The Commission’s main questions refer to top level supervision; exactly what should be included in the scope of supplementary supervision, the role of capital buffers and developing binding principles for remuneration.
This review of the FCD effectively started in 2008. During the review process, the so-called group risks have materialized all across the financial sector, underscoring the importance of the supplementary supervision of inter-linkages within financial groups and between financial institutions. While the Commission Services, with the help of European supervisors represented by the Joint Committee on Financial Conglomerates (JCFC) are reviewing the FCD, similar evaluating initiatives have been undertaken in other countries that are member of the G10's Joint Forum, such as the US, based on the original principles published by the G10's Joint Forum, and taking lessons from the crisis.
Objectives of the consultation:
· First, the issue of top level supervision not only revealed flaws in the legal text, but also the notion of a patchwork of legal group structures which are extremely difficult to understand. The overview of groups with more than 1,000 legal entities in many countries is a challenge, for supervisors, shareholders, other stakeholders and for the group's management itself. The issue of transparency in group structures may deserve consideration.
· Second, conglomerates usually have as many non-regulated entities as regulated entities, most of the time for good reasons, but still a challenge to assess from a group risk management point of view. The Joint Forum report on Special Purpose Entities was just one example of their added value but also the challenge of controlling non-regulated entities. The question comes to mind what should exactly be included in the scope of supplementary supervision.
· Third, in both mainstream sectors a fruitful debate is going on about the definition of capital. The role of the capital buffer is different in the two sectors, which may justify sector-specifics, but investors buying stocks in conglomerates cannot make that distinction. Also, the JCFC's Capital Advice included recommendations for the assessment of capital in conglomerates, which would have to be picked up cross-sectorally.
· Fourth, work is advancing on developing binding principles for remuneration in both banking and insurance sectors and is aimed at sound internal governance given the specific sector in which firms operate. As regards banks and investment firms, in July 2009 the Commission adopted a proposal to amend the CRD which, among other things, will require banks and investment firms to have sound remuneration policies that comply with a set of principles. In the insurance sector, the Commission proposes to adopt implementing measures under Solvency II which will apply similar principles. The debates, however, also raise the question of the compatibility of sectoral remuneration policies in the context of large conglomerates and their group wide remuneration policies. It may be worthwhile to consider the consistency of group wide remuneration policies in the context of groups that are not just banks or just insurers.
Deadline for comments is 15 January 2010.
© European Commission
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