Czech Republic: new rules for financial conglomerates

New rules on financial conglomerates are to be introduced into Czech law, implementing the EU Financial Conglomerates Directive. The specified implementation date for this directive was 11 August, 2004.

A financial conglomerate is a group of companies that:

• includes at least one company from the insurance sector
• includes at least one company from the banking or investment services sectors
• has significant cross-sectoral financial activities that exceed specified thresholds

The rules will mean that financial conglomerates are supervised on a group-wide, cross-sectoral basis. This is supplementary to the existing sectoral supervision of the banks, insurance companies or investment services companies which may be part of such a conglomerate. Supervision will be coordinated:

• where the conglomerate is headed by a bank, insurance company or investment services company, by the regulatory authority for that company,
• where the conglomerate is headed by a company other than a bank, insurance company or investment services company, by the authority responsible for supervising one of its subsidiaries (determined by special rules)

Whenever a sectoral regulatory authority identifies that one of the companies in its sector is part of a financial conglomerate, administrative proceedings are begun to identify the conglomerate. All the companies in a conglomerate that is formally identified by the proceedings have to make public the fact that they are part of the same conglomerate.

The new rules for conglomerates include:

• minimum solvency requirements, aimed at preventing use of the same capital more than once as a buffer against risk in different parts of the conglomerate and to prevent down-streaming by parent companies, where they issue debt and than use the proceeds as equity for their subsidiaries
• rules on proper concentration of risk at group level and appropriateness of intra-group transactions
• rules on suitability and professionalism of the management
• rules on appropriate risk management and internal control systems
• sanctions (in the form of administrative fines) for non-compliance

Law: draft Financial Conglomerates Act (Senate reading stage). Date of coming into force not yet known

For more information about the new draft rules on conglomerates, contact Michal Smrek at [email protected] or on +420 296 798 850 or Helena Hailichova at [email protected] or on +420 296 798 887.