| The Draft Directive on the Supplementary Supervision of Credit Institutions , Insurance Undertakings and Investment 17/03/2001 INDEX Comments by the British Bankers ' Association PARENT UNDERTAKINGS OUTSIDE THE EUROPEAN UNION SCOPE OF SUPPLEMENTARY SUPERVISION CAPITAL ADEQUACY Member state Discretion Consolidated Sectoral Capital Tests Minority Interests Non Regulated Entities Accounting Consolidation Capital Adequacy Tests : Terminology INTRA GROUP TRANSACTIONS AND RISK CONCENTRATIONS APPOINTMENT OF A COORDINATOR AND COOPERATION/EXCHANGE OF INFORMATION AMONG SUPERVISORS AMENDMENTS TO SECTORAL LEGISLATION Comments by the British Bankers ' Association In view of the very limited response time provided by the Commission , these comments are of a preliminary nature . They are addressed to the latest text of the draft directive ( 5.1.01 ) though reference is made also to the consultation document published by the Commission in December . On a general level , we recognise the need to develop a supervisory framework for financial conglomerates . It will be important , however , that the proposed legislation should not impose disproportionate regulatory burdens on financial groups doing business in Europe , give rise to unnecessary bureaucracy or generate significant competitive distortions within the EU . PARENT UNDERTAKINGS OUTSIDE THE EUROPEAN UNION It is intended that the geographical scope of the directive should extend beyond the EU to include the parent company of a conglomerate so located . In cases where a third country supervisor does not apply rules equivalent to those in the draft directive , it is proposed that the relevant supervisor in the EU should apply the provisions of the directive to all regulated entities within the group . Another possibility broached in such circumstances is requiring the establishment of a holding company in the EU , facilitating the application of the provisions of the directive to all regulated entities in the EU . As noted , we recognise the case for the principle of ' whole group ' supervision . Also , we are mindful of the potential for competitive distortions where groups headed by undertakings outside the EU would not be covered by an equivalent regime . Nevertheless , we believe the EU should proceed with caution . In particular , we consider that EU supervisors should hold back from taking ' unilateral ' action in respect of groups whose parent undertakings are in jurisdictions following general Basel standards . Pending broader international implementation of a similar conglomerates regime , EU supervisors should adopt a flexible approach and seek to address any concerns on group wide prudential issues in cooperation with the relevant third country supervisors . It is essential that international groups should not be required to effect major structural changes , such as setting up an EU holding company , which may lack organisational or commercial logic . It is noted , in addition , that the draft directive ( Article 12.5 ) proposes that EU supervisors should have similar extended cross jurisdictional powers regarding consolidated supervision at the sectoral level . Again , we would urge that a cooperative model be followed , particularly vis-à-vis non EU supervisors embracing general Basel standards . SCOPE OF SUPPLEMENTARY SUPERVISION The proposed scope of supplementary supervision is less than clear in various respects : It is presumed that a ( mixed ) sub group of regulated entities within a group that , as a whole , does not qualify for financial conglomerate status would be subject to the provisions of the directive . However , this is not explicitly addressed in Article 3. It may be that Article 3.4 refers but the drafting of this paragraph is obscure . It is assumed that the main focus of the paragraph is what were termed in the consultation document ' mixed activity conglomerates ' ( i. e . those groups not meeting the 50 % balance of activity test ) . If this is the case , a clear statement to that effect would be helpful . Articles 4.1 and 5.1 imply that the rules on capital adequacy and intra group transactions and risk concentrations respectively apply only to the entities identified in Article 3.2 . Presumably , this is not the case . Article 3.4 suggests that entities/groups there addressed could also be subject to the provisions in question . As drafted , it is not clear that Article 3.2 covers regulated entities that are subsidiaries of another regulated entity which is at the head of a financial conglomerate . Article 12 ( 1 ) of Directive 83/349/EC does not refer to direct parent/subsidiary relationships but rather to circumstances where undertakings ' are managed on a unified basis ' etc . It is important that there is a clear statement of the scope of the directive and to facilitate effective consultation this should be provided at an early stage . CAPITAL ADEQUACY Member State Discretion Both the consultation document and the draft directive envisage national supervisors having considerable discretion as to which of the capital adequacy tests should be applied to different kinds of financial conglomerates . We agree with the comment in the consultation document ( Section V ) that supervisors should have the flexibility to elect for a methodology , or combination of methodologies , which makes most sense in the light of the structure of a particular group . We are , however , mindful also of the level playing field considerations raised in Section X of the document and endorse the view there expressed that it will be important to ensure that any differences in the methodologies used by national supervisors do not generate significant competitive distortions . Consolidated Sectoral Capital Tests In the case of a conglomerate headed by a regulated entity , the draft directive would appear to propose that the conglomerate capital test would be additional to the consolidated test at the sectoral level ( e. g . covering banks and other financial institutions ) . The rationale for the proposed approach is unclear . Provided supervisors are satisfied with the financial soundness of the group overall , with the distribution of capital across the group and , in particular , with the capital adequacy of each regulated entity within it , it is not apparent what purpose would be served by an intermediate test . The same applies for a group headed by a holding company . It is understood that the intention is that tests at the sectoral level would not be required for such groups and that this is designed to follow from Article 12.2 which clarifies that a company cannot be both a mixed financial holding company and have the status of a financial holding company that would trigger sectoral consolidated supervision . But for certain structures the Article 12.2 clarification would not rule out a sectoral capital test - for example where a mixed financial holding company had a regulated subsidiary which in turn headed a sub group of regulated entities . Clarification is requested as to the Commission 's intentions . Minority Interests Following the line taken in the consultation document , the draft directive ( Annex 1 ) proposes that , where a subsidiary has a capital surplus , minority interests in subsidiaries should only be included in a group 's capital on a pro rata basis . For reasons that have been rehearsed many times before in the debate on consolidation techniques , this is judged unduly restrictive . We consider that the logic of the proposed capital tests for conglomerates dictates that minority interests should be included in full in group capital . Non Regulated Entities Annex 1 of the draft directive envisages proxy solvency requirements being applied to non regulated entities for the purposes of the conglomerate capital adequacy test . We do not think this would be appropriate in all circumstances . In particular , we consider that unregulated non financial entities should generally be excluded from the group wide capital test - a possible approach referred to in the report of the Joint Forum . Accounting Consolidation In the report of the Joint Forum , it is noted that in some circumstances a consolidation approach allowing full offset of market risks across a conglomerate may give ' a more accurate picture ' and would therefore be appropriate . We agree with this and would ask for clarification as to the proposed treatment in the directive . A further point on the accounting consolidation method is that the sectoral solvency requirements to be used in the group capital test should be adjusted to take account of the fact that intra group items are stripped out . This should be mentioned in the description of the method in Annex 1. Capital Adequacy Tests : Terminology As noted in the consultation document , the Commission has not sought to develop new methods or tests for assessing the capital adequacy of financial conglomerates but rather has relied on those identified by the Joint Forum . However the methods identified by the Joint Forum ( building block approach , risk based aggregation etc ) have been given different names in the draft directive , which can only confuse . It would be helpful if a standard terminology could be maintained . INTRA GROUP TRANSACTIONS AND RISK CONCENTRATIONS The decision not to lay down quantitative limits on these items in the directive is endorsed . Whilst there is some concern that the exercise of member state discretion may generate competitive distortions , we agree with the comment in the consultation document that it would not be practicable to introduce harmonised limits at this stage . In terms of qualitative measures , the directive requires regulated entities to have adequate risk management processes and internal control mechanisms to measure , monitor and control intra group transactions within a conglomerate and risk concentrations at group level - with an obligation to report to supervisors at least twice a year . In order to limit the additional administrative burden arising , it will be important for reporting requirements to mirror as far as possible those already applying of the sectoral level . There are various references in the consultation document to the possibility of intra group transactions and the allocation of business between group companies being used as a means of ' supervisory arbitrage ' . Furthermore Annex 2 of the draft directive suggests that ' when a regulated entity is at the head of a conglomerate , competent authorities may apply that entity 's sectoral rules on intra group transactions and risk concentrations to all regulated entities in the group to avoid inappropriate arbitrage of sectoral rules ' . The text quoted immediately above is ambiguous in that it is not clear whether the posited supervisory action would be taken only as a response to suspected arbitrage or as a precautionary measure to ensure that arbitrage could not take place . Presumably , the Commission 's intention is the former , since the consultation document underlines the Commission 's view that it would not be practical to have harmonised cross sectoral rules ( for example ) on risk concentrations in the short term . Nevertheless , the text needs to be redrafted so that its meaning is not subject to more than one interpretation . Article 5 of the draft directive sheds little light on the nature of the risk concentrations that would be subject to regulatory oversight at the conglomerate group level . Article 1 ( definitions ) provides more of a flavour but the relevant text is fairly broad brush . Unless the framework is spelled out in a degree of detail at EU level , there will be a danger of quite material differences in how this part of the directive is implemented in individual member states . APPOINTMENT OF A COORDINATOR AND COOPERATION/EXCHANGE OF INFORMATION AMONG SUPERVISORS The coordinator would have an important role to play in facilitating effective supervision of conglomerate groups and the core tasks to be allotted to the coordinator appear reasonable . However , there is a danger that the additional layer of regulatory oversight could lead to a duplication of supervisory effort and confusion , visiting additional burdens on the groups concerned . A key responsibility of the coordinator should be to ensure that this is avoided . In this regard , the reference in the consultation document to the coordinator 's role in preventing ' unnecessary accumulation of information , duplication of work and the passing on of irrelevant information , all of which will result in inefficiencies and higher compliance costs ' is welcomed . Clarity as to the respective roles of the various supervisors with responsibility for a conglomerate or its constituent parts , and the avoidance of supervisory overlap , will be essential in order for the proposed model to work effectively . It will be particularly important to avoid a situation in which a variety of supervisors aspire to conduct whole group supervision . Whilst the consultation document provides some reassurance on this score , it would be desirable to include a suitable reference in the recitals to the directive . AMENDMENTS TO SECTORAL LEGISLATION Article 15.1 proposes that the provisions of Article 34.2 ( 12 ) and ( 13 ) of Directive 2000/12/EC be modified so that holdings in insurance undertakings , as well as those in credit and financial institutions , of more than 10 % of their capital and other holdings which , in total , exceed 10 % of a bank 's capital , should be deducted from the bank 's capital . We would comment that the prudential rationale for the deduction of holdings of less than 10 % of an institution 's capital , as originally espoused in the Own Funds Directive , is far from clear . Industry concerns on this treatment have been brought to the attention of the Commission . Pending a detailed review of this issue , we suggest that Article 15 should be dropped . |