• PRU 8 PRU 8 GROUP RISK

    • Introduction

      • Guidance

        1. This Chapter deals with management of Group Risk Exposure of an Authorised Person. Group Risk refers to the risk of potential losses incurred by an Authorised Person on account of its relationship with other members of its Financial Group, if it were to be part of one.
        2. This Chapter includes requirements that an Authorised Person implement:
        a. an effective management framework for Group Risk Exposure;
        b. a specified methodology for the calculation of Financial Group Capital Resources and Financial Group Capital Requirements.
        3. This Chapter also includes requirements limiting Financial Group Exposures and restrictions on the ownership or control of Deposit-taking firms.

    • PRU 8.1 PRU 8.1 Application

      • PRU 8.1.1 PRU 8.1.1

        (1) This Section and Section 8.5 apply to an Authorised Person in any Category.
        (2) Sections 8.2 to 8.4 apply only to an Authorised Person in Category 1, 2 or 5.

        • Guidance

          1. Group membership may be a source of both strength and weakness to an Authorised Person. The purpose of Group Risk requirements is to ensure that an Authorised Person takes proper account of the risks related to the Authorised Person's membership of a Group. The Group Risk requirements form a key part of the Regulator's overall approach to prudential supervision.
          2. Section 8.5 imposes important restrictions on the ability of Authorised Persons in Category 3A, 3B, 3C or 4, and Financial Institutions which are not regulated in ADGM, to be a Parent of an Authorised Person in Category 1 or 5, or of a firm carrying on similar activities outside of the ADGM.

      • Requirements by the Regulator

        • PRU 8.1.2

          Upon notice to an Authorised Person from the Regulator, the Regulator will be the consolidated supervisor of a Financial Group to which an Authorised Person belongs. The Regulator may require an Authorised Person forming part of a Financial Group to comply with requirements under PRU on a consolidated basis.

           

        • PRU 8.1.3 PRU 8.1.3

          (1) The Regulator may require an Authorised Person to:
          (a) form a Financial Group with any other entity within its Group; or
          (b) include within its Financial Group any other entity within its Group;
          where the Regulator considers it necessary or desirable to do so in the interests of effective supervision of the Authorised Person.
          (2) An Authorised Person may, for the purposes of this Section, exclude from its Financial Group any entity the inclusion of which would be misleading or inappropriate for the purposes of Financial Group supervision, provided the Authorised Person has obtained the Regulator's prior written approval.
          (3) An Authorised Person must provide to the Regulator, if requested, any of the following information in relation to its Group or Financial Group:
          (a) details as to the entities within the Group or Financial Group;
          (b) the structure of the Group or Financial Group; and
          (c) the systems and controls in place to manage Group Risk.
          Amended on December 20, 2018

          • Guidance

            1. If more than one member of the same Group is subject to an obligation to provide information in respect of a position of the Group or Financial Group, one or more of those Authorised Persons may make application to the Regulator for an appropriate waiver or modification.
            2. For the purposes of Rule 8.1.3, the Regulator would consider a range of factors when requiring an Authorised Person to form a Financial Group. These factors would include regulatory risk factors, including but not limited to, (direct and indirect) participation, influence or contractual obligations, interconnectedness, intra Group Exposures, intra Group services, regulatory status and legal framework.

    • PRU 8.2 PRU 8.2 Systems and controls requirements

      • PRU 8.2.1 PRU 8.2.1

        An Authorised Person in Category 1, 2 or 5 that is a member of a Group must establish and maintain systems and controls for the purpose of:

        (a) monitoring the effect on the Authorised Person of:
        (i) its relationship with other members of its Group;
        (ii) its membership in its Group; and
        (iii) the activities of other members of its Group;
        (b) monitoring compliance with Financial Group supervision requirements below, including systems for the production of relevant data;
        (c) monitoring funding within the Group; and
        (d) monitoring compliance with Financial Group reporting requirements.

        • Guidance

          For the purposes of the above requirement, an Authorised Person may take into account its position within its Group. For instance, it would be reasonable for a small Authorised Person within a larger Group to place some reliance on its Parent to ensure that appropriate systems and controls are in place.

      • PRU 8.2.2

        (1) An Authorised Person must have systems and controls to enable it to determine and monitor:
        (a) its Financial Group Capital Requirement; and
        (b) whether the amount of its Financial Group Capital Resources is, and is likely to remain, greater than the amount of its Financial Group Capital Requirement.
        (2) Such systems and controls must include an analysis of:
        (a) realistic scenarios which are relevant to the circumstances of the Financial Group; and
        (b) the effects on the Financial Group Capital Requirement and on the Financial Group Capital Resources if those scenarios occurred.

    • PRU 8.3 PRU 8.3 Financial Group Capital Requirements and Financial Group Capital Resources

      • PRU 8.3.1

        (1) The other Rules in Section 8.3 do not apply to an Authorised Person if:
        (a) the Authorised Person's Financial Group is already the subject of Financial Group prudential supervision by the Regulator as a result of the authorisation of another Financial Group member;
        (b) the Regulator has confirmed in writing, in response to an application from the Authorised Person, that it is satisfied that the Authorised Person's Group is the subject of consolidated prudential supervision by an appropriate regulator; or
        (c) except where the Regulator has directed the inclusion of an entity pursuant to Rule 8.1.3, the percentage of total assets of Authorised Persons and Financial Institutions in the Financial Group is less than 40% of the total Financial Group assets.
        (2) If an Authorised Person receives confirmation in writing from the Regulator in accordance with (1)(b), it must immediately advise the Regulator in writing if the circumstances upon which the confirmation was based change.

      • PRU 8.3.2 PRU 8.3.2

        An Authorised Person must ensure at all times that its Financial Group Capital Resources, as calculated in Rule 8.3.4, are equal to or in excess of its Financial Group Capital Requirement as calculated in Rule 8.3.3.

        • Guidance

          If an Authorised Person breaches Rule 8.3.2, the Regulator will take into account the full circumstances of the case, including any remedial steps taken by another regulator or the Authorised Person, in determining what enforcement action, if any, it will take.

      • Financial Group Capital Requirement

        • PRU 8.3.3

          (1) An Authorised Person in Category 1, 2 or 5 must calculate its Financial Group Capital Requirement by applying the accounting consolidation method, which calculates the Capital Requirement of the Financial Group based on the Financial Group's consolidated financial statements, and using applicable prudential Rules as set out in these Rules.
          (2) For the purposes of this Rule, the consolidated financial statements of the Financial Group must be prepared in accordance with International Financial Reporting Standards.

      • Financial Group Capital Resources

        • PRU 8.3.4 PRU 8.3.4

          (1) An Authorised Person in Category 1, 2 or 5 must calculate its Financial Group Capital Resources by applying either of the following methods, excluding those amounts referred to in Rule 8.3.5:
          (a) the accounting consolidation method, which calculates the Capital Resources of the Financial Group based on the Financial Group's consolidated financial statements; or
          (b) the aggregation method, which is the sum of:
          (i) the Capital Resources of the Parent of the Financial Group;
          (ii) subject to (2), the Capital Resources of any Authorised Persons and Financial Institutions included in the Financial Group; and
          (iii) the Financial Group's proportionate share of Capital Resources in Financial Institutions not included in the Financial Group in which any member of the Financial Group has a participation.
          (2) For the purposes of (1)(b)(ii), an investment by one Financial Group member in another must not be included.

          • Guidance

            The calculation of Financial Group Capital Resources is subject to the provisions in Part 4 of Chapter 3.

        • PRU 8.3.5 PRU 8.3.5

          When calculating the Financial Group Capital Resources of a Financial Group, an Authorised Person must not include Capital Resources or Adjusted Capital Resources (as the case may be) of subsidiaries or participations of that Financial Group to the extent that those Capital Resources or Adjusted Capital Resources:

          (a) exceed the entity requirement in respect of that Subsidiary or participation, calculated in accordance with Rule 8.3.3; and
          (b) are not freely transferable within the Financial Group.

          • Guidance

            1. Because the Financial Group Capital Requirement set out in Rule 8.3.3 includes Capital Requirements in respect of Group entities, Capital Resources may be included in the calculation of Financial Group Capital Resources to the extent of those requirements. Capital that is surplus to those requirements is, however, subject to an additional condition before it may be taken into account for the purposes of Financial Group capital adequacy.
            2. In general, Capital Resources or Adjusted Capital Resources are considered not to be freely transferable if they are subject to a legal or constructive limitation on their transferability, whether that transfer would be made by dividend, return of capital or other form of distribution. Examples of relevant limitations might include obligations to maintain minimum Capital Requirements to meet domestic solvency requirements, or to comply with debt covenants.

        • PRU 8.3.6

          Deductions for Qualifying Holdings under Section 3.14 may be calculated based on the Group's total T1 and T2 Capital.

    • PRU 8.4 PRU 8.4 Financial Group Concentration Risk limits

      • PRU 8.4.1

        Subject to IFR Rule 5.4.15, an Authorised Person in Category 1, 2 or 5 must not incur any Financial Group Large Exposure, including the Financial Group's PSIAus, that exceeds 25% of its Group's Tier 1.

      • PRU 8.4.2

        An Authorised Person in Category 1, 2 or 5 must ensure that the sum of its Financial Group Large Exposures, including the Financial Group's PSIAus, to a Counterparty or group of Closely Related Counterparties does not exceed 800% of its Financial Group's Tier 1.

    • PRU 8.5 PRU 8.5 Restrictions on ownership or control

      • Guidance

        By Rule 8.1.1(1), this Section applies to an Authorised Person in any Category.

      • Parents of Category 1 and 5 Authorised Persons

        • PRU 8.5.1

          (1) No entity other than one of the following may be the Parent of, or any of the Parents of, an Authorised Person in Category 1 or 5:
          (a) another Authorised Person in Category 1 or 5; or
          (b) an Authorised Person with a Financial Services Permission to carry on the activities of Accepting Deposits.
          (2) An entity other than one referred to in (1)(a) or (b) may be the Parent of an Authorised Person in Category 1 or 5 where the ultimate, or any intermediate, Parent is an Authorised Peson of the type specified under 1(a) or (b).

      • Restrictions on Category 3A, 3B, 3C and 4 Authorised Persons

        • PRU 8.5.2

          (1) An Authorised Person in Category 3A, 3B, 3C or 4 must not, subject to (2), be a Parent of an entity that:
          (a) is an Authorised Person in Category 1 or 5 or an Insurer; or
          (b) carries on activities that would, if conducted in the ADGM, constitute Accepting Deposits or Managing a Profit Sharing Investment Account which is a PSIAu.
          (2) An Authorised Person in Category 3A, 3B, 3C or 4 may own or control an entity referred to in (1) where it is itself a Subsidiary of:
          (a) a Financial Institution with a Financial Services Permission to carry on any one or more of the activities specified in (1)(b); or
          (b) an Authorised Person in Category 1 or 5 or an Insurer.