The close link

Supervisors may refuse to issue authorization or might withdraw it if the ownership and control is a ‘close link’ one, hindering efficient supervisory work. Close linkis defined by the directive as the contact when there is a participation or control rela-tionship between two natural or legal persons.

Participation relationship exists if one person has permanent ownership over 20 per cent of the capital or voting rights (directly or via control). Controlrelationship is the parent-subsidiary (according to the directive on accountancy) or similar contact. The parent-subsidiary contact is detailed in the accountancy regulation and makes it compulsory to elaborate a consolidated financial report. In the sense of the accountancy directive, that undertaking controls another one which

– owns the majority of voting rights

– is in the position to nominate or recall a majority of managers and which is at the same time a shareholder or member of the undertaking

– according to the statute or contract has a dominant influence in the undertaking and at the same time is a shareholder or member of the undertaking

– solely on the basis of its votes the majority of the leaders was nominated (and there is no other parent company which would satisfy the previous 3 points) and at the same time is a shareholder or member of the undertaking

– with voting rights acquired through an agreement or contract controls the taking on its own and at the same time is a shareholder or member of the under-taking.

Similarly, it is a control relationship and the undertaking can be compelled to sub-mit a consolidated financial report if it is in a participation relationshipwith anoth-er undanoth-ertaking and ovanoth-er and beyond

– it practically has a dominant influence in the other undertaking or

– they are managed on a unified basis because they have a common parent com-pany.

It seems that the person who is able to influence the activity of the institutions will also be determined basically through ownership or membership relation in the future. The decisive difference is the consideration of natural persons, and the addition “similar to that” regarding control relationship, which turns definitions

of accountancy directives into a basis of correlation regarding the strength of the contact, while not making necessary the presence of a participation or member-ship relation.

A close link will be evaluated between two legal entities in a sister relationship, too, if they are in a control relationship with a natural or legal person.

If there is a direct permanent participation or control relationship between two institutions, than there is a close link between them and they form a group. If, however, there is a multiple chain, i.e. the subsidiary has a subsidiary (control rela-tionship) or other participation relations, close link will be “inherited” via the con-trol relation only.This is shown in the figure below:

Similarly, two companies in a sister relation are not in close link if one of them is only in participation relationship with the parent company.

Thanks to the post-BCCI directives, sectoral directives³⁷ all include the provision that supervisory authorities may reject authorization or revoke a licence if owner-ship and controlling (close) links or legal rules in third countries relating entities in close link with them hinder efficient supervisory work. These obstacles may relate

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37Directive 2000/12/EC on credit institutions, Directive 92/49/EEC on non-life insurance, Directive 92/96/EEC on life insurance, Directive 93/22/EEC on investment services and Directive 2001/107/EC on asset management.

to the supply of information, thus it may happen that legal rules restrict the flow of information. The supervisory authority should be informed continuously about close links and about changes in obstacles relating to close links, not only at the time of authorization.

The amendment reflects the lesson of the BCCI case, i.e. the supervisory authori-ty has to see who are those influencing the operation, profitabiliauthori-ty, solvency of the supervised institution, because the supervision of the institution alone is not sufficient.

At the same time the EU directives give the minimum interpretation of the defini-tion of close link, compared to which member states might be much stricter by interpreting other relationships also as close links.

Definition of close link in the British regulation

Definition of close link in Britain is not much different from the definition in the EU directives. The difference is that close link between parent, subsidiary and sister company is accomplished with persons, the instructions, and orders of whom are followed by the institution’s managers.

It is about a parent company or subsidiary, if any of the seven characteris-tics of the controlling relation listed in the EU directive is present and the eighth characteristic is, if a certain person owns a participation of over 20 % of the voting right or capital. Thus certain relations will be differently aggre-gated, when participation relationship is defined also as parent-subsidiary relationship (participation of over 20 % of the voting right or capital). In the ownership chain, however, only the parent-subsidiary relation representing

Participation

controlling relation "spreads" close link, parent-subsidiary relation repre-senting participation does not spreads, just like in the EU directive.

Close link in the German regulation

The German regulation defines close link among natural and legal persons, where directly or indirectly they own 20 % of voting rights or capital, and there is a parent, subsidiary, sister or similar relationship among them.

Practically, they took over the definitions of the directive and they did not strengthen the prescriptions of the directive with enlarging the "list" of the contacts.