Under IFR, the notion of a financial institution is integral to many of the prudential requirements under the Regulation including whether prudential consolidation by investment firms and/or their parent company is required. It is moot that the term "investment firm" refers solely to an investment firm established within the EEA and regulated under MiFID (including ancillary services undertakings and/or tied agents - see Q&A ID 2023_6779), however, doubt has arisen as to the interpretation of the term "financial institution" and whether this must be established within the EEA.

IFR defines a "financial institution" as: "an undertaking other than a credit institution or investment firm, and other than a pure industrial holding company, the principal activity of which is to acquire holdings or to pursue one or more of the activities listed in points (2) to (12) and point (15) of Annex I to Directive 2013/36/EU, including a financial holding company, a mixed financial holding company, an investment holding company, a payment institution within the meaning of Directive (EU) 2015/2366 of the European Parliament and of the Council (2), and an asset management company, but excluding insurance holding companies and mixed-activity insurance holding companies as defined in point (g) of Article 212(1) of Directive 2009/138/EC of the European Parliament and of the Council." (Article 4(1)(14)).

Articles 4(1)(11) and 8(2)(b) of IFR then include provisions that solely for the purposes of the definition of "consolidated situation" and for Article 8 of IFR (group capital test) that "the terms ‘... ‘financial institution’, ‘... shall also apply to undertakings established in third countries, which, were they established in the Union, would fulfil the definitions of those terms in Article 4" which appears to imply (contrario sensu) that undertakings, including specifically financial institutions, established in third countries generally do not fulfil the definitions of those terms in Article 4. 

The relevance of clearly ascertaining whether the definition of "financial institution" includes undertakings established in third countries is shown in the following scenarios:

(a) a financial Group headed by a 'holding company' (which must be a financial institution) established outside the EEA;  or 

(b) an investment firm forming part of an exclusively international financial group where it is the sole EEA entity and represents a minority of the group's revenue and other factors.

In each case, whether or not prudential consolidation applies hinges on whether or not the defintion of "financial institution" includes undertakings established in third countries.