These rules will implement the requirements of the Financial Groups Directive, which introduces for the first time a financial regime for financial conglomerates – those firms whose activities span both the banking and investment sectors, and the insurance sector. These new requirements are designed to improve the stability of the financial system, and by doing so protect customers of financial groups.
Michael Folger, Director of Wholesale and Prudential Policy at the FSA, said:
“The final rules that we have published today mark an important step forward in ensuring the financial soundness of large complex financial groups. A growing number of such groups operate across different sectors within the financial services industry, and across national borders. These rules will enable us to regulate on the basis of the whole group, rather than regulating different sectors of the business independently of each other. And applying these new requirements will promote greater co-operation between international regulators."
The implementation of the Financial Groups Directive in 2005 creates a new financial regime for conglomerates. The requirements for conglomerates build on key aspects of the existing regulatory regimes for the different business sectors, including the need for a conglomerate to have adequate capital. Requirements are also set governing risk concentration and intra-group transactions. In addition conglomerates must have adequate systems and controls to monitor their intra-group risks. To streamline the supervision of such groups, the Directive requires a single supervisory co-ordinator for each conglomerate.
A key aim of the Directive is the consistent application of group supervision for all financial groups operating in Europe. It achieves this by extending the scope of the current supervisory oversight of banking and investment groups, to include parent companies located outside the EEA, as is already the case for insurance groups. Where such non-EEA groups are already subject to equivalent supervisory requirements in their home country, the need for additional regulation from the EEA falls away. Conglomerates will also be subject to similar requirements if they have non-EEA parents.
One issue on which we consulted that is not covered in today's policy statement is the proposed introduction of a 'hard' group capital adequacy test for insurance groups. In view of the consultation responses to this proposal, we will be considering the issue further in discussion with the industry, before looking to issue a supplementary policy statement in September.
