Holding companies that are at the head of a group supervised by the supervisory authority on a pooled basis may now require written authorisation from the supervisory authority under the German Banking Act (Kreditwesengesetz, KWG) itself. This is the case if they constitute so-called parent financial holding companies or mixed parent financial holding companies.
1. Who is affected by the authorisation requirement?
At the end of January, the relevant newspapers of the fintech and financial industry were abuzz with the news that BaFin wants to regulate resp. supervise the innovative digital bank N26 more closely. Not only the actual bank, but also the superordinate N26 GmbH should now be under the supervision of BaFin. This shall be the case because also the holding company is to be classified as a financial holding company. But what exactly is a financial holding company and what are the consequences of this classification?
The central regulation in German law is first of all the provision of Section 2f of the German Banking Act (KWG), which was introduced by the so-called German Risk Reduction Act of 9 December 2020. This in turn serves to implement Article 21a CRDV and establishes the authorisation requirement for financial holding companies or mixed financial holding companies at the top of a regulatory group.
The legislative consideration behind the new regulation is that in certain group structures, supervision at the level of the non-licensed parent company can make more sense than mere supervision at the level of the licensed institution. Therefore, it was regulated that such companies require a corresponding licence from the supervisory authority responsible for the supervision of the group – in Germany this is BaFin.
Previously, only a directly regulated CRR institution was responsible for group-wide compliance with certain regulatory obligations if it was itself at the head of a group.
Accordingly, the first two paragraphs of the new Section 2f KWG first establish the authorization requirement of such a financial holding company (since it is usually not already regulated) and then regulate which information must be submitted to which body.
Paragraph 3 then regulates the criteria that must be fulfilled by the company so that a corresponding authorisation can actually be granted.
2. What is a financial holding company?
But which company at the head of a group now qualifies as such a financial holding company? The definition of a financial holding company used to be in the KWG itself. Since the CRD IV Implementation Act, it is now tob e found again at the European level – namely in the so-called Capital Adequacy Regulation (CRR). According to this, a financial holding company is
- a financial institution (also within the meaning of the CRR),
- which in turn is not a mixed financial holding company, and
- whose subsidiaries are exclusively or at least mainly institutions or financial institutions,
- and at least one of these subsidiaries is an institution.
Thus, this complex definition also depends on the definitions of the financial institution as well as the institution as well as the mixed financial holding. These in turn are based on various European regulations and can – in simplified form – be summarised as follows:
- Financial institution is a company that is not an institution and whose main activity is to acquire participations.
- Institution means a credit institution or investment firm.
- Mixed financial holding company means a parent undertaking, not subject to prudential supervision, which, together with its subsidiaries (at least one of which is a regulated entity with its head office in the EU) and other entities, forms a financial conglomerate. The financial conglomerate, in turn, is a group of undertakings that brings together different financial services undertakings (e.g. banks and insurance undertakings) under one roof.
In a very simplified way, one could say that a financial holding company is a company of a group,
- which primarily acquires equity interests and
- whose subsidiaries are at least mainly regulated institutions themselves or in turn acquire mainly participations, inter alia, from regulated institutions.
It is interesting to note that the criterion “mainly” is not (only) numerically measured by whether the majority of the subsidiaries are licensed themselves, but that it also depends on an economic consideration, i.e. on the relevance of the business volume of the institutions among the subsidiaries (due to the participation) on the balance sheet of the holding company.
At the same time, it must not constitute a financial conglomerate in the above sense. Finally, it is necessary that there is consolidated supervision.
3. Admission requirements and exception
A look at the requested documents for the licence application according to Section 2f (2) KWG shows that these do not differ significantly from the requirements for licensing according to Section 32 KWG, which in turn applies to banking businesses and financial services.
Thus, the application must contain in particular the following information:
- A complete presentation of the organisational structure of the group – with clear identification of all parent and subsidiary companies, as well as information on the registered office and type of activity of each company in the group;
- All information required for the assessment of the reliability and professional suitability of the business managers (so-called fit and proper procedure);
- A complete presentation of the internal organisation and distribution of tasks within the Group;
- If part of the group is also a CRR credit institution, also comprehensive information on the so-called “significant participations” (corresponds approximately to participations above 10%).
In particular, it will be interesting which knowledge and experience the supervisory authorities will rely on when assessing this expertise. The same experience that is required of the managers of institutions cannot be demanded here.
BaFin will only grant authorisation if the internal agreements and the allocation of tasks within the group are suitable for controlling all subsidiaries, preventing or defusing resp. resolving conflicts (of interest) within the group and enforcing the strategies defined by the applicant for the group as a whole within the entire group.
Paragraph 4 provides for an exception to the authorisation requirement, if
- the main activity of the parent undertaking in relation to institutions and financial institutions is the acquisition and holding of participations in subsidiaries,
- the applicant is not a settlement entity in the European sense,
- a CRR credit institution as parent company is already responsible for compliance with the obligations on an aggregated basis,
- the applicant is not involved in the management of the business at group level, and
- there is also otherwise no impediment to effective supervision of the Group on an aggregate basis.
In practice, this means that a financial holding company does not need its own authorisation if BaFin can already supervise the group on a consolidated basis via a higher-level CRR credit institution.
4. Permit procedures and ongoing supervision
Pursuant to paragraph 9, BaFin must inform the applicant within four months after receipt of the complete set of appliaction documents, but at the latest within six months after receipt of the application for authorisation, whether the authorisation is granted or refused.
BaFin then continuously monitors whether the applicant also complies with the requirements. For this purpose, BaFin must be provided with all information required for this continuous control.
If the prerequisites are actually no longer met, BaFin may, for example, prohibit the applicant from exercising voting rights in any CRR institution of the group, temporarily designate a CRR institution as the parent company of the group, limit or completely prohibit distributions or interest payments to shareholders, as well as order the applicant to immediately submit a plan to restore the prerequisites.
5. Transitional regime and outlook
The regulations already came into force on 29 December. For existing financial holding companies, there is a transitional arrangement whereby an application for authorisation must be submitted by 28 June 2021, insofar as the requirements had already been met by 27 June 2019.
Against the backdrop of the recent Brexit, the entire regulatory complex is also likely to be of particular interest to holding companies that are now domiciled outside the EEA but provide banking business or financial services in the EU via one or more subsidiaries and are thus not (or no longer) subject to consolidated supervision; depending on the amount of consolidated assets, this may even result in the obligation to establish a European holding company (Intermediate (EU) Parent Undertaking, IPU). The same applies, of course, to third-country holding companies.
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