FCA Handbook - COND 2.3 Effective supervision

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COND 2.3 Effective supervision

Paragraph 2C of Schedule 6 to the Act

(1)
A must be capable of being effectively supervised by the FCA having regard to all the circumstances including-
1. (a)
  the nature (including the complexity) of the regulated activities that A carries on or seeks to carry on;
2. (b)
  the complexity of any products that A provides or will provide in carrying on those activities;
3. (c)
  the way in which A’s business is organised;
4. (d)
  if A is a member of a group, whether membership of the group is likely to prevent the FCA’s effective supervision of A;
5. (e)
  whether A is subject to consolidated supervision required under any of the relevant directives;
6. (f)
  if A has close links with another person (“CL”)-
  1. (i)
    the nature of the relationship between A and CL;
  2. (ii)
    whether those links are or that relationship is likely to prevent the FCA’s effective supervision of A; and
  3. (iii)
    if CL is subject to the laws, regulations or administrative provisions of a territory which is not the UK (“the foreign provisions”), whether those foreign provisions, or any deficiency in their enforcement, would prevent the FCA’s effective supervision of A.
(1A)
Paragraphs (a), (b) and (e) of sub-paragraph (1) do not apply where the only regulated activities that the person concerned carries on, or seeks to carry on, are-
1. (a)
  relevant credit activities, and
2. (b)
  if any, activities to which, by virtue of section 39(1D), sections 20(1) and (1A) and 23(1A) do not apply when carried on by the person.
(2)
A has close links with CL if-
1. (a)
  CL is a parent undertaking of A;
2. (b)
  CL is a subsidiary undertaking of A;
3. (c)
  CL is a parent undertaking of a subsidiary undertaking of A;
4. (d)
  CL is a subsidiary undertaking of a parent undertaking of A;
5. (e)
  CL owns or controls 20% or more of the voting rights or capital of A; or
6. (f)
  A owns or controls 20% or more of the voting rights or capital of CL.

Paragraph 2C of Schedule 6 to the Act sets out the effective supervision threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

For the purposes of paragraph 2C (1A) of Schedule 6 to the Act, relevant credit activity is defined in paragraph 2G of Schedule 6 to the Act. Guidance on the meaning of relevant credit activity is given in COND 1.1A.5A G.

Paragraph 3B of Schedule 6 to the Act

(1)
B must be capable of being effectively supervised by the FCA having regard to all the circumstances including-
1. (a)
  the nature (including the complexity) of the regulated activities that B carries on or seeks to carry on;
2. (b)
  the complexity of any products that B provides or will provide in carrying on those activities;
3. (c)
  the way in which B’s business is organised;
4. (d)
  if B is a member of a group, whether membership of the group is likely to prevent the FCA’s effective supervision of B;
5. (e)
  whether B is subject to consolidated supervision required under any of the relevant directives;
6. (f)
  if B has close links with another person (“CL”)-
  1. (i)
    the nature of the relationship between B and CL;
  2. (ii)
    whether those links are or that relationship is likely to prevent the FCA’s effective supervision of B; and
  3. (iii)
    if CL is subject to the laws, regulations or administrative provisions of a territory which is not the UK (“the foreign provisions”), whether those foreign provisions, or any deficiency in their enforcement, would prevent the FCA’s effective supervision of B.
(2)
B has close links with CL if-
1. (a)
  CL is a parent undertaking of B;
2. (b)
  CL is a subsidiary undertaking of B;
3. (c)
  CL is a parent undertaking of a subsidiary undertaking of B;
4. (d)
  CL is a subsidiary undertaking of a parent undertaking of B;
5. (e)
  CL owns or controls 20% or more of the voting rights or capital of B; or
6. (f)
  B owns or controls 20% or more of the voting rights or capital of CL.

Paragraph 3B of Schedule 6 to the Act sets out the effective supervision threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

The guidance in COND 2.3 should be read as applying to both paragraph 2C of Schedule 6 of the Act and, as far as relevant to the discharge by the FCA of its functions under the Act in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity, paragraph 3B of Schedule 6 of the Act.

Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA is also responsible for assessing effective supervision under its own threshold conditions. Paragraphs 4F and 5F of Schedule 6 to the Act set out the effective supervision threshold conditions which are relevant to the discharge by the PRA of its functions under the Act in relation to firms carrying on, or seeking to carry on, a PRA-regulated activity. For the avoidance of doubt, this guidance does not apply to the threshold conditions set out in paragraphs 4F and 5F of Schedule 6 to the Act.

Paragraphs 2C and 3B of Schedule 6 to the Act implements requirements of the Single Market Directives, but the Act extends this condition to firms from outside the EEA and other firms which are outside the scope of the Single Market Directives.

In assessing the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act, factors which the FCA will take into consideration include, among other things, whether:

(1)
it is likely that the FCA will receive adequate information from the firm, and those persons with whom the firm has close links, to enable it to determine whether the firm is complying with the requirements and standards under the regulatory system for which the FCA is responsible and to identify and assess the impact on its statutory objectives; this will include consideration of whether the firm is ready, willing and organised to comply with Principle 11 (Relations with regulators and the rules in SUP on the provision of information to the FCA;
(2)
the structure and geographical spread of the firm, the group to which it belongs and other persons with whom the firm has close links, might hinder the provision of adequate and reliable flows of information to the FCA; factors which may hinder these flows include the fact there may be branches or connected companies in territories which supervise companies to a different standard or territories with laws which restrict the free flow of information, although the FCA will consider the totality of information available from all sources; and
(3)
[deleted]
(4)
in respect of a firm not carrying on, or seeking to carry on, a PRA-regulated activity, it is possible to assess with confidence the overall financial position of the group at any particular time; factors which may make this difficult include lack of audited consolidated accounts for a group, if companies in the same group as the firm have different financial years and accounting dates and if they do not share common auditors.

Meaning of "parent undertaking" and "subsidiary undertaking"

(1)
Section 420(1) of the Act (Parent and subsidiary undertaking) states that, except in relation to an incorporated friendly society, 'parent undertaking' and 'subsidiary undertaking' have the same meaning as in the Companies Acts (see section 1162 of, and schedule 7 to, the Companies Act 2006). These are the cases referred to in COND 2.3.7 G (1)(a) to (f).
(2)
Section 420(2) of the Act supplements these definitions in two ways; these are the cases referred to in COND 2.3.7 G (1)(g) and (h).
(3)
Paragraph 1Aof Schedule 6 to the Act extends the meaning of 'subsidiary undertaking' for the purposes of the threshold conditions to all the cases in articles 1(1) and (2) of the Seventh Company Law Directive in which one undertaking may be a subsidiary of another undertaking (see COND 2.3.11 G).

(1)
For the purposes of the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act, and except in relation to an incorporated friendly society, an undertaking is a parent undertaking of another undertaking (a subsidiary undertaking) if any of the following apply to it:
1. (a)
  it holds a majority of the voting rights in the subsidiary undertaking; or
2. (b)
  it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of its board of directors; or
3. (c)
  it has the right to exercise a dominant influence over the subsidiary undertaking through:
  1. (i)
    provisions contained in the subsidiary undertaking's memorandum or articles; or
  2. (ii)
    a control contract; or
4. (d)
  it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the subsidiary undertaking; or
5. (e)
  it has the power to exercise, or actually exercises, dominant influence or control over it, or it and the subsidiary undertaking are managed on a unified basis; or
6. (f)
  it is a parent undertaking of a parent undertaking of the subsidiary undertaking; or
7. (g)
  it is an individual and would be a parent undertaking if it were an undertaking.
8. (h)
  [deleted]
(2)
[deleted]

(1)
In relation to COND 2.3.7 G (1)(b) and (d), an undertaking is treated as a member of another undertaking if any of its subsidiary undertakings is a member of that undertaking, or if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.
(2)
[deleted]
(3)
[deleted]

The provisions of Schedule 7to the Companies Act 2006(Parent and subsidiary undertakings: supplementary provisions) explain and supplement the provisions of section 1162 of the Companies Act 2006(outlined in COND 2.3.7 G (1)(a) to (f)).

Section 420(3) of the Act (Parent and subsidiary undertaking) states that an incorporated friendly society is a parent undertaking of another body corporate (a subsidiary undertaking) if it has the following relationship to it:

(1)
it holds a majority of the voting rights in the subsidiary undertaking; or
(2)
it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of the subsidiary undertaking's board of directors; or
(3)
it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in it.

For the purposes of the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act, an undertaking is a subsidiary undertaking of another undertaking if:

(1)
the other undertaking (its parent) is a member of the undertaking;
(2)
a majority of the undertaking's board of directors who have held office during the financial year and during the preceding financial year have been appointed solely as a result of the exercise of the parent's voting rights; and
(3)
no one else is the parent undertaking of the undertaking under COND 2.3.7 G (1)(a) or COND 2.3.10 G (1).

Paragraphs 2C(2)(e) and (f) and 3B(2)(e) and (f) of Schedule 6 to the Act reflect legislation initially introduced in the Post-BCCI Directive, which defines close links, in part, by reference to participation. Recital 5 of the Post-BCCI Directive gives further guidance on what is meant by ‘participation’ for the purposes of the directive. It states that the sole fact of having acquired a significant proportion of a company’s capital does not constitute participation for the purposes of the directive if that holding has been acquired solely as a temporary investment which does not make it possible to exercise influence over the structure or financial policy of the undertaking.

The guidance in COND 2.3 is not comprehensive and is not a substitute for consulting the relevant legislation, for example the Companies Act 2006, the Friendly Societies Act 1992 and the Seventh Company Law Directive, or obtaining appropriate professional advice.