The regime of Financial Holding Companies based on the recent updates of Circular CSSF 12/552

Given that the credit institution controlled by these holding companies is not always able to ensure compliance with the requirements on a consolidated basis throughout the supervised group, certain (M)FHCs are therefore brought under the direct scope of supervisory powers pursuant to the CRD V and CRR to ensure compliance on a consolidated basis. Nevertheless, it is important to note that the new regime does not impose new individual requirements for those (M)FHCs that fall under its scope, and capital requirements continue to apply at the consolidated level. As a result, in line with the requirements CRD V, (M)FHCs must undergo an approval process and are subject to direct supervisory powers, although not burdened with additional prudential requirements on an individual (solo) basis.

As part of its recent update, the Circular 552 now clarifies that, when (M)FHCs are intermediaries in the holding chain and have no material impact on the conduct and compliance of both their consolidating parent institution and their subsidiaries, a proportionate approach shall be applied. The extent of this approach shall be nevertheless determined by mutual agreement with the competent authority.

Based on the EBA Guidelines on Internal Governance (EBA/GL/2021/05 2 July 2021) the proportionality principle encoded in Article 74(2) of Directive 2013/36/EU (CRD) aims to ensure that internal governance arrangements are consistent with the individual risk profile and business model of the institution, taking into account their size and internal organisation, and the nature, scale and complexity of their activities. In other words, institutions which are more significant, complex or riskier should have more sophisticated governance arrangements, while small and less complex institutions may implement simpler governance arrangements. Enhanced arrangements include, for example, the establishment of specialised committees, the appointment of independent members additional to the supervisory body or additional authorised managers to facilitate the day-to-day management.

Notwithstanding all the above, regardless of the organisational and operational structure in which the institution or group is integrated, the implementation of Circular 552 must enable the institution to maintain complete control over its activities and the risks to which it is or may be exposed, including the intragroup activities and risks and regardless of the location of the risks.

Now, having clarified the rationale behind the application of the proportionality principle, one could question the new mechanism introduced by Circular 552 to achieve compliance by (M)FHC, i.e. the mutual agreement with the competent authority.

A first question mark can be raised on the expression “mutual agreement”, clearly borrowed by private law. In private law, the parties are given instruments and powers to influence the results of their essentially private activity. Less obvious is the use of such an expression within the framework of the regulatory powers attributed to supervisory authorities whose acts, in contract, are expected to have unilateral and prescriptive content. Indeed, the legal nature of the documents drawn up by national competent authorities carrying out supervision of credit companies - such as, for example, the Circular 552 itself - is a largely controversial topic in the European legal doctrine, where some have come to the recognition of the status of substantially full and autonomous legislation.

Second question mark is whether Circular 552 exceeds the perimeter of CRD allowing this level of bilaterality in the establishment of proportional measures. While it goes without saying that under normal practice, the measures are indeed discussed by the applicant with the competent supervisory authority, should neverthless any rights be granted to the applicant to “negotiate” those measures?

For sake of completeness, it should be recalled that Articles 34-1 to 34-3 of the LFS detail the conditions of the approval process, whose objective is to ensure that (M)FHCs can be held directly responsible for compliance with consolidated prudential requirements stemming from CRD V and CRR.

As such, (M)FHCs subject to approval must submit the application file and the supporting documentation to the competent authority in charge of the supervision of the group on a consolidated basis and, where the (M)FHC is established in a different Member State, also to the competent authority of the Member State where the (M)FHC is established. In this latter case, both the consolidating supervisor and the competent authority of the Member State where the (M)FHC is established are expected to reach a joint decision to approve the (M)FHC.

Where the (M)FHC is established in the EU and is part of a significant group subject to the direct supervision of the European Central Bank (ECB), the application file and the supporting documentation must be submitted to the ECB exclusively, as competent authority to grant the approval.

There are situations whereby a (M)FHC is not mandated to undergo this approval procedure: in circumstances where it does not engage in taking management, operational or financial decisions affecting the group or its subsidiaries that are institutions or financial institutions - subject nevertheless to the fulfilment of a number of predefined conditions - (M)FHC may be exempted. In this case, a (M)FHC may apply for an exemption from approval by providing the supporting documentation to the competent authorit(y)(ies).