Subject to rule 14.1.2, consolidated supervision and this chapter apply to a firm which is a member of a group if:
It is:
a securities and futures firm, subject to the financial rules in Chapter 3, which is a broad scope firm but not a venture capital firm.
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A firm is not subject to consolidated supervision under the rules in this Chapter where any of the following conditions are fulfilled:
the firm is included in the supervision on a consolidated basis of the group of which it is a member by a competent authority other than the FCA; or
the firm is included in the supervision on a consolidated basis of the group of which it is a member by the FCA under MIFIDPRU 2.5 (prudential consolidation); or
the firm is subject, along with a MIFIDPRU investment firm, to the group capital test in MIFIDPRU 2.6 (the group capital test).
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Where there is more than one authorised firm in the group, subject to the rules of this chapter, one consolidated supervision return may be submitted on behalf of all the firms in the group in accordance with SUP 16.3.25G.
A firm need not meet the requirements in rules 14.3.1 and 14.3.2 if:
there is no credit institution in the group;
no firm in the group deals in investments as principal, except where it is dealing solely as a result of its activity of operating a collective investment scheme
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the firm notifies the FCA of any serious risk that could undermine the financial stability of the group as soon as it becomes aware of that risk;
the firm reports to the FCA all group large exposures as at the end of each quarter, and within the period specified in SUP 16;
the firm meets the conditions in rule 14.1.5; and
the firm has first notified the FCA in writing that it intends to rely on this rule.
If the firm notifies the FCA under rule 14.1.4 that it will not apply the rules in this section, it must:
submit to FCA a consolidated supervision return within the time period specified by SUP 16, together with a consolidated profit and loss account;
ensure that each firm in the group deducts from its solo financial resources any quantifiable contingent liability in respect of other group entities;
ensure that the solo financial resources requirement of each firm in the group incorporates the full value of the expenditures of the firm wherever they are incurred on behalf of the firm; and
make a note in its audited financial statements that it is not subject to regulatory consolidated capital requirements.
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The conditions in rule 14.1.5 aim to ensure that the firm is protected from weaknesses in other group entities.
In rule 14.1.5(2), contingent liabilities includes direct and indirect guarantees.
14.1.5(3) aims to ensure that the expenditure-based requirement incorporates the firm's actual ongoing annual expenditures (including any share of depreciation on fixed assets) where these have been met by another group entity.
The FCA may require further information from the firm if it considers that the firm's consolidated financial position raises undue risks to consumers. It may also seek reassurance that the firm has sufficiently robust client money and asset controls - for example, it may require a skilled person's report. The FCA may also use its own initiative power to impose conditions on the firm. This could include raising additional capital or further limitations on the firm's intra-group exposures.
Rule 14.1.4(5) refers to large exposures, which should be measured against group consolidated own funds or (if this would result in all exposures being classified as large exposures) by aggregating all the exposures of the individual entities in the group and measuring them against the own funds of the individual firm giving rise to the consolidated supervision requirement. If there is more than one firm in the group giving rise to the consolidated supervision requirement, the group large exposures should be measured against the firm with the smallest own funds.
For the purposes of the rules in this chapter, a firm's group means the firm and:
any UK parent institution in the group which is a financial holding company, a credit institution, or an investment firm;
any credit institution, investment firm or financial institution which is a subsidiary either of the firm or of the firm's UK parent institution as defined in (1); and
any credit institution, investment firm or financial institution in which the firm or one of the entities in (1) or (2) holds a participation.
If a group exists under rule 14.2.1, the firm must also include in the scope of consolidation any ancillary services undertaking and asset management company in the group.
Rule 14.1.1 states what type of firm may be subject to consolidated supervision (trigger firm). Rule 14.2.1 states what type of relationship triggers the existence of a group for consolidated supervision purposes. Rules 14.2.1 and 14.2.2 specify what entities should be included in the scope of consolidated supervision.
A firm's parent is a financial holding company if it is either a financial institution or a securities and futures firm that is subject to the financial rules in Chapter 3 and that is a broad scope firm (but not a venture capital firm) and if its subsidiary undertakings carry out mainly listed activities, activities of a credit institution or activities undertaken by a Chapter 3 broad scope firm. For this purpose the FCA interprets the phrases 'mainly' or 'main business' to mean where the balance of business is over 40% of the relevant group or sub-group's balance sheet (measured on the basis of total assets) or profit and loss statement (measured on the basis of gross income). In addition, if the firm's parent has significant holdings in insurance undertakings or reinsurance undertakings, it is a mixed financial holding company, and the firm is subject to the rules in GENPRU 3.1 instead of the rules in this chapter. This is because a parent cannot be a financial holding company and a mixed financial holding company at the same time. GENPRU 3.1 sets out what constitutes significant insurance holdings (broadly more than 10% of the financial sector activities of the group). A firm's parent is a financial holding company and not regarded as a mixed financial holding company unless:
the parent has been notified by its coordinator that the group it heads is a financial conglomerate; and
it has not been notified that the coordinator and the relevant competent authorities have agreed not to treat the group as a financial conglomerate in accordance with regulation 16 of the financial groups directive regulations.
A firm with an ultimate non-UK parent may also be subject to the provisions in GENPRU 3.2.
In the case where undertakings are linked by a consolidation article 12(1) relationship, the FCA will determine how consolidation is to be carried out.
A firm may, having first notified the FCA in writing, exclude from its group the following:
any entity the total assets of which are less than the smaller of the following two amounts:
10 million euros; or
1% of the total assets of the group's parent or the undertaking that holds the participation;
provided that the total assets of such entities do not collectively breach these limits.
any entity the inclusion of which within the group would be misleading or inappropriate for the purposes of consolidated supervision.
The FCA may require a firm to provide information about the position in the group of any undertaking excluded from the consolidation under rule 14.2.5.
An exclusion under rule 14.2.5(2) would normally be appropriate when an entity would be excluded from the scope of consolidation under the relevant UK generally accepted accounting principles.
A firm must at all times ensure that its group maintains group financial resources in excess of its group financial resources requirement.
A firm, other than one which is defined in rule 14.1.1(1), must at all times comply with large exposures limits applied on a group basis.
A firm must calculate its group financial resources on the basis of the consolidated accounts of the relevant group, subject to the adjustments in rule 14.4.2 and on the basis specified in rule 14.4.3.
If more than one firm in the group is subject to the rules of this chapter, group financial resources are defined according to the relevant rules applicable to the main firm in the group to which this chapter applies, with Tier 1 minority interests being allowed as Group Tier 1 capital and Tier 2 minority interests being allowed as Group Tier 2 capital.
In calculating the group financial resources, deductions should be made for intangible assets, material unaudited losses incurred since the balance sheet date and investments in own shares.
Material holdings and material insurance holdings must be recalculated on a group basis and deducted in arriving at the group financial resources.
Financial resources will be defined based upon the main firm in the group to which this chapter applies as follows:
if a broad scope securities and futures firm (excluding a venture capital firm), Table 3-61R;
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The FCA interprets 'main' by reference to the share of the firm's business in the group, its contribution to the group's balance sheet (measured on the basis of total assets) or profit and loss statement (measured on the basis of gross income).
The form in SUP 16 Ann 19 R, together with the guidance in SUP 16 Ann 20 G, shows the mechanics of the calculation.
A firm must calculate its group financial resources requirement as the aggregate of:
the sum of the financial resources requirements of all group entities within the scope of consolidation calculated in accordance with rule 14.5.2, except that:
requirements in respect of intra-group balances with other entities within the scope of consolidation should be excluded; and
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the sum of any adjustments that are made to each firm's financial resources, calculated on a solo basis in accordance with rule 14.4.3, in order to arrive at the amount of financial resources used to meet its solo financial resources requirement. These adjustments must exclude deductions in respect of the investment in and other relationships with other entities that are included within the scope of consolidation.
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The financial resources requirements of entities in which the group holds a participation must be included proportionately.
Financial resources requirements for individual entities in the group are:
for firms regulated by the FCA, their regulatory capital requirement under FCA rules;
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for entities that are recognised third country credit institutions or recognised third country investment firms and which are subject to the local regulatory capital requirement of that regulator, that local regulatory capital requirement;
for entities not in (2A) that are regulated by a third country competent authority named in the table in BIPRU 8 Annex 6R as it applied on 31 December 2021 and which is subject to the local regulatory capital requirement of that regulator, that local regulatory capital requirement; and
for other entities in the group, a notional financial resources requirement calculated as if the entity were regulated by the FCA.
For the purposes of rule 14.5.2(3) the notional financial resources requirements of group entities should normally be calculated as if the entities were subject to the financial rules in IPRU-INV relevant to the main firm in the group. The interpretation of 'main' given in 14.4.4 G applies here.
For the purposes of calculating an expenditure-based requirement, no account should be taken of expenses that have been recharged to another entity included in the scope of consolidation. For example, in calculating the notional requirement for a service company, the expenditure-based requirement should be calculated net of recharged expenses. This is to avoid double counting of the expenses.
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A firm may apply for a waiver of rule 14.5.1R, to permit a line-by-line approach to determine its group financial resources requirement. A firm should also demonstrate that calculating its requirement in this way does not result in a distortion of the group financial resources requirement.
