As firms strive to meet the challenges of Solvency II, Martin Shaw, Chief Executive of the Association of Financial Mutuals, argues that regulators must show stronger leadership in guiding the industry’s efforts
Solvency II is demanding considerable investment in infrastructure and staff from firms. But it turns out that for many mutuals cost is not the biggest concern, rather it is a lack of regulatory clarity. The demands on the business to meet the new governance and reporting standards as well as capital requirements means many firms are investing heavily in the run up to the implementation deadline.
Firms are also engaged in a major overhaul of their risk and compliance systems with processes such as the ORSA affecting operations at every level. These require engagement with Solvency II starting at the Board level and running throughout the organisation. The UK mutual sector has shown strong commitment to meeting the challenges of Solvency II.
A survey of 26 members of the Association of Financial Mutuals (AFM) conducted over the summer shows that 92% of respondents indicated they were ‘confident’ or ‘very confident’ that they will be fully compliant with Solvency II requirements by 1 January 2013. I see this commitment on a regular basis as the AFM works with our members on a number of initiatives to coordinate activity and share knowledge and resources. For example, members actively support our code on corporate governance, regularly attend networks where they share experiences and intelligence and turn up in high numbers for our Solvency II seminars and annual conference.
But the results of the survey also indicate that this commitment is carried out, if not with enthusiasm, then at least with a pragmatic desire to meet the implementation deadline. In many ways the pragmatism is understandable.
Solvency II has been plagued with delays and redrafting of key texts. This is perhaps not surprising given that it is the largest and most comprehensive regulatory exercise undertaken both by the FSA and the European Union. What is less understandable, or excusable, is the blasé attitude of regulators. There is a noticeable lack of leadership coming from Frankfurt and London, which is jeopardising the efforts of many of our members. There has been a subdued tone to messages issued by the regulator in recent months, both about the timeline for Solvency II and its ultimate value.
At the FSA conference in April, it was noticeable that Hector Sants and a number of his senior team were reluctant to issue a clear call for firms to embrace Solvency II positively and suggested that, if they had their way, there would have been no need to depart from the current solvency regime. The efforts of insurers are being dampened by political indecision not only on the timeline but also on crucial Level 2 and Level 3 texts. As a result, insurers are constantly having to adjust their work plans to map the changing criteria and timelines. In the UK there is a further (and ever-present) worry that the FSA will gold-plate the regulation which could lead to arbitrage opportunities that will disadvantage UK insurers.
There is also a sense that the FSA is taking a view that Solvency II is a replication of the Individual Capital Assessments (ICAs) – a risk based regulatory system that already proved its robustness through the financial crisis. Delays and indecision in Europe appear to be partly a result of the difficulty in finding a solution that satisfies and applies equally to all countries, as well as the temptation to read across the constantly shifting regime for EU banks. A further concern for many of our members is that Solvency II is being implemented at the same time as other regulations and accounting changes.
The introduction of IFRS, gender equalisation, changes to MiFID and IMD, and with-profits regime change are all adding to an increasing regulatory burden. In the UK, insurers also have to comply with the launch of the Retail Distribution Review. And yet, there seems to be little awareness on the part of regulators how this is affecting many smaller firms and mutuals.
The failure by European regulators to agree on the finer detail of the regime and the danger of the FSA’s habitual tinkering – some might say tendency to gold-plate – are jeopardising the efforts of many insurers. There is an urgent need to identify ways in which the rules can be properly simplified for smaller organisations and it needs to be done now. Regulators must step up to the plate and provide the leadership that is needed to guide the industry through the process.
The author is the Chief Executive of the Association of Financial Mutuals. The views expressed are the author’s own.