies 
(which, in turn, specifies that participating interest shall mean rights in the capital of other undertakings, 
whether or not  represented  by  certificates,  which, by  creating  a  durable link  with  those  undertakings, 
are  intended  to  contribute  to  the  company’s  activities),  or  the  direct  or  indirect  ownership  of  20%  or 
more of the voting rights or capital of an undertaking 
Fourth  Council  Directive  78/660/EEC  of  25  July  1978  on  the  annual  accounts  of  certain  types  of 
companies 
See Annex III of the JCFC's Advice to the European Commission on the review of the FICOD 

EN 

20 

   EN 

                                                 
and  Article  228  of  S2  allow  for  consolidation  as  meant  in  the  FICOD  "if  the  competent 
authority is confident about the level of integrated management and control".43 If information 
cannot sufficiently be obtained, for whatever reason, there is no way the parent can control the 
risks of the participation, and consequently, the parent bank or the parent insurer will have to 
deduct  the  participation  from  own  funds.  Based  on  the  JCFC  data,  at  the  end  of  2007  EU 
groups  had  participations  in  the  financial  sector  entities  of  €415  billion,  of  which 
participations  held  by  bank-led  conglomerates  constituted  €398  billion  with  the  remainder 
held by insurer-led conglomerates.  

3.3.5.  Problem tree 

The below problem tree illustrates the linkages between problem causes and drivers, and the 
actual problems described in sections 3.3.1 - 3.3.4. Problem drivers represented by boxes that 
are not shaded have already been, partially or fully, addressed by legislative initiatives that are 
very closely linked to the current proposal to amend the FICOD (please see section 4.1).  

3.3.6. 

Subsidiarity and proportionality of EU action 

In  an  increasingly  integrated  EU  financial  marketplace,  cross-border  groups  of  financial 
services providers – insurers, banks or investment firms - have become a dominant force. The 
EU passport allows financial firms to operate across the EU. The group risks outlined above 
have  been  shown  in  theory  to  rise  with  group  size  and  materialize  especially  in  this  larger, 
more  complex  environment.  Importantly,  gravity  and  implications  of  these  risks  for  the 
financial stability have been underscored by the recent financial crisis. While supplementary 
supervision  on  a  confined,  national  basis  may  help  in  containing  them,  actions  taken  by 
individual  Member  States  will  not  be  sufficient  to  facilitate  effective  and  coordinated 
supplementary  supervision  in  a  cross  border  context  that  is  crucial  for  the  stability  of  these 
groups and, in turn, the stability of the financial system they operate in.  

The  principle  of  subsidiarity  for  action  at  the  EU  level  is  substantiated  further  by  a  need  to 
amend an existing EU-level legislative tool in order to remove potential regulatory arbitrage 
opportunities which are made possible by it and to enhance level playing field for European 
financial  conglomerates  by  ensuring  a  consistent  EU  approach  for  tackling  various  issues 
covered by the scope of this legislative initiative. 

The supplementary supervision provided by the FICOD is only justified when institutions are 
potentially exposed to group risks, and / or when management complexity could cover up the 
potential double use of capital. The sectoral directives, the CRD and insurance directives, deal 
with  the  required  assessment  and  management  of  sector-specific  risks  and  the  appropriate 
capital  adequacy  thereof.  The  proportionality  of  the  FICOD  is  rooted  in  its  supplementary 
nature: it supplements the sectoral directives and is not meant to replace them. This legislative 
initiative is aimed at enhancing the effectiveness of supplementary supervision at the ultimate 

43 

Article  59  of  the  CRD  entails  discretion  for  supervisors  to  allow  their  credit  institutions,  as  an 
alternative to deduction of participations from own funds, to apply mutatis mutandis methods 1, 2 or 3 
of  Annex  I  to  the  FICOD  for  participations  envisaged  in  Article  57(o)  &  (p).  Method  1  (accounting 
consolidation),  however,  may  be  applied  only  when  supervisors  are  confident  about  the  level  of 
integrated management and internal control regarding the entities which would be included in the scope 
of the consolidation. 

EN 

21 

   EN 

                                                 
parent level of conglomerates where decisions about attraction and allocation of capital across 
businesses, and group-wide risk management are taken. 

4. 

OBJECTIVES 

The  over-arching  objective  of  this  initiative  is  to  ensure  that  the  effectiveness  of  the 
supplementary  supervision  of  large  and  complex  groups  in  the  EU,  represented  by  the 
FICOD,  is  enhanced  while  maintaining  the  competitive  position  of  these  groups.  This 
translates into the following three general policy objectives to:  

– 

– 

– 

Enhance financial stability (G-1); 

Enhance safeguarding of creditor and policyholder interests (G-2); 

Enhance international competitiveness of EU financial groups (G-3). 

In  light  of  the  problems  presented  in  section  3.3,  three  sets  of  operational  objectives  (see 
Table 2) have been identified to address the specific problem drivers. Effective realization of 
such operational objectives should contribute to the achievement of the following longer-term 
specific policy objectives to:  

– 
Enhance effectiveness of supplementary supervision (S-1). This means that managers 
responsible for the risk management, internal governance and capital allocation for the whole 
group  should  be  held  accountable  by  their  supervisors  for  compliance  with  sectoral  and 
supplementary supervisory provisions, regardless of whether the top level is a regulated entity 
or an MFHC. Also, the identification criteria should allow for a supervisory assessment of the 
nature,  scale  and  complexity  of  the  groups  and  assure  supervisors  that  the  supplementary 
supervision will not weaken the relevant sectoral supervisory frameworks. Supervisors must 
be able to assess consequences of the ties between different parts of a group and participations 
in other firms.  

– 
Reinforce  financial  conglomerates'  risk  management  (S-2).  Internal  governance  and 
risk management of financial conglomerates should be enhanced due to a more effective and 
risk-based supplementary supervision. 

– 
Eliminate  regulatory  arbitrage  opportunities  (S-3).  Possibilities  to  circumvent  the 
current FICOD or sectoral provisions, in particular, by creating group structures that limit the 
application of sectoral or supplementary rules, shall be eliminated. 

– 
Reduce  compliance  burden  (S-4).  Unnecessary  compliance  costs  for  the  industry 
should be cut, among others, by removing small and simple financial groups from the scope 
of the legislation. 

EN 

22 

   EN 

PROBLEM TREE: FICOD REVISION 

PROBLEM 
DRIVERS 

Lack of alignment in 
supervisory powers 
under FCD relative to 
powers at holding 
company level available 
under sectoral directives 

Certain supervisory 
tools can not be 
applied to some 
holding companies 

Discretionary use of 
waivers and sectoral 
directives 

Duplication of 
sectoral supervision at 
sub-group level 

Too vague definition of 
a relevant competent 
authority 

Diverse interpretation 
of coordination 
provisions 

Exclusion of asset 
management fund from 
threshold tests 

Application of threshold 
tests hampered by 
ambiguity of parameters 
and un-availability of 
data 

Lack of risk-based, 
forward-looking 
dimension in threshold 
application 

Lack of availability of 
information on 
participations 

Lack of guidance for 
day-to-day treatment of 
participations 

List of financial 
groups subject to 
FCD provisions is 
inappropriate 

Hampered monitoring 
of risk concentrations 
& intra-group 
transactions 

Lack of legal clarity with 
regard to definition of a 
'durable link' 

Inconsistent 
interpretation of 
'durable link' 

S 
U 
P 
E 
R
V 
I 
S 
I 
O
N 

& 

C
O
O
R
D 
I 
N 
A
N 
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N 

I
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I
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N 

P
A
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T
I
C
I
P
A
T
I
O
N
S 

GENERAL 
PROBLEMS 

Sub-optimal level of risk 
management by companies  

Ineffective supplementary 
supervision i.e. insufficient 
control of group risks 
(contagion, complexity, 
concentration, conflict of 
interest) and double use of 
capital 

Sub-optimal 
protection of 
creditors and 
policyholders

Regulatory arbitrage 
opportunities 

Lack of legal clarity 

Lack of cross-border (and 
cross-sector) convergence in 
supplementary supervision 

Unlevel playing field 

Unwarranted compliance 
cost burden for supervisors 
and companies 

Increased risks to 
financial stability  

Implications for 
competitiveness 
of EU financial 
industry

EN 

23 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
– 
Enhance  level  playing  field  (S-5).  Level  playing  field  conditions  for  cross-border 
groups shall be strengthened by limiting the scope for application of national discretions, such 
as use of waivers in the financial conglomerate identification process. 

– 
Enhance  supervisory  cooperation  and  convergence  (S-6).  Cross  border  cooperation 
and  convergence  of  the  supplementary  supervision  is  important  since  the  FICOD  is  mainly 
about  LCFIs.  A  lack  of  convergence  of  the  interpretations  by  various  supervisors  of  the 
directive's provisions hampers the achievement of its objectives.  

– 
Enhance  legal  clarity  (S-7).  More  legal  clarity  is  warranted  from  the  industry's 
perspective  with  respect  to  outcomes  of  the  financial  conglomerate  identification  process, 
particularly  on  issues  such  as  treatment  of  asset  management  companies  and  participations, 
and application of waivers. From the supervisory perspective, more legal clarity is necessary 
on identification of relevant competent authorities. 

Achievement of the specific policy objectives, in turn, should facilitate the attainment of the 
three aforementioned general policy objectives. Table 2 provides an overview of the identified 
problems, drivers underlying them as well as operational, specific and general objectives, by 
indicating linkages between them. 

4.1. 

Coherence of objectives with other initiatives of the Commission 

Several problem drivers and problems that they cause that were described in section 3.3 have 
been already addressed with the proposal for the Omnibus Directive that was adopted by the 
Commission  in  October  2009.  This  does  not  change  the  legal  text  of  the  FICOD  as  the 
proposed Omnibus Directive aims at the convergence of supervisory practices. The proposed 
Omnibus  Directive  dealt  substantively  with  the  issues  of  (i)  application  of  the  durable  link 
concept and the treatment of participations in the calculation of capital (see section 3.3.4) and 
(ii) alternative indicators in the conglomerate identification process, when data necessary for 
threshold calculation are not available (see section 3.3.3).  

The main impact of these technical standards, as explained in the proposal for the Omnibus 
Directive,  will  be  further  convergence  of  supervisory  practices,  thus  improving  the  level 
playing  field,  increasing  predictability  of  practices  and  decreasing  compliance  costs. 
Therefore,  policy  objectives  of  these  legislative  initiatives,  i.e.,  proposals  for  Omnibus 
Directive and revision of the FICOD, are closely aligned.  

Like all initiatives in the supervision package, the revision of the FICOD also contributes to 
the  Commission's  aim  for  more  convergence  and  coherence  in  the  supervisory  approaches 
across countries given that cross border financial conglomerates are exactly the case in point 
for  stronger  co-ordination  and  supervision.  These  amendments  constitute  an  important 
element in the total package. 

While the problem definition and objective sections of this impact assessment have captured 
the  above  areas  in  order  to  provide  a  more  complete  background  for  the  policy  proposals 
included in the legislative proposal to amend the FICOD, further sections of the report tackle 
only outstanding issues.  

EN 

24 

   EN 

 
For  a  broader  overview  of  the  Commission's  initiatives  linked  to  financial  conglomerate 
supervision please see Box 3. 

Box  3:  Overview  of  the  Commission's  initiatives  related  to  financial  conglomerate 
supervision 

•  Omnibus directives I and II contain examples of provisions for which the new European 
Supervisory Authorities should get a role in promoting supervisory convergence (such as 
the list of items which should be monitored when supervising intra-group transactions i.e. 
potential contagion channels), as well as alignment of provisions that appear in all financial 
directives and for which the new Authorities should get a role (such as the harmonization 
of authorization and notification procedures,  but also a  consistent use of the durable  link 
concept).  Omnibus  dealt  with  the  existing  provisions  that  needed  harmonisation  or 
convergence. 

FICOD I aims at addressing urgent issues that are outlined in this impact assessment, such as 
the MFHC problem or the flaws within identification process, in order to include or exclude 
those groups in the scope which should have been included in or excluded from the scope as 
from 2002. In addition, provisions to promote supervisory convergence, in the areas related to 
the amendments, are included in FICOD I. 

FICOD II must address fundamental problems that not only relate to lessons from the crisis, 
but also to the sectoral directives. These relate to the inclusion of non-regulated entities in the 
scope  of  supplementary  supervision,  a  fundamental  review  of  the  definition  of  financial 
conglomerate  in  the  light  of  blurring  sector-boundaries,  and  the  alignment  of  eligibility 
requirements  of  regulatory  capital  across  directives.  However,  this  has  to  account  for 
international  progress  on  these  issues  and  conclusions  of  sectoral  initiatives.  MARKT  will 
kick off this debate with a conference on 7 June, then discuss a Call for Advice to the Joint 
Committee  of  Financial  Conglomerates  with  the  member  states  at  level  2  in  October  2010, 
follow the development of the Advice with the JCFC, and prepare for a proposal in the course 
of 2011. 

Communication  on  EU  Framework  for  Cross-Border  Crisis  Management  in  the 
Banking Sector is about banks, because of the urgency of the resolution problem for banks. 
However, both the character of the problems and the solutions thereto, are not bank specific. 
Solving  problems  like  supervisory  cooperation  and  asset  transferability  for  banks  implies 
solving it for all kinds of groups in the financial market. 

EN 

25 

   EN 

Table 2: Summary of problem drivers and objectives 

Specific Objectives 

General 
Objectives 

S-1 

S-2 

S-3 

S-4 

S-5 

S-6 

S-7  G-1 

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Problem Area 

Problem Drivers 

Operational 
Objectives 

Supervision on 
holding company 
level and 
supervisory 
cooperation 

Financial 
conglomerate 
identification 

Loss 
certain 
of 
supervisory  powers  at 
holding  company  level 
available  under  sectoral 
directives 
if  MFHC 
replaces FHC or IHC 

Loss  of  certain  waivers 
at  sectoral  level  when 
MFHC replaces FHC or 
IHC 

'relevant 
Definition  of 
competent authority' too 
vague  

of 

Exclusion 
asset 
management  companies 
from threshold tests 

of 
Application 
threshold 
quantitative 
tests 
by 
hampered 
ambiguity  of  certain 
parameters 
and  data 
unavailability 

risk-based, 

Lack 
of 
forward-looking 
dimension  in  threshold 
application 

•  Treatment  of 
participation
s 

Lack  of 
legal  clarity 
with regard to definition 
of a 'durable link' 

Lack  of  availability  of 
information 
on 
participations 

Align 
supervisory 
powers under the FICOD 
with  powers  at  holding 
level  under 
company 
directives, 
sectoral 
regardless 
group 
structure 

of 

Prevent  duplication  of 
supervision 
at 
consolidated (sub) levels 

legal 

regard 

clarity 
Enhance 
the 
with 
determination of 'relevant 
competent authority' 

to 

Account  for  the  role  of 
management 
asset 
when 
companies, 
identifying 
financial 
conglomerates 

leeway 

Enhance 
identification 
process  by  allowing  for 
to 
more 
assess 
qualitatively 
potential 
group-wide 
risks, 
that  quantitative 
tests alone do not capture 

• 

link' 

Provide a more clear 
of 
definition 
'durable 
or 
improve  clarity  on 
the  application  of 
the 
link 
durable 
criterion 

•  Devise  appropriate 
prudential  treatment 
for  situations  where 
necessary 
information 
on 
participations  is  not 
available 

EN 

26 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5. 

POLICY OPTIONS, IMPACT ANALYSIS AND COMPARISON 

This  section  presents  the  policy  options  and  their  impacts  on  stakeholders  for  each  of  the 
major problem areas. As pointed out above, the analysis covers possible policy options with 
respect to those problems that are still outstanding following the adoption by the Commission 
of a proposal for the Omnibus Directive. The identification, analysis and comparison of policy 
options  have  been  combined  for  each  area  to  allow  for  a  more  coherent  presentation. 
Cumulative impacts of all preferred options are discussed at the end of the section.  

5.1. 

Supplementary  supervision  on  holding  company 
coordination 

level  and  supervisory 

5.1.1.  Alignment of supervisory powers 

In order to align supervisory powers at the ultimate parent level of a conglomerate, to prevent 
both the loss of powers when a group structure changes and the duplication of supervision at 
the conglomerate level, four options have been considered: 

–  Policy option 1.1: Retain current approach; 

–  Policy option 1.2: Allow an MFHC to be at the same time an FHC or an IHC; 

–  Policy option 1.3: Add to the MFHC level supervisory powers that are lost at the sectoral 

level; 

–  Policy option 1.4: Allow supervisors at the MFHC level to exercise discretionary powers 

that are lost at the top sectoral level. 

Policy option 1.1: Retain current approach 

The  current  provisions  in  the  FICOD,  applying  supplementary  supervision  at  the  MFHC44 
level,  exclude  the  form  of  an  MFHC  as  the  top  level  of  a  banking  group45  or  an  insurance 
group46. This exclusion was explicitly preferred when the directive was negotiated in 2002, in 
order to prevent an increase in supervision of (non-regulated) top level holding companies.  

An  unforeseen  and  unintended  consequence  of  the  FICOD  appeared  to  be  the  loss  of 
supervisory reporting waivers at sub-consolidated levels under the IGD that were applicable 
to IHCs. Another unforeseen and unintended consequence transpired after the adoption of the 
CRD which introduced supervision at the consolidated, i.e., the FHC level. The interaction of 
different  holding  company  forms  was  not  considered  during  the  negotiations  of  the  CRD, 
which focused on the European transposition of the 2004 Basel II framework. The inability to 
apply several rather important CRD provisions at the MFHC level prompted the waiving from 
the supplementary supervision of several, mainly larger, banking groups. Without a change to 
the current provisions problems outlined in section 3.3.1 would remain unaddressed. 

44 
45 
46 

Article 2(15) 
Article 29(1) 
Article 28(1) 

EN 

27 

   EN 

                                                 
In short, the FICOD would continue to provide for a substituting or duplicating supervision, 
rather than the intended supplementary supervision. Secondly, the waiving of groups from the 
supplementary  supervision  by  supervisors  who  wish  to  retain  the  powers  at  the  sectoral  top 
level would continue to contribute to the unlevel playing field conditions. As importantly, for 
European  citizens  this  policy  option  implies  that  these  complex  groups  would  not  be 
supervised  in  a  comprehensive  and  prudent  way  that  was  aimed  for  when  establishing  the 
FICOD,  impairing  the  supervisory  toolkit  essential  for  safeguarding  of  creditor  and 
policyholder interests and provision of the financial stability. 

Policy option 1.2: Allow an MFHC to be at the same time an FHC or an IHC 

This policy option entails a legal amendment to end the exclusion of the form of an MFHC as 
the  top  level  holding  company  of  a  banking  or  an  insurance  group.  This  amendment  would 
imply that provisions and powers regarding the ‘old’ FHC or the ‘old’ IHC do not disappear 
when a group is identified as an MFHC as a result of an acquisition in the other sector. All 
consequences listed in section 3.3.1 are prevented, and consistency is ensured with any future 
provision  added  to  the  sectoral  directives  which  will  be  applicable  at  the  top  level  holding 
company. To ensure consistency, the provisions of the sectoral directives referring to holding 
companies should include references to an MFHC, too. 

Also,  those  supervisors  who  decided  to  waive  their  conglomerates  from  supplementary 
supervision, because of the loss of powers at the sectoral top level, would be enabled to apply 
supplementary  checks  on  group-wide  available  capital,  internal  control  mechanisms  and 
group-wide  management  of  risk  concentrations  and  intra  group  transactions  (this  regards 
especially the largest bank-led conglomerates, see section 3.3.1). This would not only provide 
for a level playing field , legal clarity47 and smaller compliance burden (as sectoral sub-group 
supervision  could  be  "waived"  under  this  option)  to  firms  as  well  as  more  legal  clarity  to 
those  supervisors  who  did  not  have  a  possibility  to  apply  the  group  level  provisions  of  the 
CRD,  the  IGD  and  the  FICOD  as  intended,  but  also  enhance  the  effectiveness  of  group 
supervision,  thus,  aiding  the  financial  stability  and  better  protection  of  the  interests  of  bank 
creditors and insurance policyholders.  

The "open" character of this policy option might give rise to concerns about the duplication of 
supervision, in case a sectoral directive contains similar provisions. In the CRD this concerns 
the large exposures regime only, one element of the supervision of risk concentrations. In the 
IGD  there  is  no  provision  that  could  be  duplicated.  In  case  the  same  policy  option  were 
chosen for S2 (for which level 2 measures are being developed), a mapping of provisions for 
concentrations of risks, contagion through intra-group relationships, and group-wide internal 
governance would be necessary. In order to ensure that only once supplementary supervision 
is applied, this policy option may need to be accompanied by a general safeguarding provision 

47 

The  study  conducted  by  Europe  Economics  looked  at,  among  others,  compliance  costs  of  financial 
institutions with the FICOD. It found that for the sample of 44 banks and financial conglomerates, one 
off implementation costs of this directive were about 0.01% of their operating costs (for a sub-sample of 
only  financial  conglomerates  the  respective  estimate  was  0.019%).  In  terms  of  implementation  cost 
drivers, some 30% of them were caused by legal advice costs, consultancy fees and familiarisation with 
the directive. Therefore, a share of this 30% of overall implementation costs may be potentially saved 
by banks as a result of enhanced legal clarity pertaining to supplementary supervision. Source: Europe 
Economics, Study on the Cost of Compliance with Selected FSAP Measures, 2008 

EN 

28 

   EN 

                                                 
in  specific  parts  of  the  legal  text,  allowing  for  waivers  of  either  sectoral  or  top-level 
supervision on aspects already dealt with by one of the other directives.  

Policy  option  1.3:  Add  to  the  MFHC  level  supervisory  powers  that  are  lost  at  the  sectoral 
level 

This  is  a  version  of  policy  option  1.2  which  would  entail  an  amendment  of  a  "closed" 
character  by  listing  precisely  which  sectoral  top  level  provisions  can  also  be  applied  at  the 
conglomerate  level.  This  would  pertain  especially  to  (sectoral)  group-wide  internal  capital 
adequacy  assessment  process  (ICAAP)  and  capital  requirements  on  a  consolidated  basis, 
group-wide internal governance, reporting waivers, and fit & proper management provisions.  

Similar  to  option  1.2,  this  option  would  ensure  that  important  supervisory  powers  at  the 
consolidated  level  and  important  waivers  for  the  industry  are  no  longer  lost.  Similar 
safeguards  to  prevent  duplication  of  supervision  would  be  necessary.  The  main  difference 
with  option  1.2  is  that  the  amendment  would  only  affect  the  legal  text  of  the  FICOD,  and 
leave aside the CRD and insurance directives. This difference also implies, however, that any 
subsequent addition or amendment of the sectoral top level provisions would have to be added 
to the FICOD as well. 

More  importantly,  this  policy  option  would  also  imply  a  deviation  from  the  underlying 
principle  of  the  FICOD,  i.e.,  supplementary  supervision.  Currently,  top  level  sectoral 
supervision is provided for in the sectoral directives and the FICOD is meant to supplement 
supervision in case complexity is introduced by acquisitions in the other sector. If it were also 
to correct for losses of powers at the sectoral level, the FICOD would no longer be a solely 
supplementary legislation. 

Policy option 1.4: Allow supervisors at the MFHC level to exercise discretionary powers that 
are lost at the top sectoral level 

An  amendment  allowing  discretion  to  supervisors  to  apply  sectoral  top  level  powers  also  at 
the MFHC level, could have an "open" character, as in option 1.2, or a "closed" character, as 
in option 1.3. The main difference with policy options 1.2 and 1.3 would be that supervisors 
themselves would decide whether to apply the sectoral top level powers at the MFHC level. 

This  policy  option  would  address  supervisors’  concern  of  not  being  able  to  apply  certain 
checks at the top level, but would provide no legal clarity whatsoever to the supervised firms. 
Also, convergence of practices would be difficult to achieve and, thus, unlevel playing field 
from the perspective of financial conglomerates would be maintained. 

Conclusion 

Retaining  the  current  scenario  (option  1.1),  implies  that  the  current  problems  would  persist 
and,  therefore,  contribution  of  the  supplementary  supervision  of  financial  conglomerates 
towards  all  the  relevant  policy  objectives  would  remain  sub-optimal.  While  policy  options 
1.2, 1.3, and 1.4 seem to be comparable in terms of their effectiveness as regards contribution 
towards  the  objectives  of  reinforced  risk  management  of  financial  conglomerates  (S-2)  and 
reduced  compliance  burden  (S-4),  policy  option  1.2  is  the  most  effective  among  them  with 
respect to objectives of enhanced supplementary supervision (S-1), elimination of regulatory 
arbitrage opportunities (S-3), enhanced level playing field (S-5) and enhanced legal clarity (S-
7).  Policy  option  1.2  also  appears  to  be  the  most  efficient  from  the  regulatory  angle  as  it 

EN 

29 

   EN 

preserves  a  supplementary  nature  of  the  FICOD  and,  therefore,  is  a  preferred  option.  This 
preference  is  in  line  with  the  supervisors’  advice.  Feedback  of  the  industry  to  the  public 
consultation showed that it prefers this option as well, provided that potential duplication is 
explicitly addressed. The member states gathered in the EFCC expressed a similar preference 
to change the definitions and to make provisions across directives consistent. 

Table 3: Summary of policy options' effectiveness and efficiency 

Policy 
Options 

1.1 Retain current approach 

1.2 Allow an MFHC to be at the same 
time an FHC or an IHC 

1.3 Add to the MFHC level supervisory 
powers that are lost at the sectoral level 

Enhance 
effectiveness 
of 
supplementa
ry 
supervision 
4 

1 

2 

Policy Option Comparison Criteria 

Effectiveness 

Reinforce 
financial 
conglomerate
s' risk 
management 

Eliminate 
regulatory 
arbitrage 
opportunities  

Reduce 
compliance 
burden  

Enhance 
level playing 
field 

Enhance 
legal clarity 

Efficiency 

4 

1-3 

1-3 

4 

1 

2 

4 

1-3 

1-3 

4 

1 

2 

3 

4 

1 

2 

3 

4 

1 

2 

3 

1.4: Allow supervisors at the MFHC level 
to exercise discretionary powers that are 
lost at the top sectoral level. 
Scale of option ranking: 1=most effective / efficient, 4=least effective / efficient 
Effectiveness measures extent to which options achieve relevant objectives  
Efficiency measures extent to which objectives can be achieved for a given level of resources 

1-3 

1-3 

3 

3 

5.1.2. 

Identification of RCAs 

To  address  the  lack  of  clarity  stemming  from  Article  2(17)(a),  defining  RCAs  as  "Member 
States competent authorities responsible for the sectoral group wide supervision of any of the 
regulated  entities  in  a  financial  conglomerate",  the  following  two  policy  options  have  been 
considered: 

–  Policy option 1.5: Retain current approach; 

–  Policy option 1.6: Narrow down the definition of RCA to supervisors of ultimate parent 
entities within individual sectors and supervisors regarded as relevant by the supervisor of 
the ultimate parent. 

Policy option 1.5: Retain current approach 

Under  this  policy  option,  the  lack  of  clarity  with  respect  to  the  interpretation  of  current 
provisions, as outlined in section 3.3.2, would remain. 

Policy  option  1.6:  Narrow  down  the  definition  of  RCA  to  supervisors  of  ultimate  parent 
entities  within  individual  sectors  and  supervisors  regarded  as  relevant  by  the  supervisor  of 
the ultimate parent 

The original objective of the definition under Article 2(17)(a) was to determine the RCA as a 
supervisor of the ultimate parent within a sector. Policy option 1.6 would make this explicit in 
the  RCA  definition.  This  option  in  the  first  place  would  enhance  the  legal  clarity  for  the 
supervisors.  Secondly,  it  would  increase  the  effectiveness  of  the  financial  conglomerate 
determination  process,  as  it  focuses  on  the  right  sub-group  of  competent  authorities.  Most 
importantly,  clarifying  the  definition  by  explicitly  pointing  to  the  group-wide  supervisor  of 
the  ultimate  parent  entity  in  a  sector  would  be  consistent  with  the  objective  of  the 
supplementary  supervision  and  is  expected  to  contribute  to  both  the  efficiency  and 

EN 

30 

   EN 

effectiveness thereof. The other part of the definition, i.e., those supervisors who are regarded 
as relevant by the supervisor of the ultimate parent, would remain. 

Conclusion 

Policy option 1.6 is a preferred option as it is more effective and efficient than option 1.5 in 
contributing to the attainment of the policy objectives of enhanced supplementary supervision 
(S-1), enhanced supervisory cooperation and convergence (S-5) and enhanced legal clarity (S-
7). This is what both the JCFC and the EFCC would prefer, since they are currently facing a 
confusing legal provision and would welcome clarity, so that they can focus on the relevance 
of  authorities  when  determining  the  college,  not  on  the  interpretation  of  a  vague  provision. 
The  effectiveness  of  the  amendment  will  be  re-enforced  by  guidelines  regarding  its 
application, as well as the possibility that the Joint Committee of newly established European 
Supervisory Authorities may mediate in case of disputes. 

Table 4: Summary of policy options' effectiveness and efficiency 

Policy 
Options 

Enhance effectiveness of 
supplementary supervision 

1.5 Retain current approach 

2 

Policy Option Comparison Criteria 
Effectiveness 
Enhance supervisory 
cooperation and 
convergence 
2 

Enhance legal clarity 

2 

1.6 Narrow down definition of RCA to 
supervisors of ultimate parent entities 
within individual sectors and supervisors 
regarded as relevant by the supervisor of 
the ultimate parent 
Scale of option ranking: 1=most effective / efficient, 2=least effective / efficient 
Effectiveness measures extent to which options achieve relevant objectives  
Efficiency measures extent to which objectives can be achieved for a given level of resources 

1 

1 

1 

Efficiency 

2 

1 

5.2. 

Financial conglomerate identification process 

5.2.1. 

Inclusion of AMCs in the identification process 

To address the identification issues pertaining to the inclusion of AMCs in the supplementary 
supervision, the following three policy options have been considered: 

–  Policy option 2.1: Retain current approach; 

–  Policy  option  2.2:  Inclusion  of  AMCs  at  all  times  complemented  with  guidance  on 

indicators for inclusion; 

–  Policy option 2.3: Inclusion of AMC' proprietary business only. 

Policy option 2.1: Retain current approach 

No  change  implies  an  unlevel  playing  field  among  conglomerates,  as  the  current  FICOD 
provisions  regarding  AMCs  are  not  structure-neutral:  if  an  AMC  is  part  of  a  banking  or  an 
insurance silo, it is consolidated automatically, but if it is structured outside the silo, it can be 
excluded.  Without  a  change  to  the  current  provisions  this  and  other  problems  pertaining  to 
AMC identification, outlined in section 3.3.3, would remain unaddressed. 

EN 

31 

   EN 

Policy option 2.2: Inclusion of AMCs at all times complemented with guidance on indicators 
for inclusion 

The addition of AMCs to the scope of the directive in 2002 was justified from a group risk 
point of view: AMCs are adding risks of complexity, contagion, concentration and conflicts of 
interest to a financial group. Experience from the recent financial crisis has not revealed any 
counter-arguments  to  this  justification.  This  policy  option,  therefore,  entails  inclusion  of 
AMCs  in  the  conglomerate  identification  process  at  all  times.  The  specific  character  of 
AMCs,  however,  justifies  additional  guidance  from  the  Joint  Committee  of  the  newly 
established European Supervisory Authorities with respect to the use of alternative indicators 
for their inclusion, which more specifically reflect the character of their business. 

Policy  option  2.2  would  provide  an  effective  solution  to  the  problems  -  from  the  industry's 
angle  -  of  unlevel  playing  field  and  lack  of  legal  clarity,  whereas  from  the  supervisory 
perspective  it  would  ensure  that  the  scope  of  conglomerates  subjected  to  the  supplementary 
supervision is made more appropriate, which should in turn enhance both the effectiveness of 
supplementary  supervision  and  groups'  own  risk  management.  As  a  result,  both  financial 
stability and interests of bank creditors and insurance policyholders would be enhanced.  

This policy option entails compliance costs for supervisors in terms of their envisioned role to 
develop  an  alternative  set  of  indicators  pertaining  to  AMCs  to  be  used  in  the  conglomerate 
identification process as well as for groups that may be identified as financial conglomerates 
following this policy option. However, the anticipated impact in this regard for both groups of 
stakeholders is deemed to be immaterial.48 49 

Policy option 2.3: Inclusion of AMCs' proprietary business only 

This policy option for AMC identification has been put forward by the industry. It is based on 
the distinction between provision of services to customers, who themselves bear the ultimate 
risk (non-proprietary management), and to owners' own account, which implies a risk for the 
financial  undertaking  (proprietary  management).  While  no  respondent  to  the  Commission 
services' public consultation reported a relative importance of more than 10% of proprietary 
business  in  their  total  asset  management,  the  responses,  however,  did  not  clarify  how  the 
contagion  channels  coming  from  one  or  the  other  type  of  AMC  business  could  be 
distinguished. Both proprietary and non-proprietary businesses typically appear to be part of 

48 

49 

Responses to the public consultation showed that in cases where groups would cease falling within the 
scope of the FICOD, they would realise cost (e.g., information provision- and capital-related) savings in 
the  range  of  €10  -  500  thousand  per  year.  For  the  30  largest  conglomerates  this  is  equivalent,  on 
average,  to  0.00003%  to  0.00156%  of  their  revenues.  By  extension,  this  estimate  may  be  used  to 
approximate  incremental  compliance  costs  for  groups  that  would  be  captured  in  the  scope  of  the 
supplementary  supervision  following  the  proposed  legislative  changes.  However,  given  the  limited 
number  of  groups  potentially  affected  by  policy  option  2.2,  the  effect  on  the  compliance  costs  of  the 
industry overall is deemed to be immaterial.  
One-off  implementation  costs  of  the  FICOD  for  financial  conglomerates  were  estimated  to  be 
approximately 0.019% of their current operating expenses; whereas ongoing compliance costs with the 
directive were estimated to equate approximately 0.006% of their current operating expenses; source: 
Europe Economics, Study on the Cost of Compliance with Selected FSAP Measures, 2008 

EN 

32 

   EN 

                                                 
one and the same legal entity and are often difficult to distinguish50. Moreover, regardless of 
the type of business, both types can imply substantial operational risk for a group.  

Even though policy option 2.3 may imply lower compliance costs for the industry, as it has 
direct  implications  on  determining  which  groups  fall  within  the  scope of  the  supplementary 
supervision,  due  to  the  reasons  outlined  above  it  would  not  provide  for  the  optimal  legal 
clarity, may give rise to additional regulatory arbitrage possibilities and, overall, less effective 
supervision  of  complex  financial  groups,  which  may  have  ramifications  for  the  financial 
stability. 

Conclusion 

Retaining the current scenario (option 2.1), implies that the current problems would remained 
unaddressed.  Policy  option  2.3  implies  an  improvement  compared  to  policy  option  2.1  as  it 
would  lead  to  at  least  a  partial  solution  for  identified  problems.  Policy  option  2.2  is  a 
preferred option as it is more effective than policy option 2.3 in terms of contributing towards 
the  objectives  of  enhanced  supplementary  supervision  (S-1),  reinforced  risk  management  of 
financial  conglomerates  (S-2),  elimination  of  regulatory  arbitrage  opportunities  (S-3), 
enhanced level playing field (S-5) and enhanced legal clarity (S-7). Even though compliance 
costs  for  the  industry  are  lower  under  option  2.3,  it  may  be  argued  that  option  2.2  is  more 
efficient  than  option  2.3  as  well  since  in  spite  of  higher  compliance  costs  it  allows  for  the 
attainment of policy objectives to a far greater extent. Both the JCFC and the EFCC expressed 
a preference for this option. 

Table 5: Summary of policy options' effectiveness and efficiency 

Policy Option Comparison Criteria 

Policy 
Options 

2.1 Retain current approach 

2.2 Inclusion of AMCs at all times 
complemented with guidance on 
indicators for inclusion 

Enhance 
effectiveness of 
supplementary 
supervision 
3 

Reinforce 
financial 
conglomerates' 
risk management 
3 

Effectiveness 
Eliminate 
regulatory 
arbitrage 
opportunities  
3 

1 

1 

1 

2.3 Inclusion of AMC' proprietary 
business only 
Scale of option ranking: 1=most effective / efficient, 3=least effective / efficient 
Effectiveness measures extent to which options achieve relevant objectives  
Efficiency measures extent to which objectives can be achieved for a given level of resources 

2 

2 

2 

Enhance level 
playing field 

Enhance legal 
clarity 

Efficiency 

3 

1 

2 

3 

1 

2 

3 

1 

2 

5.2.2.  Risk-based identification 

To address the problem of the lack of a risk-based identification of conglomerates, five policy 
options have been considered: 

–  Policy option 2.4: Retain current approach; 

–  Policy option 2.5: Guidelines on the application of the "waiving option" in Article 3(3); 

50 

Only  one  respondent  to  the  Commission  services'  public  consultation  indicated  that  its  two  types  of 
AMC business are organised as separate legal entities, whereas eleven respondents reported otherwise 

EN 

33 

   EN 

                                                 
–  Policy  option  2.6:  Guidelines  on  the  application  of  the  "waiving  option"  in  Article  3(3) 
combined  with  a  lower  relative  threshold  for  groups  whose  smallest  sector  exceeds 
absolute threshold; 

–  Policy  option  2.7:  Guidelines  on  the  application  of  the  "waiving  option"  in  Article  3(3) 
combined  with  an  option  to  waive  groups  whose  smallest  sector  is  below  absolute 
threshold; 

–  Policy  option  2.8:  Supervisory  discretion  as  regards  waivers  at  all  times  beyond 

materiality thresholds. 

Under policy options 2.5 – 2.8, the current materiality thresholds would remain to ensure that 
groups  whose  smaller  sector  has  a  balance  sheet  of  less  than  €6  billion  assets  (absolute 
threshold)  and  is  less  than  10%  of  the  group  in  terms  of  the  average  of  the  ratios  of  (i)  its 
balance sheet to the total balance sheet of the group and ii) its regulatory capital requirement 
to the total capital requirement of the group (relative threshold) be excluded from the scope of 
the directive. Even thought the industry in its response to the public consultation argued that 
such exclusion could not be justified, as even the smallest groups could be exposed to group 
risks,  especially  when  a  group  structure  comprises  many  non-regulated  Special  Purpose 
Entities,  the  Commission  services  consider  that  such  materiality  threshold  is  justified  for 
proportionality reasons, but may revisit this aspect at the time of a more fundamental debate 
on  the  scope  of  the  supplementary  supervision.  Given  a  limited  capacity  of  the  supervisory 
community,  the  Commission  services  regard  the  allocation  of  this  capacity  towards 
supplementary supervision of the largest conglomerates as more appropriate, considering the 
externalities  that  the  largest  groups  my  have  on  the  European  scale,  and,  thus,  favour 
maintaining the absolute materiality threshold. Also, the FICOD is a supplementary directive, 
and with regard to the smallest groups the sectoral directives are deemed to be sufficient. 

•  Furthermore,  changing  the  materiality  thresholds  only  would  not  be  sensible,  since  the 
review showed that group risks have little to do with size, other than the observation that 
the smallest groups were not always exposed to group risks as assumed by the directive. 
This is another reason why the materiality threshold should be kept.  

Policy option 2.4: Retain current approach 

Retaining  the  current  approach  would  leave  the  problem  drivers,  described  in  section  3.3.3 
un-tackled.  The  identification  process  would  remain  predominantly  quantitative,  which 
complicates  the  appropriate  coverage  of  institutions  with  potential  group  risks.  It  would  be 
inconsistent with the underlying spirit of the Basel II bank capital framework and S2 towards 
a  more  risk  based  supervisory  approaches.  FICOD  review  clearly  revealed  that  the 
identification process should be made more risk-based. 

EN 

34 

   EN 

Policy option 2.5: Guidelines on the application of the "waiving option" in Article 3(3) 

This  policy  option  entails  development  of  guidelines  with  respect  to  the  application  of  the 
option,  which  is  available  to  supervisors  under  Article  3(3)  of  the  FICOD,  to  waive 
conglomerates  whose  smallest  sector  is  above  the  absolute  threshold  but  below  the  relative 
one  from  the  supplementary  supervision.  Therefore,  this  policy  option  entails  compliance 
costs for the Joint Committee of the newly established European Supervisory Authorities who 
would be in charge of developing guidelines on the application of the waiver. Application of 
such  guidelines  would  allow  for  a  converged  risk-based  approach  to  conglomerate 
identification,  enhancing  the  effectiveness  of  supplementary  supervision  by  ensuring  that  it 
focuses on the appropriate sample of large groups. Larger conglomerates would benefit from 
enhanced level playing field conditions and strengthened legal clarity. 

While adding of such guidelines may solve the problem pertaining to the inclusion of larger 
conglomerates  on  risk-based  basis,  this,  however,  would  not  solve  the  unwarranted 
compliance burden placed on small and simpler groups whose smaller sector is less than €6 
billion  but  in  excess  of  the  relative  threshold  as  they  would  remain  to  be  included  in  the 
scope. 

Policy  option  2.6:  Guidelines  on  the  application  of  the  "waiving  option"  in  Article  3(3) 
combined with a lower relative threshold for groups whose smallest sector exceeds absolute 
threshold 

This policy option modifies option 2.5 by introducing a legal amendment to lower the relative 
threshold,  e.g.,  from  10%  to  5%,  for  groups  exceeding  the  absolute  threshold  of  €6  billion. 
This approach may, to a certain extent, address the observed problem of identifying the larger 
groups, however, such identification would be only partially carried out on risk-based basis as 
guidelines under this option would not be applied to groups whose smaller sector is above the 
relative  threshold  of  5%  but  below  the  relative  threshold  of  10%  (which  is  implied  under 
policy option 2.5). Therefore, while this option would yield a higher number of conglomerates 
to  whom  supplementary  supervision  is  applied,  their  identification  would  be  less  risk-based 
than  under  option  2.5.  Moreover,  this  option  forgoes  the  tackling  of  the  issue  of  automatic 
inclusion of smaller groups that was also applicable to option 2.5. 

Policy  option  2.7:  Guidelines  on  the  application  of  the  "waiving  option"  in  Article  3(3) 
combined with an option to waive groups whose smallest sector is below absolute threshold 

In  order  to  allow  supervisors  to  assess  whether  a  small  group  is  so  complex  that  its 
supplementary  supervision  is  justified,  but  also  to  waive  supplementary  supervision  if  it  is 
regarded disproportionate, this policy option entails inclusion of provisions in the FICOD to 
allow for the waiving of those groups where the balance sheet of the smallest sector does not 
exceed the absolute threshold of €6 billion, but the sector itself exceeds the relative threshold. 
Guidelines may be developed as to the application of this waiver. 

Similarly  to  policy  options  2.5  and  2.6,  in  order  to  provide  for  more  legal  clarity  and  more 
levelled playing field, guidelines would be developed as well for the application of the waiver 
under  Article  3(3)  to  the  larger  groups  that  are  exceeding  the  absolute  but  not  the  relative 
threshold. 

EN 

35 

   EN 

This  policy  option  would  result  in  a  sample  of  identified  conglomerates  that  are  regarded, 
after  a  supervisory  assessment,  as  groups  which  are  active  in  several  financial  sectors  and 
which  could  be  exposed  to  risks  of  contagion,  concentration,  complexity  and  conflicts  of 
interest.  The  supplementary  supervision  would  be  applied  to  those  groups  for  which 
supplementary checks on capital, risk concentration, intra group transactions and group-wide 
internal  governance  are 
including 
administrative costs, for smaller, simpler groups would be avoided. With respect to the latter, 
incremental  cost  savings  as  reported  in  the  public  consultation  varied  between  €10.000  and 
500.000 per group per year.51  

justified  while  unwarranted  compliance  costs, 

However, for the industry as whole impact on compliance costs is expected to be immaterial 
as  cost  savings  for  smaller  conglomerates  would  be  offset  by  costs  incurred  by  larger 
conglomerates52,  as  some  of  them  may  no  longer  be  waived  from  the  supplementary 
supervision following the implementation of the proposals to amend the FICOD. Yet in terms 
of  the  financial  stability  benefits  are  expected  to  be  substantial,  as  the  total  assets  of  large 
groups, whose current waiving from the supplementary supervision would be re-considered, 
added up to €9 trillion as of the end of 200953.  

Policy option 2.8: Supervisory discretion as regards waivers at all times beyond materiality 
thresholds 

Policy  option  2.8  entails  full  supervisory  discretion  with  respect  to  the  application  of 
supplementary supervision for all groups. While such an approach would address the problem 
of  smaller  groups  without  significant  group  risks  and  may  provide  for  more  effective 
supplementary supervision vis-à-vis the baseline scenario (policy option 2.4), it would result 
in unacceptable level of legal clarity for the larger groups and may bring about an increase in 
compliance costs due to a less certain identification process. The conglomerate identification 
process would become more work intensive and, therefore, costly from the supervisory angle 
as  well.  A  concomitant  lack  of  convergence  of  national  practices  would  have  a  negative 
impact on the level playing field conditions.  

Conclusion 

While options 2.5, 2.6, 2.7 and 2.8 have all been shown to be effective in aiding – to various 
degrees  -  the  identification  process  with  a  qualitative  assessment  of  potential  group  risks, 
therefore, implicitly contributing to the achievement of objectives of enhanced supplementary 
supervision (S-1) and reinforced financial conglomerate risk management (S-2), only policy 
option  2.7  is  expected  to  be  simultaneously  effective  in  limiting  compliance  costs  (S-4), 
increasing  legal  clarity  (S-7)  and  enhancing  level  playing  field  (S-5)  for  the  industry,  as  it 
would  introduce  a  waiver  to  be  applied,  where  appropriate,  to  smaller  groups  and  add 
guidelines  on  the  application  of  the  current  waiver  for  larger  groups.  This  option  was  also 

51 
52 

53 

See footnote 49 
At  the  end  of  2007,  there  were  10  groups  (represented  by  the  upper  left  box  in  Chart  1)  where  the 
balance sheet the smallest sector did not exceed the absolute threshold of €6 billion but the sector itself 
exceeded the relative threshold and 17 groups (represented by the lower right box in Chart 1) where the 
smallest  sector  exceeded  the  absolute  but  not  the  relative  threshold,  and  of  which  several  bank-led 
conglomerates had been waived 
Source: company annual reports 

EN 

36 

   EN 

                                                 
preferred  by  most  industry  respondents  to  the  Commission  services'  public  consultation,  as 
they currently observe an unlevel playing field.  

In  the  long  run,  amending  the  non  risk  based  thresholds  into  a  set  of  risk  based  parameters 
would be preferable. However, at the G20 level, the Joint Forum, the IMF and the FSB are 
still  investigating  how  to  detect  a  group  that  is  exposed  to  significant  group  risks.  Interim 
reports  mention  size,  interconnectedness  and  substitutability  as  potential  parameters.  By 
giving  the  JCFC  the  opportunity to  develop  the  risk  based  identification  process  along  with 
gained insight at the G20 level, the Commission supports the preferred direction.  

Table 6: Summary of policy options' effectiveness and efficiency 

Policy Option Comparison Criteria 

Effectiveness 

Reduce 
compliance 
burden  

Enhance level 
playing field 

Enhance legal 
clarity 

Efficiency 

Policy 
Options 

2.4: Retain current approach 

2.5: Guidelines for the "waiving option" in 
Article 3(3) 

2.6 Guidelines for the "waiving option" in 
Article 3(3) combined with a lower 
relative threshold for groups whose 
smallest sector exceeds absolute threshold 

2.7 Guidelines for the "waiving option" in 
Article 3(3) combined with an option to 
waive groups whose smallest sector is 
below absolute threshold 

Enhance 
effectiveness of 
supplementary 
supervision 

5 

1-3 

1-3 

Reinforce 
financial 
conglomerates' 
risk 
management 
5 

1-3 

1-3 

1-3 

1-3 

5 

2 

3 

1 

2.8 Supervisory discretion as regards 
waivers at all times beyond materiality 
thresholds 
Scale of option ranking: 1=most effective / efficient, 5=least effective / efficient 
Effectiveness measures extent to which options achieve relevant objectives  
Efficiency measures extent to which objectives can be achieved for a given level of resources 

4 

4 

4 

5 

1-3 

1-3 

5 

1-3 

1-3 

1-3 

1-3 

4 

4 

5 

2 

3 

1 

4 

5.3. 

Participations 

The  objective  of  detecting  potential  group  risks  and  double  use  of  capital,  requires,  among 
other  elements,  a  check  on  relationships  among  group  entities  that  take  form  of  a 
participation.  As  described  in  section  3.3.4,  participations  under  the  FICOD  can  be  defined 
not only by control or ownership, but also by durable links. The review of the FICOD found a 
lack of predictability of the application of the durable link concept which entails the detection 
of interconnectedness in a group of legal entities. The Commission addressed this problem in 
October 2009 by adopting a proposal for the Omnibus Directive which included a possibility 
for the new European Supervisory Authorities to adopt technical standards in this area. 

Another  problem  that  was  identified  during  the  review  pertains  to  the  treatment  of 
participations  in  supplementary  supervision  and  is  triggered  by  the  fact  that  company  law 
prohibits  a  minority  owner  from  accessing  information  which  is  not  accessible  to  other 
shareholders. In order to address this problem, three policy options have been considered: 

–  Policy option 3.1: Retain current approach; 

–  Policy  option  3.2:  Guidelines  with  respect  to  treatment  of  participations  in  various 

situations; 

EN 

37 

   EN 

–  Policy  option  3.3:  Require  inclusion  of  participations  in  the  full  spectrum  of 
supplementary supervision when they can be consolidated or a full deduction from capital 
otherwise. 

Policy option 3.1: Retain current approach 

Both the industry and the supervisory community agree that the provisions in this area are not 
clear and that under certain circumstances requirements cannot be fulfilled. Without a change 
to the current provisions problems outlined in section 3.3.4 would remain unaddressed.  

Policy option 3.2: Guidelines with respect to treatment of participations in various situations 

This policy option would provide for a more consistent treatment of "detected" participations. 
When assessing the impact of the supervisory treatment of participations, the JCFC observed 
a  wide  diversity  in  the  character  of  the  existing  participations  explained  by,  among  others, 
relative  versus  absolute  ownership  figures,  alliances  with  connected  owners  (consortia), 
longer term business contracts not accompanied by material ownership and, last but not least, 
diversity in the application of the participation definition. Therefore, this policy option entails 
a  development  of  guidelines  on  how  to  supervise  participations  in  the  various  thinkable 
situations.  Since  relationships  underlying  a  participation  can  be  very  different,  while 
quantitatively similar holdings can imply either a strategic alliance, or just an investment, or 
anything in between, this policy option would also facilitate more effective outcomes of the 
supplementary supervision. 

Under  this  policy  option,  each  and  every  case  would  be  assessed  while  respecting  the 
confidentiality  obligations  of  supervisors  who  have  access  to  information  vis-a-vis  the 
conglomerate under supervision and other stakeholders54. Supervisors could share experiences 
on individual cases and learn how to circumvent the minority shareholders' problem of access 
to information. This may solve the problem in several individual cases, however, would not 
provide  for  the  most  effective  solution  to  the  legal  problem  and,  therefore,  would  not  be 
entirely effective in minimising compliance costs for the financial groups. 

Unfortunately, the character of the participations problem, given the limited insight available 
today,  makes  a  legally  binding  requirement  for  the  treatment  of  participations  impossible, 
which is why the JCFC should start developing guidelines on how to deal with this problem. 
Where appropriate, and when there is more clarity about the legal problem of company law 
hampering  access  to  information  (despite  the  exclusive  supervisory  powers  to  access 
information in Article 14 of the FICOD) the aforementioned guidelines could be transformed 
into more binding tools. 

Policy option  3.3: Require inclusion of participations in the full  spectrum of supplementary 
supervision when they can be consolidated or a full deduction from capital otherwise 

Policy  option  3.3  reinforces  the  supervision  of  participations  in  the  framework  of 
supplementary  supervision.  It  would  entail  the  alignment  of  the  FICOD  with  the  sectoral 
directives in terms of capital-related treatment. This option would clarify what to do once the 
character  of  a  participation  is  detected,  i.e.,  a)  consolidation  if  information  is  sufficiently 

54 

Article 14 allows supervisors to obtain this information but is silent about its transfer to the supervised 
minority shareholder 

EN 

38 

   EN 

                                                 
available  to  enable  prudent  group-wide  risk  management,  including  the  participation,  or,  b) 
deduction from capital if such information is not sufficiently available.  

The  feasibility  of  this  option,  however,  depends  on  the  outcomes  of  the  sectoral  capital 
debates,  in  particular,  with  regard  to  the  treatment  of  participations,  as  well  as  an  adequate 
solution  to  the  lack  of  access  to  information,  caused  by  national  company  law  in  some 
member states, despite the exclusive supervisory powers allowing them to access information 
under Article 14 of the FICOD. Therefore, consideration of this option would have to wait for 
conclusions  of  debates  on  capital  and  scope  in  cross-sectoral  cases  in  order  to  ensure 
coherence  with  sectoral  provisions.  After  all,  the  FICOD  was  meant  as  a  supplementary 
directive;  adding  capital-related  elements  to  it  would  require  a  debate  beyond  the  currently 
carried out technical review. 

The cause of the problem linked to the provisions of company law that hamper the control of 
risks in a group that has one or more participations, would have to be examined thoroughly in 
the  broader  context  of  appropriate  regulatory  response  to  the  recent  financial  crisis.  Option 
3.2, in this context, could pave the way for option 3.3. 

Conclusion 

Retaining  the  current  scenario  (option  3.1),  implies  that  outstanding  problems  pertaining  to 
supervisory  treatment  of  participations  would  remain  unaddressed.  While  policy  option  3.3 
may  be  more  effective  than  policy  option  3.2  with  respect  to  contributing  towards  the 
objective  of  reducing  compliance  burden  (S-4),  its  viability  is  driven  by  the  outcome  of 
sectoral debates on capital and the feasibility of revision of relevant company law provisions. 
Option 3.2, given the more consistent and appropriate supervisory outcomes it entails, on the 
other hand, seems to be more effective and efficient with respect to attaining the objectives of 
enhanced  supplementary  supervision  (S-1),  reinforced  risk  management  of  financial 
conglomerates  (S-2)  and  enhanced  supervisory  cooperation  and  convergence  (S-5)  and, 
therefore, has been identified as a preferred option. It shall be noted, however, that option 3.3 
may be viewed as complementary to policy option 3.2 and, as such, could be pursued in the 
longer run. In its responses to the public consultation, the industry simply asked not to require 
risk management information regarding the participations anymore; the industry realizes that 
that would imply deduction from capital, so it welcomes the interim solution. Both the JCFC 
and the EFCC would support this option as an interim solution, which would be addressing 
the problem, even though it could not solve it entirely. 

Table 7: Summary of policy options' effectiveness and efficiency 

Policy Option Comparison Criteria 

Effectiveness 

Policy 
Options 

3.1 Retain current approach 

Enhance 
effectiveness of 
supplementary 
supervision 
3 

3.2 Guidelines for various situations 

1 

Reinforce financial 
conglomerates' risk 
management 

Reduce compliance 
burden  

3 

1 

3 

2 

3.3 Inclusion of participations in 
supplementary supervision when they can 
be consolidated 
Scale of option ranking: 1=most effective / efficient, 3=least effective / efficient 
Effectiveness measures extent to which options achieve relevant objectives  
Efficiency measures extent to which objectives can be achieved for a given level of resources 

2 

2 

1 

Enhance 
supervisory 
cooperation and 
convergence 
3 

1 

2 

Efficiency 

3 

1 

2 

EN 

39 

   EN 

5.4. 

The package of preferred policy options and its impact 

The following table shows the five preferred policy options.  

Table 8: Package of preferred policy options 

Policy Option Set 

Supplementary 
supervision on holding 
company level and 
supervisory coordination 

Financial conglomerate 
identification process 

Policy Options 

Alignment of supervisory powers 

Policy option 1.2: Allow an MFHC to be at the same time an FHC or an IHC 

Identification of RCAs 

Policy option 1.6: Narrow down definition of RCA to supervisors of ultimate parent entities within individual sectors and 
supervisors regarded as relevant by the supervisor of the ultimate parent 

Inclusion of AMCs in the identification process 

Policy option 2.2: Inclusion of AMCs at all times complemented with guidance on indicators for inclusion 

Risk-based identification 

Policy option 2.7: Guidelines for the "waiving option" in Article 3(3) combined with an option to waive groups whose smallest 
sector is below absolute threshold 

Treatment of 
participations 

Policy option 3.2: Guidelines for various situations 

The  proposed  policy  changes  are  expected  to  render  the  supplementary  supervision 
framework more robust in the long run, leading to more effective risk management incentives 
and  practices,  which,  in  turn,  should  also  help  to  enhance  the  international  competitiveness 
position of EU financial groups. The proposals should contribute positively to containing the 
risks to the financial stability and the concomitant costs to society in the future. At the level of 
individual stakeholder groups and systemic concerns, expected impacts of the proposals are as 
follows: 

–  Certain  smaller  EU  financial  groups  having  a  simple  structure  and  not  more  than  a  few 
licenses in both  sectors may be  excluded  from  supplementary supervision and,  therefore, 
should  see  compliance  cost  savings.  Some  ten  smaller  financial  groups  with  combined 
assets  of  approximately  €69  billion  may  be  considered  for  this  possibility.  Compliance 
costs  for  several  large  bank-led  conglomerates  that  have  hundreds  of  licenses  and  are 
active  in  both  sectors,  on  the  other  hand,  should  increase  as  up  to  8  of  such  groups, 
representing about €9 trillion assets in the financial sector, may be included in the scope of 
the  supplementary  supervision.  Incremental  compliance  costs  would  also  be  incurred  by 
those  financial  groups  whose  structure  includes  asset  management  business  and  that  are 
identified  as  financial  conglomerates  following  proposed  changes  to  the  conglomerate 
identification process with respect to asset management companies. Compliance costs for 
financial  groups  that  are  added  to  the  scope  of  the  supplementary  supervision  should  be, 
given  their  overall  size,  immaterial  in  relative  terms.  Furthermore,  they  should  be  offset 
with  benefits  coming  from  more  effective  risk  management  practices,  induced  by 
incentives  implicit  in  this  legislative  proposal.  Another  positive  impact  can  be  expected 
from  a  greater  visibility  and  trust  in  the  markets,  when  a  company  is  identified  as  a 
conglomerate. These benefits should enhance the international competitiveness of large EU 
groups, given initiatives in the area of supplementary supervision that are being pursued in 
other major international jurisdictions; 

–  The aforementioned changes to the conglomerate identification process will be guided by 
the  guidelines  developed  by  the  supervisory  community.  These  changes  will  make  the 
scope  of  the  supplementary  supervision  more  appropriate  and,  thus,  will  enhance  the 
effectiveness  of  supervisors'  monitoring  of  the risks that financial groups  are exposed to, 
which  should  outweigh  the  costs  of  developing  such  guidelines.  Combined  with  a  more 

EN 

40 

   EN 

streamlined - without duplicating or substituting sectoral top level supervisory powers and 
regardless  of  group  structure  -  supervision  at  the  top  conglomerate  level  and  improved 
supervisory  toolkit  for  detection  of  contagion,  concentration,  complexity  issues  and 
conflicts  of  interests  in  firms  connected  to  a  conglomerate  through  participations,  this 
should produce a positive contribution to the financial stability;  

–  The  enhanced  clarity  of  provisions  as  regards  the  inclusion  of  asset  management 
companies  in  the  identification  and  supplementary  supervision  as  purported  in  2002, 
should provide for a more level playing field in this area; 

–  Protection of depositors and policyholders will be enhanced as improved effectiveness of 
the supplementary supervision and risk management of financial conglomerates will lead 
to  a  reduction  of  their  default  risk;  this  shall  also  have  a  positive  impact  on  long-term 
investors in financial conglomerates such as pension funds55;  

–  As regards clients of the affected financial groups, the impact is expected to be negligible 
with respect to the availability of products and their pricing, given the overall materiality 
level  of  the  net  incremental  effect  of  this  proposal  on  the  latter.  Clients  should  not  even 
worry  about  the  differences  between  the  regulatory  treatment  of  banks,  insurers  and 
conglomerates. They trust that the supervisory framework is comprehensive and prudent, 
and this revision is especially aimed at enhancing that notion.  

The Commission's Better Regulation strategy is aimed at measuring administrative costs and 
reducing  administrative  burden.  The  distinction  between  the  two  is  that  the  latter  denotes 
costs  linked  to  providing  the  information  that  businesses  would  not  incur  in  the  absence  of 
legislation.  In  the  area  of  prudential  regulation  of  financial  groups,  certain  information 
requirements are necessary to provide for the desired level of financial stability and creditor / 
policyholder  protection  and,  hence,  should  be  set  at  a  level  that  ensures  an  equilibrium 
between  ensuing  administrative  burdens  and  the  benefits  that  they  yield.  However, 
administrative  burden  associated  with  the  current  FICOD  provisions  is  assumed  to  be  low. 
According to a study  conducted by  Europe Economics, one-off implementation costs  of  the 
FICOD  for  financial  conglomerates  are  approximately  0.019%  of  their  current  operating 
expenses; whereas ongoing compliance costs with the directive are approximately 0.006% of 
their  current  operating  expenses.56  Since  administrative  costs  and,  in  turn,  administrative 
burden are part of such total compliance costs, they would represent even a smaller share of 
financial  conglomerates'  operating  costs.  Areas  where  proposed  policy  changes  may  have 
implications  for  the  administrative  costs  incurred  by  conglomerates,  have  been  identified 
throughout  the  report  (see  sections  5.1.1,  5.2.1  and  5.2.2),  some  of  them  resulting  in  cost 
increases while others - in reduction. Overall net effect, particularly, given the limited number 
of institutions affected by  various individual proposals, is expected to be immaterial for the 
industry.  

55 

56 

EN 

in 

E.g., for top 100 largest investments of ABP (a Dutch pension fund that is one of the largest pension 
funds 
link: 
2008 
http://www.abp.nl/abp/abp/images/01%200002%2008C_top100ENG%20(def%20versie)_tcm108-
59128.pdf  
http://ec.europa.eu/internal_market/finances/docs/actionplan/index/090707_cost_of_compliance_en.pdf  

following 

world) 

please 

see 

the 

the 

in 

41 

   EN 

                                                 
In  terms  of  the  social  impacts, this  legislative  initiative,  as  mentioned  above,  is  expected  to 
contribute  to  strengthening  of  the  financial  stability  and,  hence,  shall  benefit  the  society  at 
large. No major implications of the proposal on environment are anticipated. 

6. 

MONITORING AND EVALUATION 

It is expected that the proposed amendments will enter into force in 2011. The Commission, 
in  co-operation  with  Member  States  will  monitor  the  effectiveness  of  the  proposals  once 
implemented.  The  Commission  will  also  have  regard  to  other  stakeholders  such  as  the 
industry  and  supervisors  while  assessing  whether  the  objectives  outlined  in  this  impact 
assessment  are  fulfilled.  The  JCFC,  and  later  the  conglomerates'  subcommittee  of  the  Joint 
Committee is monitoring the application of the directive on a continuous basis57. 

(4) 

(5) 

The  proposed  amendments  are  tightly  inter-linked  with  a  recent  proposal  of  the 
Commission for the Omnibus Directive. As indicated earlier, they also are likely to be 
followed  up  with  a  more  fundamental  review  of  the  FICOD  that  may  include 
provisions  pertaining  to  the  quality  of  capital  buffer  and  scope  as  regards  non-
regulated  entities.  The  Commission  services  started  such  fundamental  debate  with  a 
conference  on  7  June  2010  in  Brussels  and  will  work  on  developing  appropriate 
proposals in the course of 2011. 

Normally, the practice at the Commission is to conduct an evaluation of a legislation 
some four years after its implementation. However, given the possibility of additional 
amendments  to  the  FICOD  in  the  near  future  and  its  close  ties  to  the  Omnibus 
directives,  as  well  as  initiatives  at  the  G20  level  in  the  Joint  Forum  and  the  FSB,  it 
might be sensible to conduct a comprehensive evaluation that would be based on the 
entirely  overhauled  legislative  framework,  for  which  a  target  date  should  be  set 
accordingly.  

57 

This  could  be  supplemented  by  reports  to  the  European  Commission  regarding  the  application  of  (i) 
capital  calculations  (Article  6),  (ii)  internal  control  of  group  risks  (Articles  7,  8  and  9),  and  (iii) 
supervisory coordination (Section 3) 

EN 

42 

   EN 

                                                 
7. 

ANNEX I: ACRONYMS 

AIFM: Alternative Investment Fund Manager  

AIG: American International Group, Inc.  

AMCs: Asset Management Companies 

APRA: Australian Prudential Regulation Authority 

EBF: European Banking Federation 

CEA: Commission Européenne d'Assurance 

COM: European Commission 

CRD: Capital Requirements Directive  

EACB: European Association of Co-operative Banks 

EAPB: European Association of Public Banks 

EASB: European Association of Savings Banks 

EEC: European Economic Community 

EFCC: European Financial Conglomerates Committee 

FC: Financial Conglomerate 

FCD: Fourth Council Directive 

FHC: Financial Holding Companies 

FICOD: Financial Conglomerates Directive 

FT: Financial Times 

FSB: Financial Stability Board 

GE: General Electric 

GM: General Motors 

ICAAP: Internal Capital Adequacy Assessment Process 

IGD: Insurance Groups Directive 

IHC: Insurance Holding Companies 

INS: Insurance groups 

EN 

43 

   EN 

ITE: Intra-group Transactions and Exposures 

JBF: Journal of Banking and Finance 

JCFC: Joint Committee on Financial Conglomerates 

JFI: Journal of Financial Intermediation 

LCFI: Large and Complex Financial Institution 

MFHC: Mixed Financial Holding Companies 

MiFID: Markets in Financial Instruments Directive 

MTG: Mixed Technical Group 

RC: Risk Concentrations 

RCA: Relevant Competent Authority 

S2: Solvency II 

SIFI: Systemically Important Financial Institution 

UCITS: Undertakings for Collective Investments in Transferable Securities 

EN 

44 

   EN 

8. 

ANNEX II: GLOSSARY 

Bail outs: act of giving capital to an entity (a company, a country, or an individual) in danger 
of failing in an attempt to save it from bankruptcy, insolvency, or total liquidation and ruin, or 
to allow a failing entity to fail without spreading contagion.  

Capital  Requirement  Directive:  introduces  a  supervisory  framework  in  the  EU  which 
reflects  the  Basel  II  rules  on  capital  measurement  and  capital  standards  for  the  financial 
services industry.  

Compounding effects: the opposite of diversification effects, i.e. acceleration of risks in case 
they materialize at the same time Conflict of interest: a situation in which the same person or 
entity would both benefit and suffer from the same decision 

Contagion: transmission of a financial shock in one entity to other interdependent entities  

Depositors: a person who has deposited money in a financial institution 

Diversification effects: To the degree that correlations across risks are imperfect, there is a 
diversification benefit that the firm faces less risk, and would therefore require less capital to 
operate  safely,  than  would  otherwise  be  the  case.  In  other  words,  the  aggregate  risk  is  less 
than the sum of the individual risks that are being aggregated. This is found across all of the 
major types of market risk factors, including interest rates, foreign exchange rates and equity 
prices. 

Group risks: Adverse developments which affect the soundness of a firm, when it is part of 
an  aggregate  of  many  different  entities.  The  group  risks  are  the  risk  of  contagion,  I.e.e  the 
spreading  of  risks  throughout  the  group  because  of  intra-group  relationships,  management 
complexity, concentration of risks (i.e. the same risk materializing throughout the group at the 
same  time)  and  conflicts  of  interests.  Group  risks  arise  incrementally  when  licenses  for 
different financial services are combined under the same roof.  

Home-host relationships: Relationships between authorities from both the country where a 
supervised entity has its headquarters, and the country where the same group has its foreign 
activities. 

Leveraging: use of debt capital to supplement equity capital.  

Management complexity: Difficulty of controlling many legal entities at the same time. 

Mixed Technical Group: created by the European Commission following the Joint Forum's 
recommendations, in order to guide the implementation of the FICOD in the European Union. 
It consists of experts from regulatory and supervisory authorities for banking, insurance and 
securities,  the  European  Commission  (chair)  and  the  European  Central  Bank  (ECB).  The 
MTG reports to its sectoral committees, and it is active in the area of financial conglomerates.  

Mixed  Financial  Holding  Company:  a  parent  undertaking,  other  than  a  regulated  entity, 
which together with its subsidiaries, at least one of which is a regulated entity which has its 
head office in the Community, and other entities, constitutes a financial conglomerate 

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Own  Funds:  a  bank's  available  capital  and  reserves  for  the  purposes  of  capital  adequacy 
rules.  

Regulated entity: legal entity which is authorized by an authority to perform certain defined 
activities in the financial sector. Synonym for licensed entity or authorized entity. 

Ringfence:  The  legal  walling  off  of  certain  assets  or  liabilities  within  a  corporation.  For 
example,  a  firm  may  form  a  new  subsidiary  to  protect,  or  ring-fence,  specific  assets  from 
creditors  

Scope: groups subject to the provided supplementary supervision 

Technical provisions: accounting magnitudes which the insurer must fund in order to be able 
to meet the undertakings signed with its insured.  

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9. 

ANNEX III: FICOD REVIEW PROCESS 

The  review  envisaged  in  FICOD  started  in  2008.  It  was  preceded  by  two  earlier  evaluation 
exercises with respect to financial conglomerates regulation. The first exercise, conducted by 
the so-called Mixed  Technical Group (MTG) in 2005  focused on the  implementation  of the 
FICOD  and  produced  answers  to  questions  about  implementation.  The  second  exercise, 
Advice no. 2 of the Interim Working Committee on Financial Conglomerates (a predecessor 
of the JCFC) in 2008, examined the consequences of the differences in sectoral rules on the 
calculation  of  own  funds  of  financial  conglomerates  –  this  is  usually  referred  to  as  "the 
Capital  Advice".  A  smaller  but  significant  contribution  regarding  the  application  of  the 
concept  of  "relevant  competent  authority",  which  relates  to  supervisory  coordination 
arrangements  better  known  as  "home-host"  relationships,  was  sent  by  the  JCFC  to  the 
Commission services on a confidential basis in April 2008. 

In April 2008 the EFCC approved the launch of the required review of the FICOD with a Call 
for Advice to the JCFC. The Call for Advice was essentially a backward-looking exercise and 
confined to a review of provisions with the biggest impact, grouped in three categories:58 

–  Language, i.e., clarity and consistency of definitions and terminology used;  

–  Scope, i.e., which groups should be subject to the provided supplementary supervision; and  

–  Internal  control  requirements  that  cover  the  supplementary  checks  on  risk  management 
processes, monitoring of risk concentrations, and on intra-group transactions and exposures 
(aspects of "Pillar 2"59 within the meaning of the CRD and S2). 

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As  regards  the  evaluation  of  remaining  provisions,  review  of  the  provisions  on  capital  adequacy  was 
already  included  in  the  Capital  Advice,  whereas  before  addressing  other  necessary  supplementary 
supervision issues (e.g., supervisory coordination articles) the EFCC wanted to wait for the conclusion 
of debates on a revision of the CRD and on the Commission's S2 proposal.  
Pillar 2 is a general term, which emanates from the revised Basel Framework for bank supervision and 
refers to many aspects related to the supervisory review process, assessing a group's risk management 
and internal control processes. 

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