RWA Newsletter Newsletter July 2013 | Page 5

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 .