Is the relation between a company and its directors as they are indicated in the company’s structure (irrespective of their number and irrespective if they are executive or non-executive directors) an indicator of control? Would it thus lead to identify a "single risk" and therefore to the creation of a group of connected clients? ?
According to Article 4(1)(39)(a) of Regulation (EU) No 575/2013 "group of connected clients" means any of the following: (a) two or more natural or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others; (b) two or more natural or legal persons between whom there is no relationship of control as described in point (a) but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter funding or repayment difficulties.
It is unclear whether, in case for example company A has as shareholders companies B1, B2 and B3, and Companies B1, B2 and B3 have as shareholders companies C1, C2, C3, C4 etc..., and each of the above companies have different entities as directors, i.e. W, X, Y and Z, then all of the above (i.e. A, B1, B2, B3, C1, C2, C3, C4, W, X, Y, and Z) this should be treated as single risk and form one group or not.
According to the companies’ memorandum and Articles of association, the directors (irrespective of their number and/or if they are executive / non-executive directors) have a clear power to direct the activities of the companies and make decisions on crucial financial transactions, thus controlling the companies’ financial viability.
We considered the cases described in part I, section B, “Interpretation of control”, paragraph 30, of the "Guidelines on the implementation of the revised large exposure regime" dated 11/12/2009. However, the GLs mentioned in the question are in the process of being revised (see EBA´s consultation paper EBA/CP/2016/09, 26 July 2016.
The notion of “control” according to Article 4 (1) (39) (a) CRR is defined in Article 4 (1) (37) CRR and comprises the relationship between a parent undertaking and a subsidiary as defined in a specified accounting framework, or a similar relationship between any natural or legal person and an undertaking. In this regard, there are three different cases that should be considered by institutions in their assessment of the existence of a control relationship between clients:
(1) In relation to clients that prepare their consolidated financial statements in conformity with the national rules transposing Directive 2013/34/EU, the institution should rely on the control relationship between a parent undertaking and its subsidiaries within the meaning of Article 22(1) and (2) of that directive. As such the institution should group clients accordingly on the basis of their clients’ consolidated financial statements.
(2) In relation to clients that prepare their consolidated financial statements in conformity with the international accounting standards adopted by the EU Commission in accordance with Regulation (EC) No 1606/2002, the institution should rely on the control relationship between a parent undertaking and its subsidiaries within the meaning of those accounting standards. As such the institution should group clients accordingly on the basis of their clients’ consolidated financial statements.
(3) In relation to clients to which neither point (1) nor point (2) applies (e.g. natural persons or clients that prepare financial statements in conformity with third country accounting rules), the institution should consider control relationships that are similar to the parent undertaking/subsidiary relationships mentioned in points (1) and (2). For this purpose, the institution should deem as constituting a control relationship a set of criteria, as the one described in paragraph 13(c) of the EBA Guidelines on connected clients under Article 4(1)(39) of Regulation (EU) No 575/2013 (EBA/GL/2017/15), e.g. majority of voting rights, right or ability to exercise a dominant influence over another entity pursuant to a contract, or provision in its memorandum or Articles of association, etc. Other possible indicators of control that the institution should consider in its assessment include the power to decide on the strategy or direct the activities of an entity and the power to decide on crucial transactions such as the transfer of profit or loss.
If it can be concluded that there is no relationship of control among clients, the institution should still assess whether the different clients constitute a single risk because of economic dependence according to Article 4(1)(39)(b) CRR (and as further specified in the EBA Guidelines on connected clients ).
*The Q&A was amended on the 24/11/2017 only to update the reference to the then finalised EBA Guidelines on connected clients.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.