The FSA has published its final rules for financial groups, implementing the requirements of the Financial Groups Directive.
The directive introduces a financial regime for financial conglomerates, those firms whose activities span both the banking and investment sectors and the insurance sector.
The requirements have been designed to improve the stability of the financial system.
The new rules require conglomerates to:
· hold a minimum level of capital;
· monitor risk concentrations and intra-group exposures in the conglomerate;
· eliminate both the double counting of capital, and the excessive leveraging of capital where debt is down-streamed as equity; and
· have adequate systems and controls to monitor risks in their business;
The Treasury and the FSA said the requirements built 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.
To streamline the supervision of such groups, the directive required a single supervisory co-ordinator for each conglomerate, said the FSA.
Each conglomerate supervisor will need to:
· designate an appointed EU cross-sector supervisory co-ordinator for each conglomerate group to streamline supervision; and
· establish procedures for assessing the equivalence of regulatory regimes applying to the non-EEA parents of FSA regulated groups.
A key aim of the directive is the consistent application of group supervision for all financial groups operating in Europe, said the regulator. The directive 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.
FSA director of wholesale and prudential policy Michael Folger 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.”
