CRDV and CRR2 have introduced a number of important amendments to the existing capital requirements regime that apply to credit institutions and certain systemically important MiFID investments firms (Institutions). This has included changes to the supervision of Institutions' financial holding companies and mixed financial holding companies and a new requirement for certain third-country groups to establish an intermediate parent undertaking in the EU. This article provides a high-level overview of these changes, as well as some relevant practical considerations.
Member States were required to transpose CRD V by 28 December 2020 and apply the majority of measures from 29 December 2020. The Irish transposing legislation was signed by the Minister for Finance on 22 December 2020 and published in Iris Oifigiúil on 5 January 2021.
Approval of financial holding companies and mixed financial holding companies
CRDV now requires entities to seek approval in order to act as a financial holding company (FHCs) or a mixed financial holding company (MFHCs) of an Institution. Transitional arrangements require FHCs and MFHCs in existence on 27 June 2019 to apply for approval by 28 June 2021.
The legislation provides that the approval process may take up to six months and may include consultation among relevant competent authorities. In seeking approval, applicants will be required to provide information on the following items as part of its application:
the structural organisation of the group
the nomination of at least two persons effectively controlling the company and compliance with the requirements on the qualification of directors
the shareholders and members of the company, where the company has a credit institution as its subsidiary
the internal organisation and distribution of tasks within the group
any other information that may be necessary to carry out assessments relating to an approval or exemption.
A holding company may apply for an exemption from approval where they satisfy certain conditions, including for example, that it acts solely as a so-called 'acquisition vehicle', and does not engage in taking decisions on management, operational or financial matters that affect the group or those of its subsidiaries that are institutions or financial institutions.
Where a holding company has not secured approval or exemption, the consolidating supervisor may apply a number of significant supervisory measures. These include, but are not limited to, suspending voting rights in the subsidiary Institution, prohibitions on the upstreaming of dividends, ordering divestment of holdings, injunctions against directors and administrative fines.
FHCs and MFHCs will also be subject to ongoing supervision. FHCs and MFHCs must provide the consolidating supervisor with information required to monitor the structural organisation of the group and compliance with conditions on which the approval or exemption is granted. It is not clear, however, how often and in what manner this information should be provided.
FHCs or MFHCs will be directly responsible for compliance with its group's consolidated prudential requirements, rather than the credit institutions and / or investment firms that are its subsidiaries.
Requirement to establish an EU immediate parent undertaking
Certain third-country groups of financial institutions with a substantial presence in the EU are now required to establish an EU intermediate parent undertaking (IPU). In its legislative proposal for CRD V, the European Commission stated that the intention of this requirement was to assist with the implementation of the internationally agreed standards on internal loss-absorbing capacity for non-EU global systemically important institutions and to simplify the resolution of third country groups with significant activities in the EU. It has been suggested however, that this new requirement is also being introduced to mirror the similar regime existing in the United States.
A third-country group will be required to establish an EU IPU if:
the group has two or more institutions (credit institutions or investment firms) in the EU, and
the total value of the group's assets within the EU exceed €40bn.
The IPU may be authorised as a credit institution or MiFID investment firm (in certain circumstances) or approved as a FHC or MFHC.
A third country group may establish two IPUs where the establishment of a single intermediate IPU would:
be incompatible with a mandatory requirement for separation of activities imposed by the rules or supervisory authorities of the third country where the ultimate parent undertaking of the third country group has its head office, or
render resolvability less efficient than in the case of two IPUs according to an assessment carried out by the competent resolution authority of the IPU.
Third-country groups operating in the EU that satisfy the above conditions as of 27 June 2019 will have until 30 December 2023 to establish their IPU(s). The EBA has published a consultation paper on draft guidelines on the monitoring of the threshold and other procedural aspects (EBA/CP/2021/01), with a deadline of 15 March 2021 for responses. Thereafter, the EBA will submit a report to the European Parliament, Council, and Commission on the treatment of third-country branches under Member States' national laws. The EBA indicated in its work programme for 2021 that it intended to produce this report in Q2 2021.
Process of FHC / MFHC approval and exemption
There has, of yet, been no guidance issued on the specific processes or forms to be used by entities seeking approval as FHCs / MFHCs or when seeking exemption from the approval process. It may be that the Central Bank will issue guidance on this point in due course or Delegated or Implementing Acts may be published, which could provide additional clarity.
Impact on acquiring transaction notification process
Where the approval of a FHC / MFHC takes place concurrently with an acquiring transaction approval process, the competent authority for the purpose of that notification shall coordinate with the consolidating supervisor. In such circumstances, the acquiring transaction approval process will be suspended for the later of a period of 20 working days or until the FHC / MFHC approval procedure is complete.
On that basis, whilst the fact of a FHC / MFHC approval process would delay a concurrent acquiring transaction notification by at least 20 days, the acquiring transaction review period may in theory be suspended for up to six months until such time as a FHC / MFHC approval application is progressed.
Where the Central Bank is assessing an acquiring transaction notification, and is not the consolidating supervisor or the competent authority in which the proposed FHC / MFHC is established, the Central Bank is required to coordinate with the consolidating supervisor and the competent authority in the Member State where the FHC / MFHC is established.
Use of a holding company in an EU jurisdiction, which is different to the jurisdiction in which the Institution is based, could therefore delay matters to allow both regulators to consult with each other.
The new process could be a significant factor in intragroup banking reorganisations where acquiring transaction notification processes may in practice be approved somewhat quicker than notifications involving a third party acquisition. In time-pressed scenarios where a group is working to strict timelines, an additional layer of process involving consultation between multiple regulators in different jurisdictions could frustrate matters. Therefore, groups may need to factor in extra time for regulatory approvals.