Update on conglomerate regulation

Geoff Maddock, partner

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By Geoff Maddock, corporate insurance partner and Jonathan Goodliffe, solicitor

The Joint Committee of the European Supervisory Authorities has published an updated list of groups identified as financial conglomerates as at 31 December 2014.

What is a financial conglomerate?

A financial conglomerate is a group which satisfies certain thresholds as to minimum operations in each of (1) the insurance sector and (2) the combined banking and investment sector. Asset management companies and alternative investment fund managers may go into either sector (1) or (2). In summary terms the smaller of the insurance and the banking/investment sectors within the group should normally constitute at least 10% of the total. The balance sheet total of the smaller financial sector in the group should exceed EUR 6 billion.

Supervisors in the European Economic Area do, however, have a discretion to exempt groups from the regime under article 3 of the Financial Conglomerates Directive when their operations are close to the thresholds.

Regulation of financial conglomerates

Where a group is identified as a conglomerate it may be subject to prudential supervision across the conglomerate. This supervision may include additional regulatory capital requirements (set out in the directive and in regulatory technical standards) and/or reporting on risk concentrations and intra-conglomerate risk concentrations.

None of this cuts across the solo supervision of entities within the group and the distinct sectoral group supervision of insurance and banking/investment sub-groups within the conglomerate. Moreover supervisors may choose to apply either the conglomerate or the sectoral regime, or both, to the sub-group.

So an insurance group may be supervised under Solvency II. Its parent group may be supervised under the Conglomerates Directive. Or it may have a subsidiary group supervised under the Conglomerates Directive. Insurance Europe has commented:

"In general, we consider the Solvency II regime to be sufficiently risk based and as such, additional requirements at financial conglomerate level should not result in duplicate or contradictory requirements."

Becoming and ceasing to be a financial conglomerate

It is hardly surprising that many financial groups have organised themselves as far as possible to avoid conglomerate regulation. It has no obvious "upside" for them. Over the years a number of major groups have been identified as conglomerates. They have subsequently restructured themselves to exit the regime, or have been able to persuade their supervisors to exempt them. This applies particularly in the UK, where there the list referred to above shows that there are only 4 financial conglomerates not benefiting from an exemption. This compares to 7 in France, 8 in Germany and 5 in the Netherlands.

Possible changes in the regime

There are no current initiatives to develop the conglomerate regime. However, a report into major reforms of the regime was completed in 2012. It may lead to an amending directive when other financial services related claims on the Commission's time (Solvency II, CRR, Insurance Distribution Directive, PRIIPS, etc.) become less pressing.

Proposals for change cover the inclusion of insurance ancillary services undertakings and special purpose vehicles and entities in conglomerate regulation. It is also suggested that there should be guidance developed by the European Supervisory Authorities with a view to achieving consistency within the EEA in the granting of article 3 exemptions. This could possibly lead to more groups being regulated as conglomerates in the UK.