Interim measures, shminterim measures … welcome to Solvency II

COMMENT

Don’t let the title of the article deceive you. You are not about to be subjected to a rant criticizing EIOPA’s proposed Solvency II interim measures and related Guidelines. Far from it. What EIOPA has done is take a potentially decisive step towards defining the final shape of the rules. This is an attempt to understand its implications.

The Guidelines, published at the end of March, flesh out EIOPA’s Opinion on Interim Measures Regarding Solvency II, released in December 2012. Both are a product of two developments. The first development is actually a lack thereof. That is, the stalled political process and the call for an impact assessment on Long-term guarantees, due this summer. The second development is the announcement, first by the FSA in October 2012, then followed by a train of other national supervisors, that they would start work on aligning the current regulatory regime with what they expect the final Solvency II rules to look like. Cynics would argue that EIOPA concocted the interim measures to preserve its relevance in the process. The assumption is not entirely without merit, given that a review of the European System of Financial Supervision (ESFS) – comprising of EIOPA, the EBA, ESMA and the ESRB – is scheduled for the end of the year. But cynics will be cynics. Back on Earth it is more likely that the move is a genuine attempt to keep the process going on the one hand and to preserve the maximum harmonisation objectives of Solvency II on the other – both commendable causes given the amount of time and money already spent. EIOPA is now consulting on the Guidelines, but regardless of its motives there are a few noteworthy points to consider. The first point is that while the consultation on the Guidelines is open to all stakeholders, the Guidelines themselves (and the December Opinion) are not addressed to industry but to supervisors (National Competent Authorities or NCAs). They advise on how NCAs should prepare for the application of Solvency II. Unlike previous consultations on the actual rules this is a consultation on a set of recommendations that NCAs can use to set their own interim measures, should they chose to do so. The cover note to the consultation explains, “It is for NCAs to determine how to comply with EIOPA Guidelines by incorporating them into their regulatory or supervisory framework in an appropriate manner.” The second point is that both the Guidelines and the Opinion are just that. “NCAs ’shall make every effort to comply’ with the Guidelines, and have two months following their issuance to confirm whether they comply or intend to comply with the Guidelines,” the cover note states. NCAs must also say if they will comply or intend to comply with each guideline separately. This ‘comply or explain’ mechanism is the same one used for Level 3 Guidelines on the actual rules, which is defined under Article 16(3) of the EIOPA Regulation. EIOPA has recently published results of a ‘comply or explain’ exercise in relation to the Guidelines on Complaints-Handling by Insurance Undertakings (spoiler alert: everybody said yes). ‘Comply or explain’ may not seem like much, especially given that on this occasion it relates to advice for NCAs on how they might apply interim measures. But it does give EIOPA some powers. If an NCA chooses not to comply, EIOPA will make the fact public. It could also publish the reason for non-compliance, and tell the Parliament, Council and Commission which authorities have not complied. The last option could hurl the interim measures straight into the arena of European politics, where it would share a stage with bailouts and bartering over the EU budget. It looks like EIOPA is counting on the fact that most supervisors will comply with the interim measures, given that they took the initiative. Still there is nothing stopping an NCA or a group of rogue member states from explaining that they do not intent to comply with some elements – or the whole lot. The coming weeks will be important to gauge the mood and willingness to go along with the interim measures. The opening salvo of this Solvency II will they/won’t they mini saga was fired by the PRA (the new UK prudential supervisor, which replaces the FSA). On Friday afternoon (13/4/2013) it published sets of slides used in a series of industry briefings on the Guidelines which it held earlier that week. There is a lot of useful information in the slides, covering: Pre–application for Internal Models; System of Governance and ORSA; and reporting. Each set also contains the following note: “The PRA will decide whether the UK will comply or intends to comply with each of the GLs [Guidelines]. Until that point firms should assume that all Guidelines apply.” Does that mean firms should assume they will have to comply with the Guidelines unless the PRA says otherwise? One person familiar with the PRA’s thinking implied that would be a correct interpretation. Beyond compliance by NCAs the interim measures and Guidelines raise several questions both about the practicality of applying them (especially in the face of Pillar I uncertainty) and legality. In any event, the Guidelines will likely be instrumental in shaping Solvency II in member states. And here’s why. EIOPA expects NCAs to start putting in place interim measures from 1 January 2014. The underlying assumption, explicitly stated in the Guidelines, is that “the Solvency II Directive will be applicable on 1 January 2016.” EIOPA is also proposing both phasing-in and proportionality thresholds for application of the interim measures. With all the will in the world EIOPA can not guarantee this will be the case. After all, the measures were introduced in response to the delays and uncertainty in the political process. That begs the question: what if there are further delays? If there are further delays it is possible that the processes which have been put in place by NCA’s will carry on. The phasing-in over time will mean that more firms will be subject to the measures. Solvency II as shaped by the interim measures would become entrenched in firms’ business as usual. The more time passes, the more entrenched these practices will become and the more difficult it will be to change them, to the point that the finalised rules will have to adapt to the reality of practice on the ground. So take your pick. If you think the interim measures are just that and Solvency II will be in place in 2016 then the interim measures are well … interim. If you think implementation is more likely in 2017 or beyond … then welcome to Solvency II. ]]>