17. Financial conglomerates tend to develop their own corporate identities and management styles and will not always have an obvious position in any one of the four quadrants. The supervisory issues outlined in this paper will need to be viewed within the context of the particular circumstances of each conglomerate.

18. The quadrant analysis and classification are designed to highlight supervisory information needs and to underscore the importance of information sharing. However, irrespective of the quadrants, information sharing is important to assist supervisors in supervising the operations of the conglomerate under their jurisdiction.

Quadrant A: Global business lines, global control functions

19. A conglomerate in Quadrant A organises its business activities along the products and services that it provides and the resulting business line structure may bear little relationship to the corporate legal structure. The matrix management approach generally found in Quadrant A conglomerates assigns management "front office" responsibilities along business lines, which cut across legal entities, geographic regions, and sometimes across business lines themselves. Management "back office" responsibilities for corporate control functions cut across both business lines and the legal entities. The corporate control functions are organised largely at head office or in a separate special purpose entity, although there is necessarily local involvement in control processes. The legal entity structure is highly influenced by tax and regulatory considerations.

20. Several issues arise for the supervisors involved in the oversight of entities in a Quadrant A conglomerate. Issues for the various supervisors may differ somewhat because key risk management and control functions for entities they oversee may be located in another jurisdiction - frequently, but not necessarily always, at head office. However, there is an enhanced need for all supervisors to understand the complexities of transactions and arrangements that are extensively used to transfer risk and income intra-group between affiliates in the "global" structure. Information exchange is useful in order for an overall view to be taken, because an individual supervisor may often see only part of the management matrix (a business line or a geographical area or a legal entity).

21. The information issues for supervisors involve understanding of, access to and responsibility for assessment of:

• the business strategy of the conglomerate, especially in business lines conducted by a given supervised legal entity,
• the matrix management structure and the extent to which global risk management and global business management are evaluated by the various supervisors,
• the group corporate structure,
• the key risks in other entities, including unregulated entities, and potential impact on parent and other regulated entities,
• the organisation of global corporate control functions and their effectiveness especially outside a particular supervisor's statutory jurisdiction,
• the local controls to assess the reliability of information being fed into the global risk management systems and the quality of those systems,
• intra-group exposures and transactions.

Quadrant B: Business activities aligned with legal entities, global control functions

22. In a Quadrant B conglomerate the business activities are aligned with the legal entities but corporate control functions are organised at the head office or in a separate dedicated legal entity. In addition, the management and boards of legal entities retain a substantial role, in some cases related directly to some business operations or specialised activities that are prevalent in a particular entity. Alternatively, the legal entities may be broadly responsible for their own business strategies and certain corporate control functions, but may be subjected to very close monitoring and oversight from their parent companies.

23. Several issues arise for the supervisors involved in the oversight of entities in a Quadrant B conglomerate. As is the case with Quadrant A conglomerates, the various supervisors have a need to assess the effectiveness of controls which may be located in a different country. The primary supervisor needs to be able to assess the adequacy of controls within the subsidiaries. For all supervisors, the issue is the division of management responsibilities centrally and in subsidiaries and the ensuing division of supervisory responsibilities. Additionally, the primary supervisor needs to understand how the local business strategies, derived and implemented on a legal entity basis, consolidate into a meaningful business strategy for the conglomerate as a whole.

24. The information issues for supervisors involve understanding of, access to and responsibility for assessment of:

• the group corporate structure,
• the key risks in other entities, including unregulated entities, and potential impact on parent and other regulated entities,
• management responsibilities and of the division thereof globally and locally,
• the organisation of global corporate control functions and their effectiveness, especially outside a particular supervisor's statutory jurisdiction where relevant,
• the local controls to assess the reliability of information being fed into the global risk management systems and the quality of those systems,
• the extent to which global risk management systems are evaluated by the various supervisors,
• intra-group exposures and transactions.

Quadrant C: Business activities aligned with legal entities, local control functions

25. The corporate structure of a Quadrant C financial conglomerate fully accords with management organisation. Also, the corporate control functions are aligned with the local legal entity structure, with few functions exercised globally. Local management operates rather autonomously from the parent entity.

26. Several issues arise for supervisors involved in the oversight of entities in a Quadrant C conglomerate. All supervisors need to understand the influence of the dominant or parent entity and the effectiveness of firewalls, particularly when there is an unsupervised holding company. The primary supervisor needs to have the ability to assess the effectiveness of local controls and the reliability of risk management information. Communication between supervisors will be important to assess the extent of de facto local and central controls. For all supervisors there is an enhanced need to understand group-wide risk exposures.

27. The information issues for supervisors involve understanding of, access to and responsibility for assessment of:

• the group corporate structure,
• the key risks in other entities, including unregulated entities, and potential impact on parent and other regulated entities,
• the group's approach to concentrations and control systems that reduce the need for global risk systems,
• intra-group exposures and transactions,
• the nature and scope of the group's local controls and/or firewalls.

Quadrant D: Global business lines, local control functions

28. A Quadrant D conglomerate is organised along business lines which cut across the legal entities but its corporate control functions are organised locally, within legal entities. This is an anomalous situation as the corporate controls located in legal entities are less integrated than the business line and therefore cannot fully monitor and control the risks in those business activities. This type of a conglomerate would carry inordinate risk that the controls that are intended to ensure the proper conduct of business would fail.

29. None of the conglomerates mapped were found to fall into Quadrant D. Determining that a conglomerate has the characteristics of a Quadrant D conglomerate may not be easy and can involve a high degree of subjective judgement by supervisors. For example, the group may describe itself as having centralised corporate control functions, and internal documentation may support that. But in reality, local management may not have effectively implemented the central controls, or they may even have circumvented them.

30. It may be difficult for the primary supervisor to discover this as access to controls in all localities may not be achievable on a practical basis. All supervisors therefore should be alert to this problem, particularly if the supervised legal entity is a major contributor to group profits, and inform the primary supervisor if concerns arise and assist in any ensuing analysis of the group. This emphasises the need for all supervisors to exchange information regularly in order to facilitate the assessment of the control environment.

Implications for supervisors and information sharing

31. In each type of conglomerate structure, it is clear that information sharing between supervisors is essential. Such information sharing will be useful in enhancing supervisors' understanding of the operations of the conglomerate and their effect on the regulated entity, and in assisting supervisors in determining the characteristics of the conglomerate in terms of the Quadrant structure. A conglomerate might describe itself to fit into Quadrants A, B or C but could actually be in D.

32. A prerequisite for assessing information sharing needs amongst supervisors is a good understanding of the organisational structures and business activities of the financial conglomerate. The findings and observations of the Task Force with respect to the participating conglomerates demonstrated that the conduct of a mapping exercise is an effective way to gain that understanding. It is acknowledged that this is but one supervisory tool available to further supervisors' understanding of complex financial conglomerates.

33. The Quadrant approach can be a useful tool in identifying situations where supervisors' information needs are increased or where management of conglomerates may not themselves be receiving sufficient information. For example, conglomerates which are theoretically managed on a global business line basis and have global corporate control functions (Quadrant A), but in fact still permit considerable local autonomy in some parts of the group and in practice are structured more along the lines of a Quadrant D conglomerate could raise supervisory concerns.

34. Supervisors need to be alert to highly autonomous local managers, weak global controls or any other evidence that theoretical and actual management structures are divergent. Other warning indicators might include separate audit arrangements and different accounting year ends among the conglomerate's legal entities.

35. Irrespective of the structure of the corporate and management organisation, and the corporate control functions of financial conglomerates, the key to ensuring that overall group management practice conforms to the understandings of individual supervisors is effective communication among supervisors, as no single supervisor is likely to have ready access to all pertinent information to fully understand and assess the conglomerate.

36. Supervisors should also exchange information regarding their own objectives and approaches. Familiarity with each other's supervisory techniques can facilitate mutual understanding and trust and sharing of information. The previously mentioned Supervisory Questionnaire is a useful tool for collecting information on supervisory objectives and approaches.