EBA peer review report on ESA’s guidelines on qualifying holdings

Background

The EBA periodically organises and conducts peer reviews of the activities of competent authorities (the CAs) through an ad hoc peer review committee (the Committee). The purpose is to strengthen the consistency and effectiveness of supervisory outcomes. The CAs from 27 EU Member States, the ECB - as competent authority in the SSM - and 2 EEA countries took part in the review. The monitored areas comprised:

• The application of the guidelines regarding (a) acting in concert; (b) significant influence, (c) indirect acquisition of qualifying holdings; and
• The assessment criteria of (a) reputation of the proposed acquirer; (b) financial soundness and (c) selected aspects of the criterion on money laundering and terrorist financing risk.

The report is based on a self-assessment questionnaire completed by the CAs.

Results

CAs are expected to notify the ESAs of their intention to apply Guidelines or to give reasons for not doing so ('comply or explain principle'). According to the review conducted three years after such notifications, a large majority of CAs has applied the guidelines fully or largely.  This is a big step towards the convergence of assessment practices of proposed acquisitions or increases of qualifying holdings across the EU.

A table summarising compliance, from 'fully applied' (all assessment criteria are met without any significant deficiencies) through 'largely applied' (some of the assessment criteria are met with some deficiencies not affecting the overall effectiveness of the CA) and 'partially applied' (some of the assessment criteria are met with deficiencies affecting the overall effectiveness of the CA and leaving some material risk unaddressed) to 'not applied' provides a useful overview.

Acting in concert

CAs predominantly apply the guidelines regarding the notion of 'acting in concert' which refers to persons who decide to acquire or increase a qualifying holding in accordance with an explicit or implicit agreement between them. However, the examination of the factual situation and definitions of the notion of ‘acting in concert’ in national law may still contribute to some divergence of practices.

Significant influence

The guidelines regarding the 'significant influence' (of the acquirer over an entity’s management even though its shares or voting rights are below the usual threshold for the assessment of suitability) are generally applied in a uniform manner. Because of the case-by-case assessment by the CAs, there may still be some divergent practices.

Indirect acquisition of qualifying holdings

The feedback of the CAs on the 'multiplication criterion', ie the method by which holdings in a corporate structure are multiplied to establish whether there is an acquirer of a qualifying holding in the corporate chain, thus achieving a 'look-through' to an indirect acquirer, was positive. It operates by multiplying the holdings across the corporate chain (eg if a person holds 20%in an entity that holds 50%of shares in a credit institution that would amount to an indirect holding of 10%). If the 10% threshold is reached the approval requirement is triggered for that person.

Using the 'multiplication criterion' brought consistency and convergence of practices in the EU. However, four unspecified CAs did not yet fully apply the criterion. From the overview table and the 2017 compliance intentions these appear to be from the Czech Republic, Estonia, Italy and Poland.

Notification and assessment of proposed acquisition

A significant proportion of the CAs fail to promptly communicate with the prospective acquirer as to the completeness of the application. The overall length of the procedure, including the pre-notification contact that many CAs encourage, varies between two months and one year. In the case of large and complex transactions, the timeframe is particularly long.

Assessment criteria

All CAs assess the reputation criterion. Some of the CAs noted that the principle of proportionality does not apply to the assessment of reputation.

CAs also generally apply the financial soundness criterion. The Committee noted that the Guidelines could provide more guidance on the content and assessment of the viability of the business plan to support the acquisition.

All CAs assess the money laundering (ML) and terrorist financing (TF) criterion. However, the practices vary in respect of the intensity and scope. Some CAs conduct an AML/CTF assessment only when there are reasonable grounds to suspect ML/TF activities, leading the peer review committee to state that "all CAs should engage further in the assessment of the [ML/TF] criterion". There is also a lack of common understanding among CAs of what constitutes an uninterrupted paper trail and what amounts to 'reasonable grounds' for suspecting ML/TF activities.

Suggestions going forward

In the light of the findings, the Committee suggests the following improvements to the Guidelines:

1. Revision and enhancement of the guidelines regarding the criterion on ML/TF risk;
2. Additional guidance on the assessment of large and complex acquisitions, including – but not limited to – special acquirers like private equity funds, with multiple direct and indirect acquirers or acquirers acting in concert;
3. Review of the guidance on the application of the principle of proportionality, in particular in such complex cases; and
4. Review and improvement of the guidance on the content of documents and information to be provided, in particular of the business plan, to speed up the pre-application phase

Read the full EBA report here.

The 2017 Joint Guidelines Compliance Table setting out the NCA's intentions to comply with the Guidelines can be found here.