Appendix I: Details of Current Institutional Arrangements
Appendix II: Supervising the Insurance and Pensions Industries
88. Solvency II is in the process of replacing the current regulatory framework Solvency I in the EU and the new regime should be in place January 2013. The process started already in 2009 with the adoption of the Solvency II Framework Directive by the European Parliament. Solvency II is based on a three pillar approach, which is similar to the banking sector (Basel II) but adapted for insurance. The first pillar contains the quantitative requirements. The second pillar contains qualitative requirements on undertakings such as risk management, as well as supervisory activities, and the third pillar covers supervisory reporting and disclosure. Solvency II will also streamline the way that insurance groups are supervised, and recognizes the economic reality of how groups operate.
89. CEIOPS, the forerunner of EIOPA, was requested by the European Commission since the beginning of the process to provide technical advice on the vast majority of Solvency II Level 2 implementing measures. This role has put EIOPA in the position of being a natural source for reference, standard setting and consultant authority, as is intended in the new regulatory architecture. The implementation efforts are following an approach that requires detailed regulatory and implementing standards to ensure the consistent application of the regime throughout the EU to avoid regulatory arbitrage and an uneven playing field. Training provided by CEIOPS on Solvency II will continue, enhancing the supervisory quality and harmonization. The need for cooperation among member authorities to gain understanding of the complexity of Solvency II will enhance the work of EIOPA in the coordination area.
90. Expectations regarding EIOPA are extremely high. Solvency II is in the final stages of becoming the official solvency regime, creating an immediate need for guidance and implementing standards. Further, the internal model approval, a challenging and crucial step for ensuring solvency will probably require strong engagement from EIOPA to ensure best practice and proper understanding by all supervisory authorities. In addition, the mandate to participation by EIOPA in the Supervisory Colleges will add expectations regarding guidance in this new field of group supervision.
91. Proper staffing will be a critical component for the success of EIOPA and ultimately for the EU insurance and occupational pensions supervision. The urgent need to gain credibility calls for effective and influential participation in the Colleges of Supervision and will require an adequate level of seniority in staffing, thus constraining EIOPA’s ability to hire young promising talent at this stage. In addition, the high demand for actuarial and internal model resources created by Solvency II has significantly raised compensation to levels that could hit EIOPA’s budgeted salary structure boundaries.
92. EIOPA’s role promoting a coordinated European Union supervisory response and contributing to the stability of the financial system of the European Union, working in close cooperation with the other ESAs and the ESRB, will be not free from challenges. The low interest rate environment, together with costs associated with the introduction of Solvency II, could trigger a change in the demand for the products of the insurance industry. Also, the low interest rate environment, while beneficial for other institutions in the financial sector, could accentuate a search for yield to the detriment of credit quality in the pension and long term life products.
93. EIOPA’s contribution to the evaluation of the type of systemic risk posed by the insurance industry, as well as monitoring, providing early warnings and if necessary coordinating responses in emergency situations, will be critical. With around 30 of the largest global insurance groups domiciled in the EU, the engagement and timely evaluation of the prudential situation of these groups by EIOPA will be essential for fulfilling its mandate. Access to detailed, timely data on these groups will be required as well as strong coordination with the national authorities. Information sharing will require strong protection of confidentiality and data security, but also a cultural change in the national authorities and the willingness to share granular data on a timely basis.
94. The Institutional and Occupational Retirement Prevision (IORP) Directive is in the process of review thus adding an important and resource- intensive task to the workload of EIOPA. The EC has approached EIOPA with a Call for Advice on the new IORP Directive due by December 2011. The purpose of the Directive is to remove impediments to the cross border establishment of occupational pension funds. Currently around 78 of 150,000 occupational pension funds operate cross border. Valuation of technical provisions, the security of benefits, risk-based supervision, and modernizing the prudential regulation of defined contribution (DC) schemes are the main topics of discussion and possible harmonization. The fact that the design of occupational pensions remains a national decision is likely to dampen harmonization at EU level.
95. There is a risk that the consumer protection mandate assigned to EIOPA may be relegated in the priorities. While the mandate requires EIOPA to take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market, the assigned powers appear disproportionate, for instance giving EIOPA only the option to adopt guidelines and recommendations with a view to promoting the safety and soundness of markets and convergence of regulatory practice but not regulatory standards. EIOPA may also issue warnings in the event that a financial activity poses a serious threat to the stability and effectiveness of the system; however, it is not clear what implications and actions will follow. EIOPA is also to engage in achieving a coordinated approach to the regulatory and supervisory treatment of new or innovative financial activities. This will require a close engagement with the market and access to detailed information at the individual institutions’ level.
Proper valuation of assets and liabilities will be necessary for the successful introduction of Solvency II, but current IFRS work in insurance is delayed and there are important differences, particularly as regards the valuation of the liabilities. Solvency II valuation standards have two major areas of divergence with respect to the currently discussed IFRS. The ultimate adopted valuation will impact the application of Solvency II and could compromise the soundness of the system if too much freedom is granted.
96. Training plans are important for the enhancement of supervision. EIOPA has a wide range of training activities. Topics include Solvency II, accounting, consumer protection, and risk supervision. The training on Solvency II traditionally offered to supervisors in the policy departments has now moved to address operational staff needs. The development of online courses and their availability in the various EU languages is recommended.
Annex I: Institutional and Legal Issues from FSAPs in EU Member States
Given that the banking passport applies also to EEA countries, it is preferable to include also these countries in such regime.
FSAP Updates have been completed for Germany, Luxembourg, Netherlands, Sweden and the United Kingdom, and a more limited exercise has been held for Poland. FSAP Updates for France and the Czech Republic are forthcoming. A discussion of the institutional and legal issues arising from the five completed EU member FSAPs is provided as an annex to this paper.
An FSAP has a number of formal requirements, some of which may not be relevant at a regional level. It therefore needs to be determined whether the exercise in 2012 would technically constitute an FSAP or a parallel exercise with similar characteristics.
The mandate of the EFFE includes the institutional architecture of the EU financial stability framework. Other conjunctural issues, such as the role of the ECB in the current crisis, and alternative mechanisms to deal urgently with ailing financial institutions, form part of the Euro Area Article IV consultation.
The mission comprised Messrs. Enoch (head) and Hardy, Ms. Jassaud, and Messrs. Severo and Wehrhahn (all MCM), Messrs. Everaert and Tressel (both EUR), and Messrs. Gullo and Jansen (both LEG).
It should be noted that the European Parliament and the Council have the power to object these standards and, where necessary, block their adoption.
Individual decisions addressed to financial institutions may also be issued in case of an emergency situation, triggered by the Council, and if a financial institution is required to comply with its obligations under EU law where competent authorities have not resolved disagreements in cross-border situations.
It is understood that the responsibility will be delegated to national authorities as the ESMA builds up its implementation capacity.
Appendix II provides more details on outstanding supervisory issues in the insurance and occupational pension sectors.
In the upcoming European Market Infrastructure Regulation (EMIR) regulation, the ESMA is likely to be given a central role in the colleges of competent authorities facilitating the reach of joint opinions necessary for the authorization.
However, the Parliament or the Council may reject a regulatory technical standard before its adoption.
In contrast to the ESAs, the ESRB is not overseeing the enforcement of EU laws, and it does not have the status of a regulatory agency.
Other central banks also provide assistance.
Further steps will include a study and, if appropriate, a legislative proposal for full harmonization of bank resolution and insolvency regimes and, in 2014, an integrated framework, possibly centered on a European Resolution Authority.
See IMF, “Resolution of Cross-Border Banks—A Proposed Framework for Enhanced Coordination,” 2010.
There is a need also to improve the framework for managing crises in global banks. Within the EU, however, there is more scope for making progress because the Member States are committed to cooperate with each other indefinitely and on a wide range of issues.
With perhaps an exception for deposits that are in dispute. The Commission earlier proposed payout within seven days of a failure.
The Commission is preparing a policy paper (due by end-2011) on the permanent framework for state aid in the financial sector, which would apply from 2014 after a transitional period.
There is a parallel with rules for bank intervention: normally, intervention is not subject to a stay of execution, and ex post judicial recourse may lead to compensation rather than reversal of the action.
Some of these measures could apply to non-bank lenders.
The legal ambiguity derives from the fact that existing provisions require that supervisory data cannot be used for purposes other than strict supervision. ESAs, however, are mandated to perform risk assessment exercises beyond pure supervision.
These data are currently available in the Transaction Reporting Exchange Mechanism (TREM), which was created in 2007 by CESR–ESMA’s predecessor.
In order to achieve full consistency in the application of current Common Reporting (COREP), the EBA is working on the definition of uniform reporting formats according to Art. 74 of Directive 2010/78/EU of November 24, 2010. This common reporting system will become effective on December 31, 2012. In order to ensure uniform conditions of application of this Directive, the EBA is required to develop implementing technical standards to introduce, within the Union, uniform formats, frequencies and dates of reporting before January 1, 2012.
This central repository (CEREP) requests CRAs to make available public information on their historical performance including the ratings transition frequency and information about credit ratings issue in the past.
Even small differences in the reporting format and timing can add significantly to regulatory burden.
For example, the EBA must provide information on Key Risk Indicators to the ESRB on a regular basis.
Staffing and preparation are currently speeding up. While 3 experts were working on CRAs in 2009, the team reached 5 experts in May 2011. The unit should reach 15 staff members by the end of 2011, and 35 by end-2012.
The ESAs will need to consult with a narrower circle of respective industry representatives on technical issues.
Regulation No. 1092/2010 of the European Parliament and of the Council of November 24 of 2010 and Council Regulation No.1096/2010 of November 17 of 2010.
The voting members of the General Board are the President and the Vice-President of the ECB, the Governors of the national central banks, a member of the EU Commission, the Chairs of the ESAs, the Chair and two Vice Chairs of the ASC, and the Chair of the ATC. The non-voting members are the high level representatives of the national supervisory authorities, and the president of the EFC.
One implication is that the ESAs do not themselves have full power to set regulations in their respective areas of competence.
This Annex was prepared by a team led by Messrs. Enoch (MCM) and Jansen (LEG) and comprising also Ms. Jassaud, Mr. Verkoren and Ms. Zhou (all MCM), and Messrs. Bossu and Gullo (both LEG).
Germany, Luxembourg, Netherlands, Sweden, and the United Kingdom. All the FSAP teams also included staff from the Fund’s European and Legal Departments.
Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance, August 27, 2010, http://www.imf.org/external/np/pp/eng/2010/082710.pdf
Parliamentary committees can play a role in overseeing the effective exercise of powers delegated to the agencies. However, all of the assessed countries have parliamentary systems wherein the Minister of Finance is politically responsible for the agencies before parliament, and the accountability arrangement should reflect this central role of the minister.
Work is in train on MCM and LEG papers on this topic.
In the United States the Dodd-Frank Act (see Section 153 et.seq.) established the Office of Financial Research in the Treasury Department and charged this Office with supporting the Financial Stability Oversight Council including through the collection of data and the design of tools for risk monitoring.
Based on (1) ECB, 2010, “Recent Developments in Supervisory Structures in the EU Member States (2007–10); (2) Donato Mascinadaro and Marc Quintyn, 2010 “Regulating the Regulators: The Changing Face of Financial Supervision Architectures Before and After the Crisis,” and (3) a review by MCM experts.
This paper does not discuss Pillar 3 issues as it looks only at issues covered in the FSAP discussions.
The EU provisions on the single passport relate to EU Member States, plus the countries that are a member of the EEA, i.e., Norway, Iceland, and Liechtenstein. For simplicity’s sake, the analysis focuses on the EU Member States, but would in principle also apply to afore-mentioned EEA countries.
Although the Guidelines for Passport Notifications, issued by CEBS on 27 August 2009 (http://www.eba.europa.eu/getdoc/364b9c1a-c8c4-4e84-8b20-1195707c08f9/CEBS-Passporting-Guidelines.aspx) stress that there should be co-operation between the relevant Authorities, leading to “genuine dialogue” and that Authorities should “provide each other with the fullest mutual assistance” in any matters falling within the scope of this Guideline, it does not obligate home state supervisors to provide host state supervisors with any substantive argumentation evidencing their approval of the envisaged branch establishment. However, the CRD provides for a general cooperation requirement among supervisor with respect to branches, including on information sharing.
The CRD explicitly states that host state supervisors (Article 16) “may not require authorization or endowment capital for branches of credit institutions authorities in other Member States” and (Article 23)” “shall provide that the activities listed in Annex 1 [of the CRD] may be carried out within their territories (…) either by the establishment of a branch of by way of the provision of services, by any credit institution authorized and supervised by the competent authorities of another Member State, provides that such activities are covered by the authorization.”
For instance, in the event of breaches of domestic legislation, host authorities can only intervene by asking the home supervisor to take measures aimed at correcting the irregular situation.
Three supervisory authorities (Germany, Netherlands and United Kingdom) have granted liquidity concessions to third country branches.
Liquidity concessions were used to hand off responsibilities to the home supervisors (Germany, United Kingdom, the Netherlands as well as two other EU countries). They imply waiving quantitative requirements with respect to liquidity, in return home supervisors assume certain reporting obligations to the host supervisor. This “cooperation” involved the home supervisory authority carrying out liquidity supervision on a centralized basis for the whole group, including branches in other EU Member States.
CRD, Articles 129 and 132.
Directive 2009/111/EC, published on 16 September 2009. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:302:0097:0119:EN:PDF.
This is the case even though full implementation of EBA’s Guidelines for the joint assessment and joint decision regarding the capital adequacy of cross-border groups51 is only expected as of the end of March 2011.
Certain concerns are persisting as to possible impediments which may prevent a national authority to provide firm-specific information that is not relevant for direct supervisory purposes, but for other goals such as systemic risk assessment.
http://www.eba.europa.eu/documents/Review-Panel/Peer-Review-Report-on-the-functioning-of-colleges.aspx, issued on October 18, 2010. For details, see Table 2.
Once the legislation has been modified to allow better information flows from the specialized agencies to the MoF, a MoU between them could further specify the type and timing of information sharing.
On the role of temporary public financing in orderly resolution see IMF: Resolution of Cross Border bank—A Proposed Framework for Enhanced Coordination, June 2010, pp 23–25.
See Bagehot (1872). ELA is sometimes also referred to Lender of Last Resort (LOLR) funding.
See the Bank of England’s submission to the Treasury Committee, dated 24 November 2009. http://www.bankofengland.co.uk/publications/other/treasurycommittee/financialstability/ela091124.pdf
On the concept of “official administration” see IMF/World Bank, “An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency,” 2009, pp 26–35, and IMF, “Resolution of Cross Border Banks—A Proposed Framework for Enhanced Coordination,” June 2010, para 35.
As discussed in the EFFE companion paper, the EC is also preparing an EU-wide Directive with the aim to harmonize resolution tools.
To avoid moral hazard, such power should be well circumscribed: the DGS should only provide financial support up to the amount of insured deposits, and under the condition that the transferor bank is subsequently put into liquidation (thus avoiding open bank assistance inappropriately benefitting to the pre-insolvency stakeholders).
See IMF, “Resolution of Cross Border Banks—A Proposed Framework for Enhanced Coordination,” June 2010.