COMMISSION STAFF WORKING DOCUMENT Accompanying document to the  Proposal for a  DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  amending Directives 98/78/EC, 2002/87/EC and 2006/48/EC as regards the supplementary supervision of financial entities in a financial conglomerate
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

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EUROPEAN COMMISSION 

Brussels, 16.8.2010 
SEC(2010) 981 final 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directives 98/78/EC, 2002/87/EC and 2006/48/EC as regards the 
supplementary supervision of financial entities in a financial conglomerate 

COM(2010) 433 
 SEC(2010) 979 

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COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Directives 98/78/EC, 2002/87/EC and 2006/48/EC as regards the 
supplementary supervision of financial entities in a financial conglomerate 

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1. 

BACKGROUND 

The establishment and development of large, complex groups combining several banking and 
insurance licenses, was recognized in the early nineties. Following recommendations by the 
Joint Forum, the G10 body of supervisors, the Financial Conglomerates Directive1 (FICOD) 
was adopted in 2002. It aimed at the supplementary supervision of regulated entities that form 
part  of  a  financial  conglomerate,  by  focusing  on  potential  risks  of  double  gearing  (multiple 
use  of  capital)  and  on  "group  risks":  the  risks  of  contagion,  management  complexity,  risk 
concentration, and conflicts of interest.  

Since  2002,  markets  have  further  developed  in  a  direction  where  the  distinction  between 
banking  business  and  insurance  business  is  not  always  easily  discernable  and  where  the 
largest  groups  are  active  in  many  countries.  Both  the  revision  of  the  1988  Basel  Accord  in 
2004, implemented in the EU by the Capital Requirements Directive (CRD)2 in 2006, and the 
introduction  of  a  comprehensive  set  of  regulations  for  insurance  companies  in  Solvency  II 
(S2)3  developed  the  regulatory  framework  but,  as  regards  conglomerates,  only  in  so  far  as 
legal  entities  of  a  group  are  active  in  the  same  sector  -  banking  or  insurance.  The 
supplementary  regulatory  framework  under  FICOD  dealing  with  the  additional  complexity 
and risks stemming from combinations of licenses has not been evaluated yet.  

As of the end of 2009, the directive covered 69 European groups and 6 third country groups. 
About 35 of  them are small and operate  mainly domestically with a few licenses. Although 
the revision is also intended to simplify the supervision of small conglomerates, it specifically 
deals with the supervision of the 30 or so biggest financial groups in Europe. Total assets of 
these at the end 2009 exceeded €25 trillion, representing a substantial share of the EU banking 
market  of  roughly  €42  trillion  assets  and  the  EU  insurance  market  of  roughly  €10  trillion 
assets. A typical large conglomerate has over 400 licenses in several jurisdictions and several 
sectors: banking, life and/or non-life insurance, asset management.  

2. 

STAKEHOLDER CONSULTATION 

The Commission discussed possible improvements to the current legislative text three times at 
the  European  Financial  Conglomerates  Committee  (EFCC)4  and  three  times  in  its  FICOD 
working  group.  The  FICOD  review  benefited  from  two  earlier  evaluation  exercises  with 
respect  to  financial  conglomerates  regulation  conducted  by  the  so-called  Mixed  Technical 
Group  in  2005  and  by  the  Interim  Working  Committee  on  Financial  Conglomerates,  a 
predecessor  to  the  Joint  Committee  on  Financial  Conglomerates  (JCFC),5  in  2008  ("the 
Capital Advice"). In April 2008 the EFCC approved the launch of the required review of the 
FICOD with a Call for Advice to the JCFC. 

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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 
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  insurance 
directives presently in place 
Advisory committee for financial conglomerates. 
Lamfalussy level 3 committee for financial conglomerates 

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The industry has been involved - by means of the EFCC first newsletter and dialogues - since 
May 2008, and has also expressed its views on four public occasions since then. 

After  receiving  the  final  JCFC  Advice  in  October  2009,  a  public  consultation  on  the 
remaining  questions  and  potential  policy  alternatives  under  consideration  ran  from  6 
November 2009 until 15 January 2010. Responses to the public consultation6 from a variety 
of  both bank- and insurance-led conglomerates of a range of sizes revealed a broad support 
for the Commission services' suggestions. 

3. 

PROBLEM DEFINITION 

3.1. 

Supervision at the holding company level 

Supervision at the level of the holding company is governed by the combination of the current 
provisions  of  the  FICOD,  the  CRD  and  the  Insurance  Groups  Directive7  (IGD).  These 
directives refer 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 top level change when the top level becomes an MFHC and ceases to be a 
FHC  or  an  IHC.  Figures  1  and  28  below  demonstrate  that  the  identification  of  a  financial 
conglomerate  can  affect  the  application of sectoral  group  supervision  differently, depending 
on the structure of the group.  

Figure  1:  FICOD  supplements  and  partly  replaces  sectoral  supervision  if  a  banking  or 
insurance group becomes a conglomerate. Before acquisition by a holding company, a bank or 
an  insurer  is  subject  to  consolidated  supervision  as  laid  out  in  either  the  CRD  or  the  IGD. 
After the acquisition, consolidated supervision can only be applied to a top level banking or 
insurance entity. FICOD supplements that consolidated supervision. 

Bank 

Bank 

Bank A 

Bank B 

Bank A 

Bank B 

Insurer X 

Figure 2: FICOD replaces sectoral supervision at a group level. If a MFHC replaces a FHC 
and/or  an  IHC  and  if  there  is  no  top  level  banking  or  insurance  entity  (i.e.,  all  licenses  are 
owned directly by an MFHC), sectoral group supervision provisions can no longer be applied.  

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http://ec.europa.eu/internal_market/consultations/docs/2009/ficod/feedback_document_en.pdf 
Directive 98/78/EC on the supplementary supervision of insurance undertakings in an insurance group 
Figures 1 and 2 use the example of a banking group for the purposes of illustration, but the same is true 
for insurance groups, with reference to the application of the CRD replaced by the IGD 

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FHC 

MFHC 

ON TOP:
FICOD 
ONLY 

Bank A 

Bank B 

Bank A 

Bank B 

Insurer X 

CRD / insurance rules at solo level 

As a result of the interaction depicted in Figure 2, certain tools of sectoral group supervision 
that  can  be  applied  at  the  level  of  a  FHC  or  an  IHC  can  not  be  applied  to  the  whole  group 
when the holding company is a MFHC. Those tools include the waiving of solo-supervision 
of subsidiaries, the application of provisions on disclosure (Pillar 3) and self-assessment and 
supervisory review (Pillar 2) on a consolidated basis. This leads to the anomalous result that a 
group which has acquired a license in the other sector, so that the holding company becomes a 
MFHC, is subject to a regulatory regime which may not be as comprehensive as that which 
applied  before  the  acquisition,  even  though  the  group  has  increased  in  size  and  complexity 
and may therefore represent a higher risk to the financial system.  

As  a  consequence,  the  use  by  supervisors  of  a  waiver  in  determining  whether  a  group  is  a 
financial  conglomerate  is  influenced  by  the  assessment  of  whether  the  application  of  the 
sectoral supervision may be more prudentially sound. However, the continued application of 
sectoral supervision may not adequately address the additional prudential risks that arise from 
the increased size and complexity of the group - risks which would have been addressed by 
the  supplementary  aspects  of  the  FICOD;  and  may  result  in  differences  in  supervisory 
treatment (based on the structure rather than on the risk profile) of conglomerates.  

3.2. 

Supervisory coordination 

FICOD  supplements  the  CRD  and  insurance  directives  for  additional  supervision  at  the  top 
level  of  a  group.  To  that  end,  it  also  contains  provisions  for  coordination  among  different 
supervisors  of  a  group.  FICOD  defines  who  is  a  relevant  competent  authority  (RCA),  and 
requires  the  coordinator  (the  top  level  supervisor)  to  consult  RCAs  on  certain  supervisory 
questions.  However,  the  current  provisions  leave  room  for  varying  interpretations  of  the 
authorities that qualify as RCAs. A broad interpretation results in a high number of RCAs that 
must  be  consulted  by  the  coordinator  at  the  financial  conglomerate  level,  which  may 
undermine  the  effective  and  efficient  coordination  of  the  work  to  be  carried  out  by  the 
"college" of a coordinator and RCAs. 

3.3. 

Identification 

Provisions governing the identification of financial conglomerate also give rise to three sub-
problems.  

First, 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 

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2002,  although  it  does  require  that  AMCs  be  included  in  the  scope  of  supplementary 
supervision. Second, the threshold tests can be based on different parameters with respect to 
assets and capital requirements but the provisions are ambiguous as to how calculate the tests 
arising  from,  for  example,  different  accounting  treatments  of  assets,  or  parts  of  the  group 
which do not always have a solvency requirement. Third and most importantly, the threshold 
conditions,  given  their  fixed  amounts,  are  not  risk-based,  and  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.  As  a  result,  the 
current  provisions  on  identification  may  undermine  the  effective  achievement  of  the 
underlying objectives of the directive. 

3.4. 

Participations 

The  consistent  treatment  of  participations  in  day-to-day  supplementary  supervision  is 
hampered  by  the  lack  of  relevant  information  to  assess  group  risks,  which  is  not  so 
straightforward when participations are held in listed firms. Company law may prohibit one 
minority  shareholder  from  receiving  more  information  about  that  firm  than  its  other 
shareholders.  For  example,  if  information  about  risks  with  respect  to  participations  in 
insurance  and  reinsurance  companies  cannot  be  obtained  by  bank-led  conglomerates,  they 
cannot  provide  their  supervisors  with  the  evidence  of  a  satisfactory  level  of  integration  of 
management and internal control with these entities that is necessary for consolidation and the 
right to deduct such participations from their capital that consolidation entails.  

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  under  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; 

Enhance safeguarding of creditor and policyholder interests; 

Ensure international competitiveness of EU financial groups. 

In  light  of  the  problems  presented  above,  three  sets  of  operational  objectives  have  been 
identified  to  address  the  specific  problem  drivers.  Effective  realization  of  such  operational 
objectives should contribute to the achievement of the longer-term specific policy objectives 
aimed  at  enhancing  the  effectiveness  of  supplementary  supervision,  reinforcing  the  risk 
management  of  financial  conglomerates,  eliminating  opportunities  for  regulatory  arbitrage  , 
reducing  the  burden  of  compliance  and  enhancing  the  level  playing  field,  supervisory 
cooperation and convergence, and legal clarity. 

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5. 

POLICY OPTIONS AND THEIR IMPACT 

Altogether, seventeen policy options have been designed, impact-assessed and compared with 
a view to addressing the issues identified in the analysis. This section describes the expected 
impacts of preferred policy measures in each area. 

5.1. 

Supplementary  supervision  on  holding  company 
coordination 

level  and  supervisory 

In order to align supervisory powers at the top 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,  and  to  facilitate  coordination  by  the  most  relevant  supervisors,  the 
following targeted amendments will be introduced:  

–  end the exclusion of top level holding companies of a banking or an insurance group that 
are classified as a MFHC, so that provisions and powers that applied to the former FHC or 
IHC do not disappear when the classification of a group and its holding company changes 
as a result of an acquisition in the other sector;  

–  narrow the definition of RCA to include only supervisors of ultimate parent entities within 
individual sectors and any other competent authorities that the supervisors of the ultimate 
parent entities consider are relevant. 

5.2. 

Identification of financial conglomerates 

To  address  the  problem  outlined  in  section  3.3  regarding  the  inclusion  of  AMCs  in 
supplementary supervision, the inclusion of AMCs at all times, complemented with guidance 
on indicators for inclusion, will be proposed. 

In  order  to  tackle  the  ambiguity  regarding  parameters  and  the  lack  of  a  risk-based 
identification of conglomerates, technical standards on the application of the "waiver option" 
for  larger  groups  in  Article  3(3)  of  the  FICOD  will  be  proposed,  and  an  option  will  be 
introduced  to  waive  supplementary  supervision  for  groups  where  the  assets  held  by  the 
smallest sector are below the absolute threshold of €6 billion. 

5.3. 

Participations 

The problem of the day-to-day treatment of participations under supplementary supervision, 
which  is  aggravated  by  the  fact  that  company  law  may  prohibit  a  minority  owner  from 
accessing  information  which  is  not  accessible  to  other  shareholders,  will  be  alleviated  by 
technical standards with respect to treatment of participations in various situations. 

5.4. 

Impact of preferred policy options 

The  proposed  policy  changes  are  expected  to  render  the  supplementary  supervision 
framework more robust, leading to more 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. At the level of individual stakeholder 
groups and systemic concerns, expected impacts of the proposals are as follows: 

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–  Certain  smaller  EU  financial  groups  with  a  simple  structure  and  not  more  than  a  few 
licenses  in  both  sectors  may  be  excluded  from  supplementary  supervision  and  would 
therefore  benefit  from  savings  in  compliance  costs.  This  may  be  available  to  some  ten 
smaller  financial  groups  with  combined  assets  of  approximately  €69  billion.  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  several  such  groups, 
representing up to €9 trillion assets in the fina ncial sector, may be included in the scope of 
the  supplementary  supervision.  Increased  compliance  costs  would  also  be  incurred  by 
those financial groups whose structure includes asset management business and that will be 
identified  as  financial  conglomerates  following  proposed  changes  to  the  conglomerate 
identification process. Compliance costs for financial groups that are newly included in the 
scope of  the supplementary supervision  should, given their overall size, be immaterial in 
relative terms. Furthermore, they should be offset with benefits arising 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 
that should result from identification 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  make  the 
scope of the supplementary supervision more appropriate and should therefore enhance the 
effectiveness of supervisors' monitoring of the risks to which financial groups are exposed. 
Combined  with  a  more  streamlined  supervision  at  the  top  level  of  conglomerates  and  an 
improved supervisory toolkit for detection of contagion, concentration, complexity issues 
and conflicts of interests in firms connected to a conglomerate through participations, this 
should make a positive contribution to the financial stability. 

–  The  enhanced  clarity  of  provisions  governing  the  inclusion  of  asset  management 
companies in the identification and supplementary supervision should provide a more level 
playing field in this area. 

–  As regards clients of the affected financial groups, the impact is expected to be negligible 
given the overall level of materiality of the net incremental effect of this proposal on those 
groups.  Moreover,  clients  might  not  be  aware  of  differences  between  the  regulatory 
treatment  of  banks,  insurers  and  conglomerates:  they  simply  trust  that  the  supervisory 
framework  is  comprehensive  and  prudent,  and  this  revision  is  especially  aimed  at 
reinforcing that framework and so justifying that trust.  

6. 

MONITORING AND EVALUATION 

It  is  expected  that  the  proposed  amendments  will  enter  into  force  in  2011.  The  proposed 
amendments  are  closely  linked  with  a  recent  proposal  of  the  Commission  for  the  Omnibus 
Directive, amending the financial services directives to take account of the introduction of the 
new  European  Supervisory  Authorities.  They  also  are  likely  to  be  followed  by  a  more 
fundamental  review  of  the  FICOD  that  may  include  provisions  on  the  quality  of  capital 
buffers and scope as regards non-regulated entities. Therefore, it might be sensible to conduct 
a comprehensive evaluation based on the entirely overhauled legislative framework, for which 
a target date should be set in line with the evaluations of these other directives. 

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