Category Archives: Corporate

CRD V: Proposals for bank intermediate EU parent undertakings – retaliation to US measures?

On 23 November 2016, the European Commission (EC) outlined proposals to amend the Capital Requirements Regulation (EU/575/2013) (CRR) and the Capital Requirements Directive (2013/36/EU) (CRD) (and together referred to as CRD IV).  These proposals are likely to form part of the next version of these measures i.e. CRD V.  Links to the proposals are here (CRR) and here (CRD).

One proposed CRD V measure is a requirement for non-EU banking groups (including US groups) operating in the EU to consolidate their subsidiaries under a single “Intermediate Parent Undertaking (IPU)” in the EU, which will need to be separately authorised and capitalised.  I discuss this and similar measures introduced by the US for non-US banking groups operating there.  I also consider the impact of the proposals in relation to Brexit.

EC Proposals

The EC proposals would see a new Article 21b added into CRD to cover IPUs, which would stipulate that:

  1. if a third country group (i.e. a non-EU group) has two or more institutions (i.e. banks or investment firm subsidiaries) in the EU, it must have an EU-based IPU above them;
  2. such an IPU must be separately authorised and be subject to EU capital requirements or be an existing bank or investment firm authorised under CRR;
  3. there must be a single IPU for all subsidiaries that are part of the same group; and
  4. the threshold for this requirement to apply would be if: (a) the total value of assets in the EU (both subsidiaries and branches) of the non-EU group is at least Euro 30 billion; or (b) the third country group is a non-EU G-SII (i.e. global systemically important institution or bank – see list maintained by the FSB).

These proposals would require non-EU banking groups to hold EU bank and broker-dealer (investment firm) subsidiaries through a single EU-based IPU that would be subject to capital, liquidity, leverage and other prudential standards on a consolidated basis.

The IPU requirement may have been added late into the draft CRD V proposals and it seems to have been included without following the usual discussion and impact assessment process for such measures.  It has been suggested that this is a retaliatory action to similar measures introduced by the US (discussed below).  It is possible that EU Member States will decide to alter or even drop this measure before CRD V is adopted into law.

Possible Effect of the EC Proposals on US Banking Groups

Due to strict limitations on transactions between a US Federal Deposit Insurance Corporation (FDIC)-insured bank (and its subsidiaries – the “bank chain”) on the one hand and its bank holding company parent and sister companies (the “non-bank chain”) on the other, the large US bank holding companies operate their US broker-dealer subsidiaries as sister companies of their FDIC-insured banks and often do the same with their non-US broker-dealer subsidiaries.

Such large US bank holding companies operate in the EU through branch offices of their FDIC-insured banks as well as through locally-incorporated bank subsidiaries of those banks and separate (non-bank chain) broker-dealer subsidiaries.

To comply with the EC poposals on IPUs, a US bank holding company would need to transfer its EU bank subsidiaries so that they and the EU broker-dealer subsidiaries become indirect subsidiaries of the parent bank holding company via a single EU IPU. Doing so, could severely limit transactions between the US FDIC-insured bank including its EU branch offices and the EU bank subsidiaries (as well as the other EU subsidiaries) of the US bank holding company.

All this is likely to mean that US banking groups may have to totally rethink their existing holding structures in Europe – they may already be doing so due to Brexit (see below).

US Intermediate Holding Company Rule

Title 12 of the US Code of Federal Regulations (12 CFR Part 252.153) introduced a similar rule in March 2014 requiring  that any foreign banking organisation with US non-branch assets (i.e. subsidiaries) of USD 50 billion or more must establish a US intermediate holding company (US IHC) or designate an existing subsidiary as such.

As you can see, the US IHC rule has a much higher threshold (USD 50 billion) than that of the corresponding EC proposal (Euro 30 billion) and the US threshold only considers assets of subsidiaries, whereas the EC proposal also counts branch assets.

The US IHC rule was viewed as addressing the capital position of large US broker-dealer subsidiaries of non-US banking groups because such subsidiaries were not otherwise subject to US prudential banking regulations including on risk and leverage.  In the EU however, broker-dealer (investment firm) subsidiaries of US banking groups are currently subject to Basel-based prudential requirements.


The EC may or may not have had Brexit in mind when it came up with this proposed IPU measure.  Post-Brexit, depending on any negotiated arrangements, the UK will be outside the EU and thus, on the face of it, UK banking groups will be in the same boat as other non-EU groups with regard to the CRD V proposals and may need to establish IPUs in the EU to hold their EU subsidiaries.  Some UK and non-EU banking groups that are not G-SIIs may review the scope of their activities in the EU in light of these requirements.

Also, from the point of view of US and other non-EU banking groups who currently operate in Europe out of the UK, the need for a separately capitalised holding company in Frankfurt or Luxembourg, for example, could make London a less attractive headquarters for European operations.  Given that most banking groups are currently looking at their structures in light of Brexit, the EC proposals on IPUs will add a further layer of complexity to these considerations.

Next Steps and Conclusion

The EC intends that the CRD V proposals will apply two years after the legislative text is finalised. This would take us well into 2019 at the earliest and therefore, the IPU measure is unlikely to be applicable when the UK leaves the EU – assuming that the UK invokes Article 50 of the Lisbon Treaty in early 2017 and leaves the EU in the two year period provided.

The EC proposal for IPUs will probably be welcomed by European banking groups that have found themselves on an uneven playing field with US rivals.  However, most banking groups are reluctant to hold multiple pools of capital around the world, overseen by different regulators, which they see as less efficient than a centrally managed capital pool regulated by their home bank regulatory authority.

Whether or not the EC proposals on IPUs are adopted into law as they are currently drafted, there does seem to be a growing regulatory trend towards a fragmentation in financial rules, as key jurisdictions like the EU and the US seek to assert control and seem comfortable taking tit-for-tat action even at the risk of duplicating or complicating internationally-settled regulatory measures.




Persons with Significant Control (PSC) Register under proposal for UK-established companies

The Small Business, Enterprise and Employment Bill (sponsored by Vince Cable – the Business Secretary), is currently going through parliamentary processes in Westminster.  When it is passed, this Bill will become an Act and will seek to make various changes to corporate and other legislation applicable to companies established in the UK.book_hardcover_3

One of these changes will be to introduce the requirement for companies to maintain, along with other statutory registers, a Register of Persons with Significant Control (PSC) over the company and to make this public subject to some exclusions.  Duties will be Imposed on companies to gather information and on others to supply the information to enable the PSC register to be kept.  These changes will be made by introducing a new Part 21A to the (UK) Companies Act 2006Current proposals are for this to apply from January 2016 with filings from April 2016.

Who is a PSC?  For these purposes, a person with significant control over a company is defined as an individual that either alone or with other share or right holders meets one or more of these conditions:

  • holds, directly or indirectly, more than 25% of the shares (or right to share in the capital or profits where no share capital);
  • holds, directly or indirectly, more than 25% of the voting rights;
  • is entitled, directly or indirectly, to appoint or exercise a right to appoint or remove a majority of the board of directors;
  • has the right to exercise, or actually exercises, “significant influence or control” over the company. An expert working group is being formed to draft statutory guidance on this;
  • trustees of a trust or the members of a firm that is not a legal person meet one or more of the other specified conditions in their capacity as such or would do if they were individuals.

Exclusions.  The new Part 21A will apply to all UK-established companies, other than listed public companies (issuers) to which Chapter 5 of the Disclosure and Transparency Rules apply.  The UK government is expected to allow the suppression of information on the PSC register from public disclosure in certain limited circumstances e.g. protection to individuals at serious risk of violence or intimidation arising from the company’s activities.

High Court in England: indemnity claims in a Share Purchase Agreement – no implied term of accuracy

In a recent case, Bir Holdings Ltd v Mehta [2014] EWHC 3903 (Ch) it was held in the context of a Share Purchase Agreement (SPA) that indemnity claims were not subject to an implied term of being “accurately calculated and based on factual substance” (as had been argued).

The judgment highlights the importance of expressly setting out the mechanics and requirements in an SPA in relation to making an indemnity claim.  If there is a requirement for all claims to be supported by written evidence, this should be expressly stated as should any mechanics for the seller to dispute a claim.


The case arose from the sale of shares in a company, Quinton House Ltd, which ran a nursing home near Stratford on Avon.  Under the terms of the SPA, the buyer paid part (£250,000) of the purchase price (£687,500) into a retention account in respect of any Relevant Claims (defined as: “a claim under clause 5 [warranties], 6 [tax covenants] or 7 [specified indemnities] or Schedule 6 [completion accounts] of the contract”.)  There was no requirement in the SPA for the buyer to substantiate any such claims, nor was there a mechanism for the seller to dispute the claims made from the retention account.

The buyer subsequently obtained payments from the retention account in relation to claims.  The seller disputed these payments, alleging that in order to give efficacy to the agreement, there was an implied term that any payment from the retention fund had to be substantiated by the buyer.  Therefore, unusually, the claimant in this case was the seller and the defendant was the buyer.

Held: The judge (HHJ David Cooke) rejected the argument about there being any implied term.  He held that the mechanics of the retention account in the SPA were intended to be favourable to the buyer by allowing him to deduct amounts without prior justification.  Since this put the buyer in a commercially advantageous position, it would be inconsistent to imply a requirement on the buyer to accurately substantiate its claims.  He noted that this was especially so since a court has no power to improve the bargain the parties actually made, or to decide what it would have been reasonable for them to agree in the circumstances.

For the case click here (requires subscription).  See especially paragraphs 7 and 24 to 27.