Insurance and reinsurance - Solvency II, Consideration of Draft Report
The Solvency II directive might experiance further delay. The chair of the ECON Committee Pervenche Beres (PSE/FR) set the provisional deadline for amendment on mid-June, with a consideration not taking place before September. Rapporteur Peter Skinner (PSE/UK) opposed this timing.
Rapporteur Peter Skinner (PSE/UK) presented his report with contains almost 70 amendments to the Commission text. Many of these amendments concentrate on group supervision issues, the delegation of powers and the information to be provides among supervisors. Amendments also deal with the relationship of parent undertakings and their subsidiaries, the treatment of surplus funds, and minimum capital requirements.
Debate in Committee:
A majority of the MEPs welcomed the draft report and were in general satisfied with most of the amendments. However, they were of the opinion that they could be improved and that further discussion would be needed before the tabling of amendments. Most interventions focused on the MCR and SCR calculations, the risk management approach used in the Commission proposal, the role of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), group support and the issues it raised with regard to national company law, the effects on SMEs, third -country relations and, finally, pension and surplus funds.
The discussion in Committee revealed differing views, mostly related to the national background of the members. Shadow rapporteur Karsten Hoppenstedt (EPP/DE) made clear that several issues still have to be clarified. The balance of the home-host supervisors still needs improvement with regard to the information to be provided. Instead of ‘all information’ he prefers the term ‘relevant information’ (Amn 60). On group support, the original Commission version of ‘prompt’ money transfer fits better than the amended ‘rapid’ transfer (amn 51). Other improvements relate to the role of CEIOPS, although its role should not be binding. On the calculation of the MCR the forthcoming results of QIS4 should be taken into account, he said and referred to a special meeting on MCR and QIS4 to take place in October. This view was also supported by Elisa Ferreira (PES/POR).
He also made clear that the treatment of surplus fund as Tier2 capital is not acceptable. This position was also taken by other MEP like by Gunnar Höckmark (EPP/SWE), Wolf Klinz (ALDE/DE) and Olle Schmidt (ALDE/DA). However, Sharon Bowles (ALDE/UK) supported the rapporteur and called Tier2 as the as the adequate place for surplus capital.
Mrs Bowles, supported by other MEPs, expressed the need also to clarify how the concept on group support works in practice and proposed a special workshop. Also, the report should not exclude the possibility of group support from subsidiary to subsidiary, she said. Margarita Starkeviciute (ALDE/LIT) referred to the situation of small member states who might experience huge outflows of money in such situations which might be deteriorating to the whole economy. Discussion also revealed that the concept of group supervision needs also clarification with regard to third country regimes.
Views differed on the need for a qualitative majority vote in case supervisors cannot reach a common agreement. Jean-Paul Gauzes (EPP/FR) noted that the deletion of a veto is not acceptable. Ieke van den Burg (PES/NL) stated that in some cases national company law might restrict the group support concept, and Pervenche Beres (PES/FR) noted that a clear mandate for CEIOPS from the Commission is missing.
It was also discussed in how far the equity risk should take account of the fluctuation on equity markets. Other issues to be clarified include the role of own fund, the treatment of pension funds and realized profits.
Responding to the discussion Karel van Hulle reminded that with regard to surplus funds this is not that much a question of Tier1 or Tier2, but if it can be regarded as capital or not. He stated that the captives issue should come under the principle of proportionality and that, in the case of SMEs, a de minimis rule should be introduced (5Mio € threshold) which would mean that no significant impact would affect SMEs.He agreed that the concept of group supervision needs further clarification. On equity risk the Commission is to introduce a ‘damper’ that takes into account the market volatility. Mr van Hulle finally announced a forthcoming consultation on the relationship between Solvency II and Pension funds.
Timeline (provisional):
May: Exchange of views with Thomas Steffen CEIOPS
Mid-June: Deadline for amendments
September: Consideration of amendments
Draft report, Working document, Commission document
(Further information on Draft Report)
Exchange of views with Commissioner Charlie McCreevy
Commissioner McCreevy disclosed the Commissions' proposals for changes to the CRD and the strengthening of supervisory convergence to be presented at the informal ECOFIN meeting in Slovenia. He announced that the revised CRD proposal is envisaged to be adopted by early autumn with a view to come to an agreement by April 2009.
Capital Requirements Directive
Proposals for changes to the CRD will include:
- new rules to limit the risk stemming from large exposures,
- a harmonisation of the definition of hybrid capital,
- capital requirements for default risk in the trading book,
- a definition of the significance of risk transfer,
- technical changes to the securitisation framework,
- a series of changes to ease the administrative burden.
Further timetables:
- On enhancing transparency for investors, markets and regulators, the industry should bring forward complete data on markets for structured products by mid June.
- The IASB will present a discussion paper on improving valuation standards, in particular for illiquid assets including considerations on fair value measurement this month. In May, a IOSCO task will also present its findings.
- On improving the market's functioning and its incentives structure the Commission should finalize its assessment before the summer break.
- On fair value and mark to market measurements, the Commissioner noted that “there are some real accounting issues and anomalies to examine, such as the consolidation of special purpose entities or the measurement and information disclosed on risk exposures.”
Lamfalussy and supervisory convergence
“One of the most urgent tasks is to clarify and strengthen the role of the Level 3 Committees”, McCreevy said. The Commission has developed four options to improve and strengthen the EU toolbox for the supervision of financial groups, whereby he would favour the third option.
These 4 options include:
- to simply give the Level 3 Committees a set of minimum, general responsibilities in the area of supervisory cooperation and convergence. This would be achieved by aligning the Commission Decisions which created the Level 3 Committees.
- to modify the Commission Decisions in order to include an indicative (i.e. non-exhaustive and flexible) list of activities that the Level 3 Committees should perform to foster greater supervisory cooperation and convergence.
- to combine option 2, where necessary, with some targeted modifications to the relevant level 1 directives.
- co-legislators would create European regulatory agencies, which would replace the Level 3 Committees. Under this scenario, these agencies could adopt individual technical decisions applicable to market participants.
Debate in Committee:
Opening the debate Alexander Radwan (EPP/DE) called on the Commission to take action on regulating hedge funds and other institutions. Margarita Starkeviciute (ALDE/LIT) and Kurt Lauk (EPP/DE) asked about the role of the audit profession in particular with regard to off-balance sheet operations, SPVs and conduits. Gay Mitchell (EPP/IRL) asked about ‘financial engineering’ that he compared with casino gambling as the main driver for the market turmoil.
The Commissioner referred to the roadmap developed in October last year. SPVs will be dealt with in the review of the CRD in October. He confirmed the opaqueness of new products that triggered the crises but also reminded that Basel II rules have just been established and need time to show their effectiveness.
Kurt Lauk characterized that current system as one that ‘privatises profits, but socialises the losses’. Together with John Purvis (EPP/UK) he asked about the mark-to-market concept and fair-value accounting and wondered about the possibility to certificate new ‘innovative’ financial products and a possible role of the 3L3 Committees in this regard.
Mr McCreevy reminded that accounting standards (mark-to-market / fair-value) have not caused the present crises. The assumption would be wrong that a just changing the system would solve the problem. He also stated that financial innovation is not bad ‘per se’. Although it has caused the crises, their positive role should not be forgotten. He also reminded that this is subject to the national regulators. The idea to certify financial products simply would not work.
Ieke van den Burg (PES/NL) referred to the ‘Blueprint’ recently published by the US Treasury and was missing a Commission vision on the supervisory architecture. She called for a better legal basis of the 3L3 Committees and wondered about an increasing role of Central Banks. Also Piia-Noora Kauppi (EPP/FIN) called for more integrative supervision and a European directive that outlines the level of information and the role of home-host supervision.
Mr McCreevy clarified that this will be subject to the informal ECOFIN meeting in April. He acknowledged that the current structure is not able to cope with the cross-border situation.
Other announcements:
UCITS: The Commission will possibly postpone its proposal until it received the CESR advice.
IFRS: The Commission report on the evaluation of IFRS will be published in due course.
Speech McCreevy
© Graham Bishop
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