Qualifying holding: What to consider in the suitability assessment of the owners of a financial institution?

The assessment of owners is a crucial part of a financial institution’s licensing process. While the general procedure requires only the submission of basic information about the owners, significantly more information must be provided about some owners. Such owners are the acquirers of qualifying holding.

Who are acquirers of qualifying holding?

There is direct and indirect qualifying holding. In practice, problems arise mainly with determining indirect qualifying holding. It is difficult to determine who is an acquirer of indirect holding solely on the basis of Estonian legal acts. Therefore, European Union requirements that apply to almost all financial institutions (except for credit servicers and purchasers) must also be taken into account.

There are different approaches to defining indirect qualifying holding. Estonia has decided in favour of the so-called “control criterion” which means that the acquirer of indirect qualifying holding is a natural or legal person who:

1. acquires direct or indirect control over a company that has already direct or indirect qualifying holding over a financial institution;
2. has direct or indirect control over a company that acquires a qualifying holding in a financial institution.

Ultimate indirect holding is in any case held by the natural person that controls the acquirer of indirect qualifying holding.

Control can be determined firstly based on the size of the holding (in percentages) or the number of votes in the financial institution. It must be kept in mind though that a company can be controlled in other ways as well, for example, through having significant influence (also referred to as dominant influence) on the financial institution. So, close attention should be paid to whether there are any circumstances that could indicate significant influence. Such circumstances can include:

• additional rights granted to the shareholder under a contract or the articles of association of the financial institution;
• the shareholder is also a member of the managing body of the financial institution, has a representative or can assign a representative in such body;
• shareholder agreements that grant certain owners the possibility to have dominant influence;
• the acquirer’s capability to partake in and affect decisions that concern the activity and financial strategy of the financial institution.

In order to assess significant influence, all relevant circumstances must be taken into account in combination.

Requirements and practical aspects regarding qualifying holding

The acquirer of qualifying holding is subjected to a suitability assessment where the business reputation of the acquirer is assessed as well as the background of its managing body members, financial capabilities and other circumstances that are important for the development of a financial institution and ensuring reliability. Whereas, the following should be taken into account:

• Insofar as the acquirer of qualifying holding has to have impeccable business reputation, the person’s prior conduct in business should be evaluated.
• Similarly to the members of the managing bodies of financial institutions, information should be provided about the members of the managing bodies of the acquirer of qualifying holding. The suitability of the members of the managing bodies of the acquirer of qualifying holding is not assessed to the same extent as the members of the managing bodies of a financial institution. However, it is necessary to demonstrate how their background supports the management of the financial institution through the acquirer.
• The acquirer of qualifying holding should be prepared to provide explanations about the origin of the funds that are used to acquire or increase the qualifying holding in a financial institution. If necessary, the acquirer should also be prepared to submit additional evidence about the origin of the funds.
• Depending on the capital requirements of the financial institution, it should be assessed whether the acquirer of qualifying holding is able to support the financial institution financially if necessary and they should be ready to explain from which funds and to what extent such support might come from.
• It is also worth going over the acquirer’s future plans regarding the business activity of the financial institution after the acquisition or increase of qualifying holding and be prepared to explain them if necessary.

When should qualifying holding be reported?

In the course of the licensing process, information about all the qualifying holdings in the financial institution should be sufficiently disclosed. If there is no direct or indirect qualifying holding in the financial institution, this should also be explained during the licensing proceedings. After obtaining the respective license, it is also necessary to continuously assess whether changes in the ownership of the financial institution result in the creation or loss of qualifying holdings. For this reason, the financial institution should have an established internal process to ensure the continuous evaluation of the owners of the financial institution.

In case of qualifying holding, the financial supervision authority should be notified of the acquisition or increase of qualifying holding in the financial institution. The notice should also explain which circumstances result in the direct and/or indirect qualifying holding. All the documents required under the law should also be added to the notice. A person has a notification obligation also if they lose, decrease or assign direct or indirect qualifying holding in a financial institution. The financial institution itself is also obliged to report a transaction or event that changes qualifying holding upon becoming aware of such transaction or event.

Therefore, the more complex the ownership structure of a financial institution, the more attention should be paid to determining the acquirers of holdings. If acquirers of qualifying holding cannot be clearly determined or they do not meet the requirements, it could have a negative impact on the licensing proceedings. Moreover, changes in qualifying holding do not occur unless the person has duly reported it. Taking into account the above, careful consideration should be given to all circumstances that could affect the determination of qualifying holding.

The article was written by Ellex experts Anneli Krunks and Marion Müürsepp.