Tuesday, November 15, 2011

European Council Amends Financial Conglomerate Directive

The Council of the European Union has adopted a Directive amending the Financial Conglomerate Directive (2002/87/EC) (FICOD) in order to close loopholes and ensure appropriate supplementary supervision of financial entities in a financial conglomerate. The new Directive also adapts the supervision of financial conglomerates to the EU's new supervisory structure. The revision of FICOD also amends the relevant legislation on banking supervision, namely the Capital Requirements Directive (2006/48/EC and 2006/49/EC).

More specifically, the amendments to FICOD include the inclusion of asset management companies in the threshold tests for identifying a conglomerate and a waiver for smaller groups if the relevant regulator assesses the group risks to be negligible. Another change would allow risk-based assessments, in addition to existing definitions relating to size, in identifying financial conglomerates. The revision would also allow for both sector-specific supervision and supplementary supervision of the conglomerate's parent entity, also if it concerns a holding company. Under the current rules, supervisors have to choose which supervision they apply when a group acquires a significant stake in another sector and when the parent entity is a holding company.

A financial conglomerate is a group that combines different types of regulated financial Firms such as banks and securities firms, and is therefore exposed to two or more sector-based regulatory regimes. The Financial Conglomerate Directive, adopted at the end of 2002, gave national financial regulators additional powers and tools to watch over conglomerates and apply supplementary supervision to them, in addition to specific banking and insurance supervision. The objective of supplementary supervision was to control group risks and the risk arising from double gearing, such as multiple use of capital within a conglomerate, whereby a number of companies pool their overall risk by placing capital with each other. The type of group risks the Directive seeks to control include the risks of contagion, management complexity, concentration, and conflicts of interest, which could arise when several licenses for different financial services are combined.

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