Heads up for Holding Companies and Inter-Group Relationships
By Tim Street
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In case you were wondering how far the change of one word; that is‘ Services’ to‘ Conduct’, may affect your business, this bulletin considers the need to raise awareness for groups containing regulated entities. You may have thought of just putting policy statement PS 13 / 5 into your compliance folder and moving on, but the implications for a growing organisation could be substantial. The practical relationship between a holding company, other group companies or inter-group companies with a regulated subsidiary or sibling seems to appear, at times, dictatorial and uncertain. There appears to be doubt. The FCA under their refined authority is therefore intending to clarify this and apply greater focus to the actions of, and interactions with, close links.
The FCA‘ do not wish to fetter their discretion to make use of the powers in parallel with, or before other regulatory tools’, so enquiry and investigation may start at a different level than the one at which you anticipated. Within PS13 / 5 are two annexes. The first lists‘ possible scenarios in which the FCA may consider exercising the power of direction’ and the second‘ possible directions which the FCA may consider making’. So plenty of choice exists for the style of intervention!
Rather than reiterate the scenarios of the first annex perhaps posing questions may be more thought provoking, for example:
• Is a non-regulated holding company setting financial targets which conflict with the regulated entity’ s conflicts of interest evaluation( e. g. excessive sale targets / performance related remuneration)?
• Is the non-regulated holding company paying insufficient regard to the regulated entity’ s consumer treatment regime?
• Has the non-regulated holding company ensured adequate protection by the regulated subsidiary of client assets?
• Are the non-regulated holding company directors fit, proper or suitable to be overseers of a regulated entity?
• Do dominant non-regulated holding board directors obstruct the independence of their regulated subsidiary board?
• Is an unregulated sibling company likely to cause concern to group harmony?
• Has the parent company displayed poor conduct in the past?
Our experience shows that there may be a few‘ red ears’ with some of these issues and just to make sure that you are still following the script, a parent company may be required to‘ pay redress for claims arising from professional negligence or firms providing unsuitable advice’, which appears to be in addition to any indemnity insurance recovery.
In the second annex the FCA may consider making more structured directions, for example:
• Ensuring the group entities( containing a regulated entity) are being fair to consumers.
• Requiring holding companies to bolster SYSC resources.
• Requiring the holding company to intervene if the regulated entity is selling inappropriate products.
• Require an undertaking from the holding company to withhold senior management bonuses until any redress is quantified.
• Requiring the holding company to appoint an independent board of directors. 5
Group wide awareness of good governance, as well, must be evident with a regulated subsidiary.