Explanatory Memorandum to COM(2010)433 - Proposition de DIRECTIVE DU PARLEMENT EUROPÉEN ET DU CONSEIL modifiant les directives 98/78/CE, 2002/87/CE et 2006/48/CE en ce qui concerne la surveillance complémentaire des entités financières des conglomérats financiers - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2010)433 - Proposition de DIRECTIVE DU PARLEMENT EUROPÉEN ET DU CONSEIL modifiant les directives 98/78/CE, 2002/87/CE et 2006/48/CE en ... |
|---|---|
| source | COM(2010)433  |
| date | 16-08-2010 |
About 20 years ago, financial groups with business models that combine the provision of services and products in different sectors of financial markets began to develop. These became known as financial conglomerates. Conglomerates may include banks, insurance undertakings, investment firms and possibly asset management companies. For several years, different expert groups at international and European level discussed how to supervise such conglomerates appropriately. This resulted in the Joint Forum's i Principles for the supervision of financial conglomerates in 1999 i. Against this background, Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 i ('FICOD') introduced group-wide supplementary supervision. The objective of this supplementary supervision was to control potential risks arising from double gearing (i.e. multiple use of capital) and so-called group risks, that is the risks of contagion, management complexity, concentration, and conflicts of interest, which could arise when several licenses for different financial services are combined.
Whilst the banking and insurance directives aim at calculating sufficient capital buffers for the protection of customers and policyholders, FICOD, regulates the supplementary supervision of group risks. This implies that financial entities which have a mutual relationship that affects the risk profiles of both of them must be included in the supervisory scope. In this way, FICOD supplements the sectoral directives, the Banking Directive 2006/48/EC i ('CRD') and various insurance directives, all of which can be applied on a solo level, per licensed entity, and on a consolidated level, where all licensed legal entities subject to the same directive are aggregated.
A review of FICOD was envisaged some years after its implementation. The revision of the 1988 Basel Accord in 2004, the European implementation into the CRD in 2006, and the introduction of a comprehensive set of new rules for insurance companies in Solvency II i reflect recent developments, as far as legal entities of a group are active in the same sector, banking or insurance. Until Solvency II is implemented, the FICOD supplements the insurance directives presently in place, especially the Insurance Group Directive i ('IGD').
The Commission intends to proceed in two steps. With the present proposal, the most urgent technical issues identified during the review, as analysed by the Joint Committee on Financial Conglomerates i ('JCFC'), are addressed, including the technical issues detected in earlier review exercises. Calls for advice and a consultation were issued to assess the impact of these potential changes i. Later in 2010, a more fundamental debate will take place in the context of G20 developments regarding supplementary supervision. This debate is likely to focus on supervisory scope and capital related issues.
Contents
The review of the FICOD effectively started in 2008 and formed the basis of this legislative proposal. Certain technical issues were included in the Commission's proposal for an Omnibus Directive i in October 2009, accompanying the Regulations establishing the new European Supervisory Authorities.
During the financial crisis, so-called group risks have materialized all across the financial sector, emphasising the importance of supplementary supervision of inter-linkages within financial groups and among financial institutions. Initiatives similar to the current review were undertaken in the U.S. and Australia i, based on the Joint Forum's principles.
The aim of this legislative proposal is to amend the IGD, the FICOD and the CRD in order to eliminate unintended consequences and technical omissions in the sectoral directives and ensure that the objectives of the FICOD are effectively achieved.
Calls for Advice to the Joint Committee on Financial Conglomerates JCFC
The JCFC presented their findings in response to the Commission's Third Call for Advice to the Finance Ministries represented in the European Financial Conglomerates Committee (EFCC) in January 2009. The main issues identified relate to supervision at top level, risk based identification, clear inclusion in the scope of the directive and in the identification of conglomerates, and clear supervisory treatment of participations.
Commission working group meetings and JCFC public hearing
Commission working group meetings with Member States were held on 18 June and 23 November 2009, and 21 January 2010. A public hearing was organized by the JCFC on 8 July 2009. These discussions with stakeholders confirmed the relevance of the identified issues and revealed that effective supervision of conglomerates might require discussing even more issues, e.g. differences in eligible capital across sectors, as well as potential distortions of using different capital calculation methods. Also, the Commission initiatives with respect to alternative investment fund managers raised questions as to the inclusion of not only asset management companies but also other related undertakings in the scope of supplementary supervision on the group risks of large complex financial institutions.
The Targeted Consultation on the review of the FICOD
The responses to the targeted consultation launched in November 2009 included the view of 18 conglomerates, one authority, two associations, one union, and one research centre i which was in line with the limited number of its main target groups, and the technical nature of the questions. The initiative was broadly welcomed, and respondents recognized the major problems, as listed below, as well as the Commission Services suggestions to solve them:
- the applicability of sectoral top level provisions of the banking and insurance directives at the level of Mixed Financial Holding Companies (MFHCs);
- clarity about the inclusion of asset management companies in the scope of supplementary supervision;
- allowing a more risk-based identification of conglomerates,
- clarity about the treatment of participations in supplementary supervision.
However, diverging views were expressed in relation to the cross-sectoral alignment in the definition of capital, which has been s under consideration since the Capital Advice delivered by the JCFC in April 2008. Member States participating in the EFCC indicated a preference for a deferral of these proposals until the sectoral debates on banking and insurance issues were finalised. Respondents also pointed to the difficulties of making further distinctions between proprietary trading and non-proprietary trading of financial conglomerates’ asset management companies. Finally, the consultation confirmed that the treatment of participations in supplementary supervision was not a problem that needed to be solved in full at this stage.
With regard to issues that could be subject of a future review, the responses broadly rejected the idea to consider remuneration policies in a cross-sectoral manner i but supported initiatives in the areas of capital, i.e. regarding the consistency of eligibility provisions, as well as the taking into account of non-regulated entities affecting the risk profiles of financial groups.
Result of the Impact Assessment
In the Impact Assessment, 17 policy options have been developed, 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.
Supplementary supervision on holding company level and supervisory coordination
In order to align supervisory powers at the top level of a conglomerate, to prevent the loss of powers when a group structure changes as well as the duplication of supervision at the conglomerate level, and to facilitate coordination by the most relevant supervisors, the following amendments were positively assessed:
- include top level holding companies of a banking or an insurance group that are classified as a MFHC, so that provisions and powers that are applied to the former Financial Holding Company (FHC) or Insurance Holding Company (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;
- limit the definition of relevant competent authority so that it only includes the supervisors of ultimate parent entities within individual sectors and other competent authorities, considered relevant by the supervisors of the ultimate parent entities.
Identification of financial conglomerates
- The inclusion under all circumstances of asset management companies in the scope of supplementary supervision complemented with guidance on indicators for this inclusion was considered useful.
- In order to tackle the ambiguity regarding parameters and the lack of a risk-based identification of conglomerates, guidelines on the application of the existing waiver option for larger groups in Article 3 i of the FICOD was positively assessed. This should be combined with an option to waive supplementary supervision for groups where the assets held by the smallest sector are below the absolute threshold of €6 billion.
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, should be addressed by guidelines on the treatment of participations in various situations.
Impact of preferred policy options
The positively assessed policy changes were expected to render the supplementary supervision framework more robust, leading to more effective risk management incentives and practices. This should be beneficial to the international competitiveness position of EU financial groups. These options should contribute positively to containing the risks to financial stability and the possible costs to society. With regard to individual stakeholder groups and systemic concerns, expected impacts were evaluated as follows:
- 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 reduced compliance costs. This may be available to about ten smaller financial groups with combined assets of approximately €69 billion. On the other hand, compliance costs for bigger groups with more than hundred licenses, being active in both sectors could increase as such groups, representing up to €9 trillion assets in the financial sector, may be included in the scope of the supplementary supervision. Increased compliance costs could also be incurred by those financial groups whose structures include asset management business and that will be identified as financial conglomerates following the 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 non-substantial.
- In any event, compliance costs are expected to be set off against benefits arising from more effective risk management practices. Another positive impact can be expected from a greater visibility and trust in the markets that should result from the identification as a conglomerate. These benefits should enhance the international competitiveness of large EU groups.
- The positively assessed changes to the conglomerate identification process will render the scope of the supplementary supervision more appropriate and should 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 improved supervisory measures 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 financial stability.
- Enhanced clarity of provisions governing the inclusion of asset management companies in the identification and supplementary supervision should provide a level playing field in this area.
- As regards clients of the financial groups concerned, the cost impact is expected to be negligible given the overall low level of materiality of the net incremental effect of the identified options.
An amending Directive is the most appropriate instrument because the required changes need to be introduced to several existing Directives. This amending Directive should have the same legal basis as the Directives it amends. Therefore, the proposal is based on Article 53 i TFEU, which is the appropriate legal basis for the harmonisation of rules relating to financial institutions and financial conglomerates. In accordance with the principles of proportionality and subsidiarity as set out in Article 5 TEU, the objectives of the proposed action cannot be sufficiently achieved by the Member States but be more efficiently achieved by the European Union. Only European Union legislation can ensure that financial conglomerates operating in more than one Member State are subject to the same requirements and supervision, in this case by ensuring that provisions are clarified and supervisory gaps inadvertently created by earlier amendments of sectoral Directives are closed. The provisions of this proposal do not go beyond of what is necessary to achieve the objectives pursued.
The proposal has no implication for the budget of the European Union i.
OF THE PROPOSAL
Top level supervision - Articles 1 (IGD) and 3 (CRD) of this Proposal Articles 1, 2 i, 3 i, 4 i, 10 i and several instances of Annex I and II IGD Articles 4, 71, 72, 84, 105, 125, 126, 127, 129, 141, 142 and 143 CRD
The focus and primary aim of this proposal is to ensure appropriate supplementary supervision, i.e. to fix the unintended gaps that have evolved in supplementary supervision due to definitions in the sectoral directives, namely the CRD and the insurance directives. Given that the consolidated/group supervision in the sectoral directives is applied only to financial/insurance holding companies and the sectoral provisions do not refer to mixed financial holding companies, a financial/insurance holding company changing structure and becoming a mixed financial holding company will only be subject to supplementary supervision according to FICOD and the consolidated/group supervision at the ultimate parent level is lost. Thus, supervisory authorities have to choose (in terms of applying – or not – a waiver in determining whether a group is a financial conglomerate) if they wish to continue to classify companies as financial/insurance holding companies in order to keep consolidated/group supervision, or if they want to apply only supplementary supervision according to FICOD. Keeping consolidated/group supervision means that the additional risk resulting from the combination with another sector could not be covered. However, supplementary supervision implies that all the supervisory insight resulting from consolidated/group supervision is lost. Consequently, 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. The current regime may also result in differences in supervisory treatment (based on the structure rather than on the risk profile) of conglomerates.
In order to ensure that all necessary supervisory tools can be applied, this proposal introduces the term mixed financial holding company into the relevant provisions on consolidated/group supervision in the sectoral directives.
Articles 3 and 30 FICOD - Identification of a conglomerate
Provisions governing the identification of financial conglomerates give rise to three sub-problems.
- First, the directive does not require the inclusion of asset management companies in the threshold tests. Asset management companies are managers of UCITS (undertakings for collective investments in transferable securities), as regulated by the UCITS Directive i. UCITS and their managers are at present not covered by the sectoral prudential supervision in FICOD, although FICOD does contain a possibility to include asset management companies in the scope of supplementary supervision (Article 30).
- Second, the threshold tests can be based on different parameters with respect to assets and capital requirements. The provisions are ambiguous as regards the calculation of the tests arising from, for example, different accounting treatments of assets (see below point (i) on Article 3(5)).
- Third, 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.
In order to tackle these deficiencies, this proposal introduces the following changes:
(i) Asset management companies are included in Article 3 i and Article 30 point (c); total assets under management is introduced as an alternative indicator in Article 3 i; and a possibility to adopt guidelines on the application of Articles 3 i and 3 i is introduced.
(ii) A waiver for smaller groups in a new Article 3(3a) is introduced, allowing for guidelines for the application of the waiver to smaller groups.
(iii) Article 3 i is re-worded to properly distinguish the applicable conditions for groups below and above the EUR 6 billion threshold and adds requirements as to possible guidelines for the application of the waiver to larger groups and thus ensures a level playing field.
Article 3 i FICOD - Treatment of participations
The consistent treatment of participations in day-to-day supplementary supervision is hampered by the lack of relevant information to properly assess group risks. 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. In that case, the group needs to deduct such participations from their capital.
While the issue of information on minority participations is not yet fully examined, a first step contained in this proposal is the introduction of a waiver where participation is the only trigger for identification (Article 3 i new point (c)). As long as national company law provisions may hamper the fulfilment of requirements, specific treatment in view of risk concentration and intra group transaction requirements is allowed in Articles 7 and 8 which may be specified via guidelines. Guidelines may support also the consistent application of supervisory review processes, including specific treatment of participations, as provided for in Article 9 FICOD, Article 124 CRD and Article 36 Solvency II.
Other issues
Articles 1 and 2 FICOD – Update of the definitions
Articles 1 and 2 have to be updated in light of repealed and recast directives. However, as in particular the recast of the insurance directive (Solvency II) repeals the previous directives only with effect from 1 November 2012, references to the initial insurance directives – which are thus still in force – were maintained.
Article 2 i FICOD – Amendment of the definition of relevant competent authority and supervisory coordination
FICOD supplements the CRD and insurance directives as regards 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 the relevant competent authority and requires the coordinator (the top level supervisor) to consult this authority as regards certain supervisory questions. However, the current provisions leave room for different interpretations as regards the identification of the relevant competent authorities. An extensive interpretation results in a high number of authorities that must be consulted by the coordinator at the financial conglomerate level. This may undermine the effective and efficient coordination of the work to be carried out by the 'college' of a coordinator and relevant competent authorities.
Article 6 i and Annex I FICOD – Deletion of the third calculation method,
Part II of Annex I FICOD list three methods for calculating capital at the conglomerate level. An analysis by the JCFC in 2008 showed that the third eligible capital calculation method always results in outcomes that are significantly different from methods 1 (consolidation) and 2 (deduction and aggregation). Therefore, the third method should be deleted. By restricting the eligible calculation methods to the consolidation and the deduction and aggregation method, FICOD is also aligned to the sectoral directives it supplements.
Article 2 FICOD – Inclusion of reinsurance undertakings,
With the introduction of authorisation and supervision of reinsurance undertakings in Directive 2005/68/EC, reinsurance undertakings were included in the scope of regulated entities that can be part of a financial conglomerate. Consequently, a reference to reinsurance undertakings has to be included in FICOD. References are added in Articles 2 i, 2 i, 2 i, 2 i and 2 i.
Articles 3 i, 7 i, 8 i, 9 i, 11 i and 11 i FICOD – Introduction of provisions regarding guidelines in certain areas
In order to allow for further convergence of supervisory practices, a possibility for the European Banking Authority and the European Insurance and Occupational Pensions Authority to issue guidelines in line with Chapter IV Section 2 of the Regulation establishing a European Banking Authority i and Chapter IV Section 2 of the Regulation establishing a European Insurance and Occupational Pensions Authority i ("Joint Committee of European Supervisory Authorities") to issue guidelines is introduced.
These guidelines should reflect the supplementary nature of this Directive. By way of example, when assessing risk concentrations on a group wide basis relating to several risk types potentially materializing throughout the group (interest rate risk, market risk, etc.), this assessment should complement the specific supervision of for example large exposures as provided for in the CRD. Guidelines may also support the consistent application of the different supervisory review processes, including specific treatment of participations, as provided for in Article 9 FICOD, Article 124 CRD and Article 36 Solvency II.
Update of references in various Articles
Articles 1, 2, 6 i, 6 i, 19, 21 i of the FICOD, and Article 143 i CRD have been amended in order to update references and wording.