Prudential Regulation Authority Rulebook

6.1

These Guidelines complement the Delegated Regulation in respect of related undertakings, including participations. They cover the identification of related undertakings and their treatment both for capital resources and capital requirements purposes.

6.2

Guidelines 1 and 2 address the identification of related undertakings and participations. Firms should consider both shareholdings and the existence of dominant or significant influence when identifying related undertakings. This should not be considered a static assessment; firms should have in place procedures to identify and update their position where there are changes to shareholdings or the relationship between the firm and other entities, which might lead to the creation, or removal of, dominant or significant influence.

6.3

Firms should consider both direct and indirect holdings when identifying related undertakings.

6.4

The Delegated Regulation sets out tests a firm must be able to meet before an equity investment in a related undertaking can be considered strategic. Firms should follow Guideline 3 when seeking to demonstrate that these tests are met and be able to provide credible supporting evidence set out in paragraph 1.26 of the Guideline. In particular, the PRA draws firms’ attention to the need to demonstrate that the value of the equity investment is likely to be materially less volatile than other equities. Firms should justify the selection of equities used for comparison.

6.5

Firms should observe Guidelines 4 and 5 which support the carrying out of the calculations required by Article 68 of the Delegated Regulation. Where a deduction from own-funds is necessary, and where a straightforward application of Article 68(5) is not possible, firms should follow Guideline 6 to identify the tier of own-funds to which the adjustment should apply.

6.6

Guidelines 7 to 9 set out how firms should reflect related undertakings in their SCR calculations, whether those calculations are performed using the standard formula or an internal model. When applying the standard formula to related undertakings and participations, firms should have regard to the relevant assumptions underlying the standard formula¹⁴. The PRA regards the assumption that the value of an equity investment cannot fall below zero as particularly relevant where a related undertaking is valued on the adjusted equity method; or where any commitment by an insurance firm to provide support to a related undertaking is not captured by the counterparty default module. In addition, when a firm has identified a related undertaking where it does not hold an equity investment or its holding is a relatively small percentage, firms should consider whether the equity investment is representative of its exposure to that related undertaking.

6.7

In relation to paragraph 1.40 of Guideline 9, firms should also refer to supervisory statement SS6/15¹⁵ where the firm calculates its solo-level SCR using an internal model.