The Supervision of Financial Conglomerates under European Financial Law (Directive 2002/87/EC)

Transcription

1 The Supervision of Financial Conglomerates under European Financial Law (Directive 2002/87/EC) Christos Vl. Gortsos Assistant Professor of International Economic Law, Panteion University of Athens Article to be published in the Banking & Finance Law Review, Issue 25.2 (Winter 2010)

2 A. Directive 2002/87EC: an overview of the main provisions 1. Scope of the Directive The directive generally known as the Financial Conglomerates Directive was adopted on December 16, It sets forth a special regulatory framework for ensuring the supplementary supervision of credit institutions, insurance undertakings and investment firms (collectively called regulated entities ), 2 provided that those entities have their registered office (and their head office) in a member state of the European Community (hereinafter the Community ) and form part of composite financial groups called financial conglomerates, according to the provisions of paragraph. 14, article 2 of the Directive. 3 This Directive should have been transposed in the member states national legislation by August 11th, 2004, 4 and the supervisory requirements arising from it entered into force on January 1 st, It was adopted to address specific lacunae in the system of the provisions of European financial law 6 governing the prudential supervision of 1 European Parliament and Council Directive 2002/87/EC of 11 February 2003 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council, [2003] O.J. L35/1. At the time of the writing of this article (October 2009), the provisions of Directive 2002/87/EC have been amended by (and EC Directive 2002/87/EC, as amended, is referred to in the footnote section of this paper as, the Directive ): (a) European Parliament and Council Directive 2005/1/EC of 24 March 2005 amending ( ) Directives ( ) and 2002/87/EC in order to establish a new organisational structure for financial services committees [2005] O.J. L79/9.; and (b) European Parliament and Council Directive 2008/25/EC of 20 March 2008 amending Directive 2002/87/EC ( ) as regards the implementing powers conferred on the Commission, [2008] O.J. L81/40. In addition, articles 26 and 29 have been repealed by the following Directives of the European Parliament and of the Council: (a) Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of the busines of credit institutions (recast), [2006] O.J. L177/1, which repealed several paragraphs of article 29 (Annex III, Part A). (b) Directive 2006/49/EC of 14 June 2006 on the capital adequacy of investment firms and credit institutions, [2006] O.J. L177/201, which repealed article 26 (Annex VIII, Part A). 2 The meaning of the term regulated entity is explained in Section B2(a) of this paper. 3 Article 1, first sentence of the Directive. The meaning of the term financial conglomerate is discussed in Section A3 of this paper. 4 Ibid at article 32, first sentence. The Committee of European Banking Supervisors ( CEBS ) has been following since 2006, through its Interim Working Committee on Financial Conglomerates, the consistent application by the member states and their competent authorities of the provisions of this Directive. See CEBS Annual Report (2007), online: < 5 Ibid at article 32, second sentence. 6 European financial law, an integral part of European economic law, is defined in the present article as the sum of the provisions of secondary Community law adopted for the achievement of the goal of financial integration in the Community by the creation of a single European financial 2

3 financial intermediaries. In particular, until the entry into force of the Directive s provisions those entities were subject to supervision either on an individual basis or on the basis of a group with homogeneous financial activities or on the level of groups including credit institutions and investment firms. 7 Hence, the Directive was deemed necessary in order to establish an additional supervision level of Community regulated entities, 8 at a financial conglomerate level, taking into account: the developments in the European market, where the emergence of composite financial groups has had a rather significant growth since the 1990s, 9 the finding that some of these groups are among the biggest financial groups active in the financial markets on a global basis, 10 the risks arising from the operation of such groups, 11 risks that were not covered by the regulatory framework until Directive 2002/87/EC was adopted, and the work already performed at the international level to ensure the consistent supplementary supervision of these groups on a global basis, in the framework of the proceedings of The Joint Forum. 12 area within the single market. For a definition of the term financial integration, see European Central Bank, Financial Integration in Europe (European Central Bank, April, 2008) at 6. 7 M. Gruson, Supervision of Financial Conglomerates in the European Union, Paper presented at the International Monetary Fund Seminar on Current Developments in Monetary and Financial Law (24 May to 4 June, 2004) [unpublished] at 2-5 [Gruson]. 8 For the purposes of this paper, the phrase Community regulated entity shall mean any regulated entity with a registered office (and head office) in a member state of the European Community. 9 F. Dierick, The supervision of mixed financial services groups in Europe, (2004) 20 European Central Bank, Occasional Paper Series at Directive Supra note 1 at article 1, recital 2. See also R. Herring & R.E. Litan, Financial Conglomerates: The Future of Finance?, (April 2003), online: < [Herring]. 11 For example, please see G,A, Walker, G.A. International Banking Regulation: Law, Policy and Practice, in the International Banking, Finance and Economic Law Series (Kluwer Law International, 2001) at [Walker]; A. Kuritzkes, T. Schuermann & S.Μ. Weiner, Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates (2003),, online: Wharton Business School, Financial Institutions Center, Working Papers Series, no. 2 < V. Mälkönen, Capital adequacy regulation and financial conglomerates (2004), online: Bank of Finland Discussion Papers, no. 10; and G. Stöffler, Supervision of Financial Conglomerates (2004) 8 Ősterreichische Nationalbank Financial Stability Report at The Joint Forum belongs to the group of international fora that have been established during the last three decades in the context of the new international architecture of the financial system [see, M. Giovanoli, A New Architecture for the Global Financial Market: Legal Aspects of International Financial Standard Setting in M. Giovanoli ed, International Monetary Law: Issues for the New Millennium (Oxford, New York: Oxford University Press, 2000) at 3; J.J. Norton, Pondering the Parameters of the New International Financial Architecture in R.M. Lastra ed., The Reform of the International Financial Architecture (London-The Hague-Boston: Kluwer Law International, 2001) at 3; and Ch. Vl. Gortsos, The New International Architecture of the Monetary and Financial System in K.A. Stephanou, K.A. & Ch. Vl. Gortsos ed., International Economic Law, Series of studies on International and European Economic Law (Athens: Nomiki Vivliothiki, 2006), Chapter 11, at 183 (in Greek)]. 3

4 This supervision, which aims at limiting those entities exposure to risks from their participation in financial conglomerates, is in any case supplementary; namely, it is applied additionally to the sectoral supervision exercised on Community regulated entities on an individual level and on the level of homogeneous activity groups Content of the Directive 2.1 Field of application ratione personae According to the provisions of paragraphs 1 and 2 of article 5 of Directive 2002/87/EC, the following categories of Community regulated entities (that is, credit institutions, insurance undertakings and investment firms) will be subject to supplementary supervision, provided they belong to a financial conglomerate: (i) any regulated entity being at the head of a financial conglomerate, (ii) any regulated entity, whose parent undertaking is a mixed financial holding company 14 and has its registered (and head) office in the Community, and (iii) any regulated entity, linked with any other entity in the financial sector 15 according to article 12 (paragraph 1) of Council Directive 83/349/EEC. 16 Moreover, any Community regulated entity which is not subject to supplementary supervision according to the above, but its parent undertaking is either a regulated entity or a mixed financial holding company with its head office in a third country outside the Community, shall be subject to supplementary supervision at financial conglomerate level, in accordance with the provisions of article 18 of Directive 2002/87/EC. 17 In addition, according to the provisions of paragraph 4, article 5 of the Directive, the competent authorities may also decide, by common agreement, to exercise supplementary supervision to the regulated entities meeting the conditions set forth therein. The Joint Forum addresses issues of common interest to the financial system s three individual sectors (banking, insurance, investment services), including supervision issues ensuing from the operation of financial conglomerates. The Joint Forum consists of representatives from the Basel Committee on Banking Supervision ( BCBS ), the International Organisation of Securities Committees ( IOSCO ), and the International Association of Insurance Supervisors ( IAIS ). From its establishment in 1996 until 2000 the Joint Forum was named Joint Forum on Financial Conglomerates, since its work mainly focused on supervision issues concerning financial conglomerates. On the Joint Forum s establishment, composition and work until 2000, see Walker supra note 11 at 185. See also the following internet addresses of the Basel Committee on Banking Supervision: < < and < 13 Directive supra note 1 at article 5, para The meaning of the term mixed financial holding company is discussed in Section B3(b) of this paper. 15 The meaning of the term financial sector is discussed in Section B3 of this paper. 16 Council Directive Directive 83/349/EC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts [1983] O.J. L193/1. Also see Section B1(c) of this paper. 17 Directive, supra note 1 at article 5, para. 3. Also see Section C4 of this paper. 4

5 In order to exercise supplementary supervision to the regulated entities as stipulated above, the competent authorities, in the involved member states, will select a coordinator among them. 18 Moreover, cooperation between and exchange of information among national sectoral supervisory authorities that are competent to supervise regulated entities have become obligatory Field of application ratione materiae Drawing heavily on the guidelines formulated by the Joint Forum in 1999 with the «Supervision of Financial Conglomerates» report, 20 Directive 2002/87/EC provides that supplementary supervision, which is not exercised on a consolidated basis, but on a solo plus basis, 21 shall cover: capital adequacy (article 6 and Annex I), risk concentration (article 7 and Annex II), 22 intra-group transactions (article 8 and Annex II), 23 and internal control mechanisms and risk management processes (article 9) Other provisions In addition to the provisions discussed above, Directive 2002/87/EC introduced provisions pertaining to the following issues: (a) The obligatory submission of asset management companies 25 to a prudential supervision status, on both a sectoral and a conglomerate level Directive supra note 1 at articles 10 and 11. Also see details in L. van Couter, A new EU legislation addressing the emergence of financial services groups: an introduction to the Financial Conglomerates Directive of 16 December 2002 [2003] Euredia, vol. 2 at 188 [Couter]. 19 Directive, supra note 1 at article 12. Also see Couter Ibid. at This report is published on internet electronic address of the Basel Committee on Banking Supervision at: < For an analysis of its provisions, see Walker supra note 11 at The difference between supervision on a consolidated basis and supervision on a solo plus basis lies on the fact that, in the latter case, the point of reference used are the financial statements of each individual undertaking, which are then corrected to take into account the impact at group level. 22 Directive supra note 1 at article 2, para Ibid. at article 2, para See Gruson supra note 7 at and Couter supra note 18 at The term asset management companies is defined in the Directive at article 2, para. 5 and comprises: (a) management companies within the meaning of Council Directive 85/611/EC of 20 December 1985 article 1a, para. 2 of Directive 85/611/EEC of the Council of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, [1985] O.J. L375/3.; and 5

6 (b) The establishment of the Financial Conglomerates Committee, in order to assist the European Commission in exercising the powers assigned to it, by virtue of Directive s article (c) Finally, amendments have been introduced to a series of provisions of the sectoral European financial legislation (which were in effect when Directive 2002/87/EC was issued) on the prudential supervision of credit institutions, insurance undertakings and investment firms, 28 in order to ensure conditions of competitive equality between financial conglomerates and homogeneous financial groups whose undertakings operate in just one single financial sector and were already subject to supervision, on an individual and, as the case may be, on a consolidated basis. 29 The Directive is currently under review. According to article 31, the Commission shall submit to the Financial Conglomerates Committee ( ) a report on member states practices, and if necessary on the need for further harmonisation by August 11 th, 2007, with regard to several provisions of the Directive. While the Financial Conglomerates Committee decided to extend the deadline for the completion of this review to 2009, the European Commission has sent to the Interim Working Committee on Financial Conglomerates of CEBS 30 three Calls for technical advice covering different aspects of the Directive. 31 (b) any undertaking having its registered office in a third, non-community country, and which would be obliged to require authorisation, according to the Directive at para. 1 of article 5 if it had its registered office within the Community. 26 Ibid at article 30. Also see Section B2(a) of this paper. 27 Ibid at article 21. Accordingly, in the jargon of the Lamfalussy Report (see, among others, R.M. Lastra, Legal foundations of international monetary stability (New York: Oxford University Press, 2006) at ), the Financial Conglomerates Committee is a level 2 committee, that means a regulatory committee operating according to the provisions of Council Decision 1999/468/EC of 17 July 1999, [1999] O.J,. L184/23), which is laying down the procedures for the exercise of the implementing powers conferred on the Commission. It is worth mentioning that after the amendment of the Directive by the abovementioned (under supra note 1) Directive 2008/25/EC, the amendment by the European Commission of the nonessential elements of the Directive listed in para. 1 of article 20, under the comitology procedure, must be adopted in accordance with the regulatory procedure under scrutiny, according to articles 5a, para. 1-4, and 7 of the abovementioned Council Decision 1999/468/EC, as amended by Council Decision 2006/512/EC of 22 July 2006, [2006] O.J. L200/11 at article 20, par. 1, last sentence. It is also noteworthy that until the completion of this paper (August 2008), the Commission has not made use of its powers. 28 Namely provisions of the Directives mentioned in the title of the Directive. 29 Directive supra note 1 at article 1, lit. b, and articles See details in Couter supra note 18 at Supra note On these calls and the work undertaken accordingly by CEBS, see the following electronic address on the internet: < with further guidance). 6

7 3. Definition of the term financial conglomerate Defining the term of a financial conglomerate is fundamental for approaching the personal field of application of the provisions of Directive 2002/87/EC, since for a Community regulated entity to be placed under supplementary supervision (according to article 5) it must belong to a financial conglomerate. The term financial conglomerate is defined in paragraph 14, article 2 of the Directive, according to which a financial conglomerate is delimited on the basis of the following five (5) criteria, which must be taken into account cumulatively: (i) The financial conglomerate must constitute a group as defined in paragraph 12, article 2 of the Directive (see below in subsection B1), (ii) (iii) (iv) (v) The group must include at least one Community regulated entity (see below under subsection B2), If the group is headed by a Community regulated entity, that entity must be linked with (at least) one other entity in the financial sector (see below under subsection B3), while if the head of the group is a non-community regulated entity, the group must be operating mostly in the financial sector (see below under subsection B4), At least one of the entities in the group (not necessarily regulated in both sectors) must be operating in the insurance sector, and one in the banking or the investment services sector (see below under subsection B5) and The group must have significant cross-sector activities both in the insurance sector and in the banking or the investment services sector (see below under subsection B6). 7

8 Β. Criteria used in identifying a group as a financial conglomerate The financial conglomerate as a group (paragraph 14, article 2, lit. a) The meaning of the term group is defined in paragraph. 12, article 2 of Directive 2002/87/EC. 33 The definition adopted is broader that the one used for the purposes of consolidated accounting, according to the provisions of Council Directive 83/349/EEC. Consequently, a group identified as a financial conglomerate for the needs of Directive 2002/87/EC, does not necessarily coincide with the group that is obliged to submit and publish consolidated financial statements. 34 The reason for which the meaning of groups is defined in this Directive in very broad terms is to cover all organisation models of complex financial groups in modern economies. 35 In particular: (a) Principally, a group is defined as a group of undertakings, made up of a parent undertaking and subsidiary undertakings. The meaning of the term parent undertaking is defined exactly as in the sectoral Directives for the supervision of homogeneous financial groups. 36 Namely, it covers: both the definition of the term parent undertaking, according to article 1 of Directive 83/349/EEC, and every undertaking which, in the competent authorities opinion, exercises a dominant influence on another undertaking, even if it does not meet the definition of Directive 83/349/EEC. Respectively, a subsidiary undertaking is defined to mean both: 37 a subsidiary undertaking according to article 1 of Directive 83/349/EEC, and any undertaking, subject, in the competent authorities opinion, to the parent undertaking s dominant influence. (b) Moreover, a group is defined as every group of undertakings made up of a parent undertaking and its subsidiary undertakings, as well as undertakings in which the parent undertaking or a subsidiary undertaking are participating. The meaning of the term participation is also broadly defined, as it includes both: Gruson supra note 7 at 6-17 (with an interesting graphic presentation of groups) and and Couter supra note 18 at and According to article 4 of the Directive, the competent authorities that have authorised the regulated entities belonging in the financial conglomerate bear the obligation to identify a group as a financial conglomerate, on condition that all criteria set by para. 14 of article 2 of the Directive are met (para. 1). Then, if a financial conglomerate does exist, the competent authority assigned as coordinator, must inform the parent undertaking heading the group (or in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector of the group) of the fact that the group was identified as a financial conglomerate, and that it was appointed coordinator (para. 2). 34 See Dierick supra note 9 at Ibid at and Couter supra note 18 at Directive supra note 1 at article 2, para Ibid at article 2, para Ibid at article 2, para

9 the definition of the term participation, according to article 17 (lit. a) of Directive 78/660/EEC, 39 and the direct or indirect possession of at least 20% of an undertaking s voting rights or capital. (c) Finally, a group is also defined as the set of undertakings linked with each other in the meaning of article 12 (paragraph 1) of Directive 83/349/EEC, a case that also covers horizontal groups, where there is neither parent-subsidiary undertaking relation, nor participation in undertakings. 2. The group must have at least one regulated entity having its registered office in an EU member state (paragraph 14, article 2, item a) The Directive sets that for a group to be identified as a financial conglomerate, it must have at least one regulated entity (see below under subsection a), which, irrespective of whether it is a parent or a subsidiary undertaking, or one of the group s subsidiary undertakings, 40 must be authorised by the competent authorities of the member state (see below under subsection b). (a) The term regulated entity, which is of material importance for the application of Directive 2002/87/EC, is defined in paragraph 4, article 2 of the Directive, in such a way so as to include the following three (3) categories of financial intermediaries which are subject, according to the provisions of the sectoral Directives of European financial law to prudential supervision on an individual basis from the competent authorities of their home member states: 41 (i) credit institutions in the meaning of article 4, paragraph 1, of Directive 2006/48/EC, 42 (ii) insurance undertakings 43 in the meaning of article 6, Directive 73/239/EEC, 44 of article 6, Directive 2002/83/EC (for life insurance), 45 or of article 1, Directive 98/78/EC, 46 and 39 Council Directive 78/660/EC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, [1978] O.J. L 222/ These two cases are addressed separately under items (b) and (c) of para. 14, article 2 of the Directive (see Sections B3 and B4 of this paper, respectively). 41 In all these Directives, the term home member state is defined as the member state in which a financial intermediary has been authorized by its competent authorities. 42 Directive supra note 1 at article 2, para. 1. This provision refers to the European Parliament and Council Directive 2000/12/EC of 26 March 2000, [2000] O.J. L126/1., which was in force at the time of the adoption of Directive 2002/87/EC, but has since been repealed by the abovementioned (discussed in Section A1 of this paper) Directive 2006/48/EC (supra note 1 at article 158, para. 1). References to the repealed Directive have to be construed as being made to Directive 2006/48/EC (supra note 1 at article 158, para. 2). The same applies also to all the subsequently mentioned repealing and repealed Directives. 43 Directive supra note 1 at article 2, para Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance, [1973] O.J. L228/3. 9

10 (iii) investment firms 47 in the meaning of paragraph 1 (item 1), article 4 of Directive 2004/39/EC, 48 including undertakings referred to in paragraph 1 item (d), article 2 of Directive 2006/49/EC (that is, recognized thirdcountry investment firms). 49 The meaning of regulated entity also includes asset management companies, in the abovementioned meaning of paragraph 5, article 2 of Directive 2002/87/EC, on condition that the group has already been identified as a financial conglomerate (according to the provisions of article 4, of the Directive), and that such a company forms part of the group. 50 On the contrary, all other categories of financial intermediaries (e.g., financial institutions, such as leasing and card companies, 51 or reinsurance undertakings 52 ) are contemplated in Directive 2002/87/EC as non-regulated entities, irrespective of whether they are subject to national supervision or not. This does not mean that the activities of those non-regulated entities are not taken into account in the exercise of supplementary supervision, at the level of the financial conglomerate they belong to. The critical consideration is that the mere existence within a group of only non-regulated entities does not suffice, according to the Directive, to identify it as a financial conglomerate, and consequently, to activate the provisions on exercising financial conglomerate-level supplementary supervision. (b) Item (a) (as well as items (b) and (c)) of paragraph 14, article 2, the Directive 2002/87/EC refers to regulated entity in the meaning of article 1. From this wording, the conclusion to be drawn is that for a group to be identified as a financial conglomerate, the regulated entity therein must have been authorised by the competent authorities of a particular member state. 45 European Parliament and Council Directive 2002/83/EC of 5 November 2002 concerning life assurance, [2002] O.J. L 345/1. 46 European Parliament and Council Directive 98/78/EC of 27 October 1998 on the supplementary supervision of insurance undertakings in an insurance group, [1998] O.J. L 330/1. 47 Directive supra note 1 at article 2, para The Directive refers to the Council Directive 93/22/EC of 11 June 1993 on investment services in the securities field, [1993] O.J. L 141/27 which was in force at its adoption, but has since been repealed by the European Parliament and Council Directive 2004/39/EC of 21 April 2004 on markets in financial instruments ( ), [2004] O.J. L 145/1 at article The Directive refers to the Council Directive 93/6/EC of 11 June 1993 on the capital adequacy of investment firms and credit institutions, [1993] O.J. L 141/1, which was in force at its adoption, but has since been repealed by the abovementioned (discussed in Section A1 of this paper) Directive 2006/49/EC (article 52). 50 Directive supra note 1 at article 30, last subparagraph. 51 The meaning of the term financial institution is defined in item (5), article 4 of EC, Commission Directive 2006/48/EC (first discussed in supra note 1) 52 The meaning of the term reinsurance undertaking is defined in item (6), article 2 of the Directive, with reference to article 1, point (c) of Directive 98/78/EC (discussed in supra note 1). 10

11 This entails that the entity must have its registered office and its head office in that member state. 53 According to the provisions of European financial law, authorisation is granted: to credit institutions according to article 6 of Directive 2006/48/EC, to insurance undertakings, according to article 6 of Directive 73/239/EEC, or article 6 of Directive 79/267/EEC, 54 and to investment firms, according to paragraphs 1 and 2, article 5 of Directive 2004/39/EC If the Community regulated entity is head of the group, this must be linked with (at least) one other entity in the financial sector (paragraph 14, article 2, item b) Depending on the position that the Community regulated entity holds within the group s structure, Directive 2002/87/EC, distinguishes two cases: the case in which a Community regulated entity is at the head of the group, which is examined in paragraph 14, article 2, item (b) (see directly below), and the case in which a Community regulated entity is not at the head of the group, which is examined in paragraph 14, article 2, item (c) (see below under subsection B4). According to item (b), paragraph 14, article 2 of Directive 2002/87/EC, when the Community regulated entity is at the head of the group, this entity must: be the parent undertaking of (at least) one entity in the financial sector, hold a participation in (at least) one undertaking in the financial sector, or be linked with (at least) one entity in the financial sector, in the meaning of paragraph 1, article 12 of Directive 83/349/EEC. In all three cases, whether the second entity is regulated or not, or whether it is established or not on an EU member state, is of no legal significance. 53 The obligation to have both the registered office and the head office in the same member state applies to all categories of regulated entities (according to the provisions of the sectoral Directives), and was firstly introduced by the European Parliament and Council Directive 95/26/EC of 29 June 1995 amending Directives 77/780/EEC and 89/646/EEC in the field of credit institutions, Directives 73/239/EEC and 92/49/EEC in the field of non-life insurance, Directives 79/267/EEC and 92/96/EEC in the field of life assurance, Directive 93/22/EEC in the field of investment firms and Directive 85/611/EEC in the field of undertakings for collective investment in transferable securities (Ucits), with a view to reinforcing prudential supervision [1995] O.J. L 168/7 (known as the BCCI-Directive ), as it constituted one of the main Community regulatory reactions to the problems that were identified by the bankruptcy of the Bank for International Credit and Commerce (BCCI). See on this case, Walker supra note 11 at , with further references, and R. Herring, International Financial Conglomerates: Implications for National Insolvency Regimes in G. Kaufman ed. Market Discipline and Banking: Theory and Evidence (The Netherlands: Elsevier, 2003) at section II.C. 54 Council Directive 79/267/EEC of 5 March 1979 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance, [1979] O.J. L 63/1. 55 Directive supra note 1 at article 1, first sentence. 11

12 According to the wording of that item in paragraph 14, article 2 of Directive 2002/87/EC, in all three abovementioned cases, the Community regulated entity must be linked, in various alternative ways, with another entity of the financial sector. In this context, it is therefore necessary to determine the meaning of the term financial sector, defined in paragraph 8, article 2 of the Directive. Pursuant to that provision, a financial sector is the sector made up of the following categories of entities, which, from a systemic point of view, can be divided into two groups: (a) The first group encompasses regulated and non-regulated entities, classified into three individual sectors: the banking sector, 56 composed of credit institutions, financial institutions, 57 and ancillary services undertakings, 58 the insurance sector, 59 composed of insurance undertakings, reinsurance undertakings, and insurance holding companies, 60 and the investment services sector, 61 composed of investment firms and financial institutions. 62 (b) The second category encompasses mixed financial holding companies. A mixed financial holding company is defined 63 as any parent undertaking (irrespective of whether it has its registered office in an EU member state or a third-party country), which is not a regulated entity and which, along with its subsidiary undertakings one of which is a regulated entity with registered office in the Community and other entities, constitute a financial conglomerate Directive supra note 1 at article 2, para. 8, item (a). 57 Defined in article 4, para. 5, of Directive 2006/48/EC (see supra note 1). 58 Defined in article 4, para. 21, of Directive 2006/48/EC (Ibid.). 59 Directive supra note 1 at article 2, para. 8, item (b). 60 Defined in article 1, item (i), of Directive 98/78/EC (supra note 46). 61 Directive supra note 1 at article 2, para. 8, item (c). 62 Defined in article 3, para. 2, of Directive 2006/49/EC (supra note 1) with reference to the abovementioned provision of article 4, para. 5, of Directive 2006/48/EC (supra note 1). 63 Directive supra note 1 at article 2, para The term of a mixed financial holding company, established in the Directive, must be distinguished from the following similar terms encountered in other legal acts of the European financial law: the term of a financial holding company, according to article 4, para. 19 of Directive 2006/48/EC (supra note 1), the term of a mixed-activity holding company, according to article 4, para. 20 of Directive 2006/48/EC (supra note 1), the term of a financial holding company, according to article 7, para.2, second sentence, and para. 3, item (a), of Directive 2006/49/EC (supra note 1), the term of a mixed-activity holding company, according to article 7, para. 3, item (b), of Directive 93/6/EC (supra note 1), and the term of a mixed-activity insurance holding company, according to Directive 98/78/EC (supra note 1). 12

13 The latter case, however, is not of any interest in the examination of the criterion analysed, since that company is a parent undertaking itself (see below under subsection B4). Consequently, the examined criterion shall be met if the parent undertaking, a Community regulated entity, is linked, by any of the abovementioned alternative ways, with another entity, regulated or not, Community or not, belonging to either the banking, or the insurance or the investment services sector If the head of the group is not a Community regulated entity, the group must exercise its activities mainly in the financial sector (paragraph 14, article 2, item c) If the head of the group is not a Community regulated entity, Directive 2002/87/EC specifies (item (c) of paragraph 14, article 2) that in order to identify the group as a financial conglomerate, its activities "must mainly occur in the financial sector" (the term financial sector is defined in subsection B3 above). 66 This criterion is further specified by the provisions of paragraph 1, article 3 of the Directive, according to which, in this case, the ratio of the balance sheet total of the regulated and non-regulated financial sector entities in the group to the balance sheet total of the group as a whole should exceed 40%. In order to implement this provision, the following special provisions have also been established: (a) Based on a joint agreement, the competent authorities can: exclude an entity when calculating the ratios, in the cases referred to in paragraph 5, article 6 of the Directive, and take into account compliance with the thresholds for three consecutive years so as to avoid sudden regime shifts, and disregard such compliance if there are significant changes in the group's structure. 67 (b) The relevant competent authorities may, in exceptional cases and by common agreement, replace the criterion based on balance sheet total with one or both of the following parameters or add one or both of these parameters, if they are of the opinion that these parameters are of particular relevance for the purposes of supplementary supervision: income structure, or off-balance sheet activities. 68 (c) If, after a group has been identified as a financial conglomerate for supplementary supervision, the ratios fall below 40%, a lower ratio of 35% shall apply for the following three years to avoid sudden regime shifts. During the three-year period, the coordinator may, with the agreement of the other relevant competent authorities, decide that the lower ratio shall cease to apply See Section B5 of this paper regarding an additional restriction imposed by the Directive. 66 It is noteworthy that in the previous case discussed in Section B3 of this paper, this criterion need not to be met. 67 Directive supra note 1 at article 3, para Ibid. article 3, para Ibid. article 3, para

14 (d) The calculations taking the balance sheet into account shall be made on the basis of the aggregated balance sheet total of the group s entities, according to their annual accounts. For the purpose of this calculation, entities in which a participation is held shall be taken into account as regards the amount of their balance sheet total corresponding to the aggregated proportional share held by the group. Where consolidated accounts are available, they shall be used instead of aggregated ones. 70 If, according to the above, a Community regulated entity is not at the head of the group, then several alternatives arise. For example, the head of the group may be: a regulated entity with registered office in a third country, an entity outside the financial sector, a non-regulated entity of the financial sector (with its registered office in the Community or in a third country), or a mixed financial holding company, according to the abovementioned definition (see above under subsection B3) At least one of the entities in the group must be operating in the insurance sector, and (at least) one in the banking or investment services sector (paragraph 14, article 2, item d) Identifying a group as a financial conglomerate, additionally requires that, irrespective of its structure (according to B 3 and B 4, above), it includes at least two entities of the financial sector, without there being a requirement for both of them to be regulated. 72 However, paragraph 14, article 2, item d of Directive 2002/87/EC, set an innate restriction, according to which: one entity (regulated or not) must be within the insurance sector, and the second entity (regulated or not) must be within the banking, or alternatively the investment services, sector. Based on the above, one can reach the following conclusions in relation to that criterion: (a) First of all, it is not obligatory for one of the entities (provided it is the nonregulated one) to be established in an EU member state Ibid, article 3, para The latter case is of particular importance for the implementation of the Directive, since (as abovementioned) when it occurs, the mixed company is subject to supplementary supervision, according to the provisions of para. 1 article 5 of the Directive. 72 One undertaking of the group must be a regulated entity based on the criterion under item (a), para. 14, article 2 of the Directive. However, item (d), para. 12 refers to undertakings and not to regulated entities, and consequently, the second undertaking may be non-regulated. 73 This conclusion ensues from the fact that item (d), para. 14 article 2 of the Directive, makes no reference to article 1 of the Directive. 14

15 (b) Homogeneous financial groups (namely those whose undertakings belong exclusively to the banking sector, the insurance sector or the investment services sector) do not fall under the meaning of a financial conglomerate (and consequently are not covered by the provisions of Directive 2002/87/EC), since a regulatory framework is already in place for these groups according to the sectoral rules. Supervision of those groups is conducted as follows: for banking groups, on a consolidated basis, according to articles 71 and 72 of Directive 2006/48/EC, for investment firms groups, on a consolidated basis as well, according to article 22 of Directive 2006/49/EC, and for insurance groups, on a solo plus basis (like financial conglomerates), according to Directive 98/78/EC. (c) The term financial conglomerate does not include also groups that exclusively include undertakings in the banking sector and in the investment services sector, 74 since those groups are also subject to consolidated supervision, according to the provisions of article 2 of Directive 2006/49/EC. Consequently, the typical examples that can be used in implementing Directive 2002/87/EC include, but are not limited to, groups that contain at least the following categories of undertakings (in any case, however, one insurance or reinsurance undertaking): a credit institution and an insurance undertaking, a credit institution and a reinsurance undertaking (which is a non-regulated entity), an insurance undertaking and an investment firm, or an investment firm and a reinsurance undertaking (non-regulated entity), an insurance undertaking and a financial institution (non-regulated entity), In practice, financial conglomerates usually have a very complex form, as they include regulated entities operating in all three financial sector segments, as well as a set of non-regulated entities operating (or not) in the financial sector. It is obvious that Directive 2002/87/EC was issued in order to ensure the supplementary supervision of precisely those composite groups The group must have significant cross-sector activities, both in the insurance sector and in the banking or investment services sector (paragraph 14, article 2, item e) According to the last criterion set in paragraph 14, article 2 of Directive 2002/87/EC, irrespective of its structure, identification of a group as a financial conglomerate, requires that the group has significant cross-sector activities. This means that its activities must be significant : 74 It is worth mentioning that in the United States of America, legislation on financial holding companies, similar to that of the Directive, covers these groups as well, in terms of exercising supplementary supervision. See Dierick supra note 9 at See Couter supra note 18 at

16 both in the insurance sector, and in the banking and investment services sectors, the latter two sectors being considered together. The crucial criterion of the activity in these two sectors is dependent upon two (2) quantitative criteria: a relative one (see subsection (a) below) and an absolute one (see subsection (b) below). (a) The relative criterion By applying the relative criterion, one examines the importance of each of the abovementioned two sectors, in relation to the group s total assets, on the one hand, and the group s total capital requirements, on the other. In particular, according to paragraph 2, article 3 of Directive 2002/87/EC, activities in different financial sectors are significant if for each financial sector the average of: the ratio of the balance sheet total of that financial sector to the balance sheet total of the financial sector entities in the group, and the ratio of the solvency requirements of the same financial sector to the total solvency requirements of the financial sector entities in the group exceeds 10%. The smallest financial sector in a financial conglomerate is the sector with the smallest average, while the most important financial sector is the one with the highest average. For the purposes of calculating the average and for the measurement of the smallest and the most important financial sectors, the banking sector and the investment services sector shall be considered together. The abovementioned provisions of paragraphs 4 to 7, article 3 of the Directive 76 apply pro rata and in the application of paragraph 2 of the same article examined hereunder. In paragraph 6, the 10% ratio threshold is reduced to 8%. (b) The absolute criterion According to the absolute criterion, the group s activities are (in principal) presumed significant (and consequently the group may be identified as a financial conglomerate), if the balance sheet total of the smallest of the abovementioned two financial sectors, exceed 6 bn. 77 But even if this criterion is met, if the group does not cover the threshold set forth in paragraph 2, article 3, according to the above (see subsection (a) above), the relevant competent authorities may decide by common agreement not to regard the group as a financial conglomerate, or not to apply the provisions of articles 7, 8 or 9 of the Directive, if they are of the opinion that the inclusion of the group in the scope of this Directive or the application of such provisions is not necessary or would be inappropriate or misleading with respect to the objectives of supplementary supervision, taking into account, for instance, the fact that: 76 See Section B4 of this paper. 77 Directive supra note 1 at article 3, para. 3, first sentence. 16

17 the relative size of its smallest financial sector does not exceed 5 %, measured either in terms of the average referred to in paragraph 2, article 3, or in terms of the balance sheet total or the solvency requirements of such financial sector; or the market share does not exceed 5 % in any member state, measured in terms of the balance sheet total in the banking or investment services sectors and in terms of gross premiums written in the insurance sector. The provisions of paragraphs 4, 5 and 7, article 3 of the Directive 78 apply pro rata also in the application of paragraph 3 of the same article examined hereunder. Besides, paragraph 6, article 3, sets forth that if the balance sheet total of the smallest financial sector in the group falls below 6 billion, a lower figure of 5 billion shall apply for the following three years to avoid sudden regime shifts. 78 See Section B4 of this paper. 17

18 C. Evaluation of the criteria according to article 5 of Directive 2002/87/EC In view of the above analysis of the criteria set forth in Directive 2002/87/EC for designating a group as a financial conglomerate, and taking into consideration that its provisions on exercising supplementary supervision at a financial conglomerate level concerns Community regulated entities, exhaustively described in paragraphs 2 and 3, article 5 of the Directive (according to what is mentioned under section A, subsection 2.1, above), the following conclusions may be drawn. 1. The regulated entity is at the head of a financial conglomerate If the Community regulated entity is at the head of a financial conglomerate (the case of subparagraph 2(a), article 5), the following conditions must apply: (a) Whether the regulated entity is at the head of the group is decided in accordance to paragraph 14, article 2, item b, (b) The group must also include one more financial sector entity (regulated or not), which, however, will operate in a different sector to that of the regulated entity, in the meaning of paragraph 14, article 2, item d and (c) The group must have significant cross-sector activities, in the meaning of paragraph 14, article 2, item e. 2. The Community regulated entity is the subsidiary undertaking of a Community mixed financial holding company If the Community regulated entity is a subsidiary undertaking of a Community mixed financial holding company (the case of paragraph 2, article 5, item b), the following conditions must apply: (a) The group must be active mainly in the financial sector, according to paragraph 14, article 2, item c, (b) The group must include, as subsidiary undertaking of the mixed financial holding company, one more financial sector entity (regulated or not), which, however, has to operate in a different sector to that of the regulated entity, according to item (d), para. 14 of article 2 and (c) The group must have significant cross-sector activities, in the meaning of paragraph 14, article 2, item e. 3. The Community regulated entity is linked with other entities in the financial sector If the Community regulated entity is linked with other entities in the financial sector (the case of paragraph 2, article 5, item c), the following conditions must apply: (a) The first condition set is, in the author s opinion, rather vague. This is due to the following considerations: 18

19 (aa) As already mentioned, according to paragraph 14, article 2, item b where there is a regulated entity within the meaning of article 1 at the head of the group, it is either an ( ) entity linked with an entity in the financial sector by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC. Consequently, the case of a linked entity is addressed as one of the sub-cases, where a regulated entity is at the head of the group. (ab) On the contrary, according to paragraph 2, article 5, item c, the case of a linked entity is addressed separately from the case where the regulated entity is at the head of the group. The importance of this contradiction is the following: 79 (i) (ii) If the case of paragraph 2, article 5, item c falls under paragraph 14, article 2, item b, then lit. (c), paragraph 14,article 2, must apply. On the contrary, if the case of paragraph 2, article 5, item c does not fall under paragraph 14, article 2, item b, then lit. (c), paragraph 14, article 2 must apply, according to which where there is no regulated entity within the meaning of article 1 at the head of the group, the group's activities mainly occur in the financial sector within the meaning of Article 3(1). Consequently, this case requires initiation of the procedure under paragraph 1, article 3 of the Directive. (b) The other financial sector entity (regulated or not), must operate in a different sector than that of the regulated entity, according to paragraph 14, article 2, item d. (c) The group must have significant cross-sector activities, in the meaning of paragraph 14, article 2, item e. 4. The Community regulated entity is the subsidiary undertaking of a regulated entity or a mixed financial holding company, having its registered office outside the Community Finally, if the Community regulated entity is the subsidiary undertaking of a regulated entity or a mixed financial holding company, having its registered office outside the Community (the case of paragraph 3, article 5), the procedure of article 18, Directive 2002/87/EC shall be activated, which includes the following stages: (a) First, the competent authorities shall control whether the regulated entities whose parent undertaking is a regulated entity or a mixed financial holding company having its registered office in a third country outside the Community, are subject, by the relevant competent authorities of that third country, to supervision equivalent to that stipulated in the Directive s provisions on the supplementary supervision of regulated entities, according to the provisions of paragraph 2, article The coordinator is appointed depending on the proper interpretation, according to article 10 of the Directive (supra note 1). 80 Directive supra note 1 at article 18, para. 1, lit. (a). The verification shall be carried out by the competent authority which would be the coordinator if the criteria set out in para. 2, article 10 of the Directive were to apply, on the request of the parent undertaking or of any of the Community regulated entities, or on its own initiative [Directive supra note 1 at article 18, para. 1, lit. (b)]. Before making a decision, these authorities must consult with other relevant competent authorities [Directive, supra note 1 at article 18, para. 1, lit. (c)], consider any general guidelines defined by the Financial Conglomerates Committee and consult with the latter [Directive supra note 1 at article 18, para. 1, lit. (d)]. 19

20 (b) If equivalent supplementary supervision is not applied, as abovementioned, the provisions on the supplementary supervision of regulated entities stipulated in paragraph 2, article 5 of the Directive, shall apply pro rata for the regulated entities. 81 (c) Alternatively, the competent authorities are allowed to implement other methods that will ensure exercise of the appropriate supplementary supervision on the financial conglomerate s regulated entities. Such methods must: be approved by the coordinator, following consultation with the other competent authorities, requesting the establishment of a mixed financial holding company with registered office in the Community, and applying the Directive s provisions on the regulated entities of the financial conglomerate, the above mixed financial holding company being at the head thereof, ensure that the objectives set forth in Directive 2002/87/EC are met, and be notified to the other competent authorities involved, as well as to the European Commission Directive, supra note 1 at article 18, para Ibid at article 18, para