Heterogeneous Financial Conglomerates (HFC)
The Principles for the Supervision of Financial Conglomerates was jointly released in 1999 by the Basle Committee on Banking Supervision (Basle Committee), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS). According to the definition of heterogeneous financial conglomerates (HFC) in the Principles for the Supervision of Financial Conglomerates, a financial holding company refers to financial conglomerates with regulated entities under the same control that offer financial services (as sole or primary business) in at least two businesses: banking, insurance, and securities. For such a conglomerate, financial services are the primary business and its regulated entities engage to a significant extent in at least two of the activities of banking, insurance, and securities business, and the capital adequacy requirements vary for each type of business.
According to the European Commission's Financial Conglomerates Directive (released in 2003), a financial conglomerate is a group that meets the following five conditions:
1. A regulated entity is at the head of the group or at least one of the subsidiaries in that group is a regulated entity.
2. If there is a regulated entity at the head of the group, that entity is a parent undertaking of an entity in the financial sector, an entity that holds a participation in an entity in the financial sector, an entity linked with an entity in the financial sector by a relationship in which they are managed on a unified basis pursuant to a contract concluded between them or provisions in their memorandum or articles of association, or where their administrative, management, or supervisory bodies consist for the major part of the same persons in office.
3. If there is no regulated entity at the head of the group, the group's activities occur mainly in the financial sector.
4. At least one of the entities in the group is within the insurance sector and at least one is within the banking or investment service sector.
5. The consolidated or aggregated activities of the entities in the group within the insurance sector and of the entities within the banking and investment services sector are both significant.
As per the definition, a subgroup that meets these conditions should also be considered a financial conglomerate. This definition is the most complete and legally binding definition ever made for financial conglomerates.
So far, there is no specific definition of financial holding companies in any Chinese laws and regulations. The Memorandum on Cooperation and Separation of Duties in Financial Regulation5 created between the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC) in June 2004 is the only government paper in which "financial holding companies" are referred to. In Section 8, it states the following:
For the purpose of regulation of financial holding companies, regulatory authorities should comply with the principle of operations and oversight based on separation of activities: bring the group company of a financial holding company under the supervision of appropriate regulatory agencies according to the nature of the primary business of such a group company and cause affiliates and activities of the financial holding company to be supervised separately according to the nature of activities.
The memorandum also brings under regulation the financial holding groups coming into being out of industrial capital-related investment activities and urges effort in control, coordination, and studies (on regulatory policy, standards, and practices) for such financial holding groups. But this document neither gives any definition of financial holding companies nor deliberates how to regulate the financial holding groups coming into being out of industrial capital-related investment activities.
The institutional and regulatory framework remains on the principle of operations and oversight based on separation of activities. A financial holding company serves the purpose of diversification and integration of activities in the framework of a group. In reference to the internationally accepted definition, and in consideration of the realities in China, financial holding companies are expected to engage in at least two kinds of activities in the financial sector. Therefore, the definition of financial holding companies should be as follows: Conglomerates that, in the form of holding companies, have their principal assets to a significant extent in at least two of the banking, insurance, securities, trust, and other fields in the financial sector. Specifically, such a conglomerate is a bank holding company (BHC) if all its subsidiaries are commercial banks; a securities holding company, if all its subsidiaries are engaged in investment banking; and an insurance holding company if all its subsidiaries offer insurance services. Strictly speaking, bank or securities holding companies are not financial holding companies. For example, conglomeration occurs in a securities firm if it establishes multiple subsidiaries and engages them separately in securities brokerage, asset management, investment consulting, venture capital, and other services. The emerging conglomerate, referred to as a securities holding company, is merely an advanced form of an independent securities firm.