Solvency ii News March 2013

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Solvency ii Association
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.solvency-ii-association.com
Dear member,
Todaywewill start from Gabriel
Bernardino.
He givesusa good understanding of where
weare.
Gabriel Bernardino, Chairman of EIOPA
IMD2 and Solvency II – The road to better
policyholder protection and financial stability
Workshop organisedby theEuropean Federation of
InsuranceIntermediaries(BIPAR) Brussels
Good eveningladiesand gentlemen,
I wouldlike tostart by thankingBIPAR for the
invitationto speak toyou today and for the
opportunitytomeet again withthe representativesof EU intermediaries.
In my speech, I will bringforward some personal reflectionsabout the
current challengesin revisingtheregulatory frameworkin theinsurance
area, namely IM D2and SolvencyII and will finishby pointingout some
strategic reflectionson thewayto achievefurther consistencyof EU
regulation and supervision.
www.solvency-ii-association.com

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Let mestart withIMD2.
Thereview of the InsuranceMediationDirectiveis very relevant for
EIOPA, becausethisdirectiveaffectsalmost all our stakeholders.
Intermediariesare, and will continuetobe, a keylink in the retail
distribution chain.
We recognisethat at EIOPA, in the samewaythat weseeprotection of
consumersasa fundamental goal for usand an area whereweare
requiredto takea “leadingrole”.
For us, intermediariesare an essential part of the insurancemarket and
playa crucial rolein consumer protection.
Therefore, wewelcomethepublication of the Commission‟sproposalto
recast the existing IMD (“IMD2”) in July2012.
I must saythat it hascertainlybeen a long time in themaking ever since
thereview of IMD1wasfirst introducedintothe Recitalsof SolvencyII
bythe European Parliament and then our predecessor, CEIOPS
subsequentlyprovidedadviceto the Commissionon theDirectivein 2010
with39 different recommendations.
We support the Commission‟s objectives of making retail insurance
markets work better and promoting a more level playing field by, for
example, extendingthescope of theDirectivetoincludedirect sales.
Indeed, preventing regulatory arbitrage and promotingequal conditions
of competition arekeyobjectivesfor EIOPAtoo.
From EIOPA‟s perspective, it is important that the final legislativetext
createsa regulatory regimein the retail insurancemarket that canbe
effectivelysupervised both from a national and a European
perspective, bearingin mind thewidevariety of existingstructuresat
national levelfor supervisinginsurancedistribution.

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IM D2alsoneedstoadopt a proportionateapproachasregardsthe
objectivestobe achieved.
There needstobeproper considerationof existingmarket specificities
such asa very diverse rangeof distributionchannelsat national level,
from high street brokers to multinationals.
As I say, I welcomethe Commission‟sproposal.
Nevertheless, there are a number of pointswhereI wouldpersonally
recommend further reflection:
Transparencyof remuneration
•Theproposal introducesa mandatorydisclosureof thefull amount of
remuneration for life insuranceproductsand a 5 year transitional period
allowingfor an “on request” disclosureregime for non-life products;at
theend of the 5 year period, mandatorydisclosurewould apply.
•Furthermore, insuranceundertakingsare onlyrequired to inform the
customer about thenature and thebasisof the calculationof any
variable remuneration receivedby anyemployee of theirs i.e. not
disclosureof thefull amount.
For non-life insurance, I consider an “on request” regime asa better way
tomove further at an EU level, whilemaintainingthe possibility for
MemberStatesto imposestricter requirements.
In my view, this wouldbe the best possibleand balanced solution to
improvethetransparencyof remuneration.
Furthermore, both insuranceundertakingsand insuranceintermediaries
should havetocomplywiththesame high-level principlesasregards
information requirementsand conflictsof interest provisions.
I alsobelieve that disclosureis not a panacea tomanagingconflictsof
interest.

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Theintroduction of a general “dutyof care” wouldhelp aswouldthe
implementationof proportionateand robust administrativeand
organisational arrangementsto help systematically identify and manage
conflictsof interest.
Scope– Comparison Websites
•Comparison websitesarecaught under theRecitals,but not under the
definitionof “insurancemediation”, creatinglegal uncertainty.
In my opinion, it is important that new forms of on-linedistributionsuch
ascomparisonwebsites,are properlycaught under thescope of the
Directivetoensurea level playing field and adequate protectionfor
consumers.
Somewouldarguethat they are alreadycaught by IMD1,but weneed
more clarityon this issue.
Indeed, weare currentlyworkingon a Report on Good Practices
regardingsupervisory standardsrelatingtocomparison websiteswhich
wehope topublish beforethesummer.
It wouldalsobe useful if EIOPAcould clarify by meansof Guidelines
theapplicationof theDirectiveto aggregatorsor pricecomparison
websites.
Advice
•“Advice” is defined under the proposal as“theprovision of a
recommendation to a customer, either upon their request, or at the
initiativeof the insuranceundertakingor the insuranceintermediary”.
I am surprised that thedefinition of “advice” wasnot personalised asat
present it capturesgenericadvice aswell.
We think a clearerdefinition of adviceis required whereadviceis
provided on the basisof a “personal recommendation….”

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Freedomtoprovideservices/ Freedom of establishment
•Theproposal deletestheprovision providing for a European passport
based on a singleregistration and is not re-stated in the new Chapter IV
regardingfreedom toprovideservicesand freedom of establishment
I am surprised that theprovision wasdeleted asit wasthe foundation of
IM D1soastoencourage thecross-border activitiesof insurance
intermediaries.
In my view, thisneedstobe reinstated tosend out theright message.
Cross-selling
• Theproposal recognisesthe practiceand risksof bundlingproducts
and requires certaininformation disclosureon saleof bundled products.
Tying is outlawed Tying and bundling is an issue that has regularly
cropped up in discussions in EIOPA (with regard to sales of PPI or
linkinglife insuranceto salesof mortgages).
Several of our Membershave taken action already at national level to
combat thispractice.
I support actionon tying but a blanket ban on all tying hasimportant
implications,asthereare an enormousamount of tied productson the
market in the EU.
We need alsoto considerthat a completeban might alsoprevent
consumersfrom gettingcheaper deals.
It is important to have the same approach in IM D2, MiFID II and
MortgageCredit Directivetoensureconsistencyon this issue.
This is an area wehaveforeseenwork under the Joint Committeeof the
ESAs.

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InsurancePRIPs
•Theproposal introducesspecial requirementsfor insurancePRIPs e.g.
requirement toidentify, prevent, manageand discloseconflictsof interest
whensellinginsurance investment products.
I believethat theseprovisionsshould bekept within IMD2and we
should avoid a simple“cut and paste” asthedistribution channels
involvedare very diversesoa “onesize fitsall” approachcould have
major impact on themarket.
Furthermore, I would definitely include in IMD2, the organisational
requirements needed by distributors in order to manage conflicts of
interest.
At EIOPA, weare followingcloselythenegotiationsin the Council and
Parliament.
It is very interestingtosee thewiderangeof different opinionscoming
tothe fore on this issue.
This is not surprisingbecauseIM D2seeksto perform a very tricky
“balancingact”: enhancingthe possibilitiesfor cross-borderretail trade,
but at the same time, raisingthe bar in terms of adequatesafeguards for
consumers.
This balancingact iseven more difficult in the aftermath of the financial
crisis.
EIOPA standsreadyto support theEU political institutionsin the
negotiationprocess.
Let meknowturn to SolvencyII.
TheEU isfaced with an outdated and fragmented regulatoryregime in
insurance.

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SolvencyII hasbeendeveloped during the last 13yearsto answerto
concreteneeds.
It increasespolicyholder protection by usingthe latestdevelopmentsin
risk-basedsupervision, actuarial scienceand risk management.
We should be proud that SolvencyII is basedon sound coreprinciples.
Obviously, the financial crisishad a number of consequenceson
SolvencyII.
Some lessonswere incorporated early on in the regime, but other
challenges are still creating uncertainties on the final design and
calibration.
Thehuge market volatilityproved tobe a challengein a market-
consistent regime, especiallyfor long-term guarantees.
Thesovereigncrisisledto questionson the concept of the risk-freerate.
Thechangesin banking regulation createpressure on theroleof
insurersasprovidersof long-term bank funding.
Thelowinterestrateenvironment is threatening some insurance
businessmodels, especiallyin life insurance.
This year will be a crucial year for SolvencyII.
So, what are wedoing?
Following the agreement by the EU political institutions, EIOPA have
launched the long-term guarantee assessment that aims to test various
measuresthat havebeen discussed in theOmnibusII negotiations.
We are encouragedby thelevel of participation in thedifferent member
states,coveringbig, medium and smallerplayers.

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EIOPA will present its final report in June.
It is essential for policyholder protectionand financial stabilitythat
SolvencyII appropriatelyreflectsthe long-term financial position and
risk exposure of undertakingscarrying out insurancebusinessof a long-
term nature.
We need a robust frameworkthat wouldprice correctlyany options
embedded in thecontracts.
We needto recognisethat guaranteeshave a price; there is no“free
lunch”.
On top of the long-term guaranteeassessment, EIOPAseesit asof key
importancethat therewill be a consistent and convergent approach with
respect tothepreparation of Solvency II.
That is why, in December 2012,weissued our Opinionon interim
measuresregardingSolvency II.
Our plan is todevelop Guidelinesthat will ensure that national
supervisoryauthoritieswill start in 2014toput in placecertain important
aspectsof thenew prospectiveand risk basedsupervisoryapproach.
TheseGuidelineswill cover the system of governance, includingrisk
management and the processof developingan ownrisk and solvency
assessment, pre-applicationof internal models, and reporting to
supervisors.
We are not anticipatingSolvencyII, but preparingsupervisorsand
undertakingsfor the new regime in a consistent way.
Theguidelinesare addressed tonational supervisoryauthorities and will
besubject tocomplyor explain procedure.

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We are workingin closecooperation withthe European Commission
andmaintaininganinformal dialoguewithEIOPA‟sInsuranceand
ReinsuranceStakeholder Group and thedifferent stakeholders.
We planto havea public consultationon the GuidelinesinApril/ May
2013and theywill be tabled to EIOPABoard of Supervisorsin the
autumn.
Going forward, oneof themost critical challengesin theEU supervisory
landscapeis toensure consistencyof supervisorypractices.
I believethat theconvergence of supervisorypracticesisasimportant as
thesinglerule book.
By assuring that day-to-day supervisoryoversight of financial
institutionsis done within a consistent framework, wecan effectively
contributeto an increasedlevel of protection of policyholders and
beneficiariesin theEuropean Union.
Thesinglemarket requiresit and EIOPAis committed todeliver it.
Afirst step shouldbe the development of a SupervisoryHandbook that
wouldwork asa guidebook for supervisionin SolvencyII, settingout
good practicesin all the relevant areasof supervision.
This handbook will foster the implementationof a more consistent
frameworkfor the conduct of supervision.
EIOPA is starting to workin this area.
I believethat it is fundamental to build on the experienceof what has
been achievedby EIOPAunder the current Regulation and start a
reflectionon the further steps(tasksand powers) needed to deliver a
truly consistent supervisoryprocessand, in particular, to assure the
consistent oversight of cross-borderinsurancegroups.
Furthermore, EIOPAneedstohave resourcestoplayitschallenging
oversight role accordingtotheRegulation, by conductinginquiriesinto

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a particular type of financial institution, or type of product, or type of
conduct in order toassesspotential threats tothe stability of the
financial system and make appropriate recommendationsfor action to
thecompetent authoritiesconcerned.
In order toperform this independent assessment in a transparent,
efficient and risk basedway, EIOPAneedstoreinforceitshuman
resources, should have accesstothe relevant individual information
availableto the national supervisorsand alsohave direct accesstothe
individual institutions.
Another strategicchallengeis thelevel of regulatory consistencyin the
financial sector.
I believeit isvery relevant toachievean appropriatelevel of convergence
of the rulesprotectingretail consumersin the different areasof the
financial sector.
Nevertheless, proportionalityand good senseshould prevail.
By covering thedifferent anglesof disclosureand sellingpracticesin the
insurancemarket, IM D2should avoid the tendencytoapplya one-size-
fits-all approach.
Insurancebusinessand insuranceproductshave their own specificities
that need to be carefullyconsidered.
Somemay argue that thesespecificitiesare a sufficient argument to
maintainthestatusquo. I don‟t believe that thisis the case.
We needto recognizethat an evolution isalsoneeded in theway
consumer protectionis ensured in the different distribution channels.
We needto learnfrom themis-sellingeventsthat occurredin certain
marketsinvolvingproductslike PPI, unit-linkedproductsand pensions.

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Consumer‟sattitudesand needsare changing, and that should be viewed
positively.
Theinsurancemarket cannot and will not be out of this evolution.
Insuranceintermediariesshould support thistrend and should view
IM D2asa good opportunityto improve consumer protection, preserve
therelevant insurance specificitiesand increaseconsumer confidence.
Thank you for your attention.

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StrategicGoals
2013to 2016
Note: The SwissFinancial Market
SupervisoryAuthority FINMA is
an institutionunder public law
with itsown legal personality.
It is responsiblefor implementingthe Financial Market SupervisionAct
and financial market legislation.
As an independent supervisoryauthority, FINMA actsto protect the
interestsof creditors, investorsand insuredpersons, and to ensure the
proper functioningof the financial markets.
Their protectionliesat the heart of FINMA‟s mandate.
Consistent, risk-oriented supervision
In its supervisory role, FINMA focuseson the prudential supervisionof
banks,insurers,collectiveinvestment schemesand other financial
intermediaries.
Prudential supervision is an ongoingactivityin whichFINMAscrutinises
thesupervised institutionsand themarket witha focus on thefuture.
Its aim isto maintain the financial soundnessof theseinstitutions,
primarilyby ensuringthat theyare solvent, have adequaterisk controls
andprovide assuranceof proper businessconduct.
In order toset the right prioritiesin prudential supervision, FINMA
consistentlypursuesa risk-orientedapproach.
FINMA cannot provide full-spectrum monitoring of all thesupervised

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institutions.It must thereforeconcentrateon the key risksfor creditors,
investorsand thesystem asa whole.
Supervision of large, interconnected institutionsand segmentswith
greater inherent risk is necessarilymore intensethan for smaller market
participantswithlowerrisk profiles.
Therisk-orientedapproach is reinforcedby continuousmonitoring of
thefinancial market and, more recently, targeted spot checks.
In linewith international trends,FINMA has substantiallyincreasedits
activitiesto identify system-wideand systemic risksat an earlystage.
Thefocushere is on large, interconnectedfinancial institutionsand
market participantsthat perform non-substitutablefunctions.
FINMA aimstoensure that Switzerland‟sfinancial institutions
meet international norms in termsof capital, liquidityand resolvability.
Systemically important institutionsmust exceedtheinternational norms.
In the event of the insolvencyor bankruptcyof a supervisedinstitution,
it is FINMA‟s tasktoprotect financial market clientsfrom the
consequences.
If an institution getsintodifficulties,FINMA reactsrapidlyand
professionallyto takethe necessarymeasures.
If there is noprospect of successful restructuring, an orderly market exit
must be possible.
FINMA analysestheconduct of financial market participants.
However, in order toeffectivelyprotect financial market clientsfrom
abuses, clear rulesof conduct for financial servicesproviders
are imperative,asarebetter product documentation and increased
transparency.

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FINMA‟sstrategic goals
Prudential supervision
Strengthening financial stability and crisis resistance through
prudential supervision
Theinterestrate situation, the changedenvironment in cross-border
businessand the pressureon marginsand pricesare presenting
banksand insurerswith major financial and organisational challengesin
their core business.
Significant structural changein the Swissfinancial centre can be
expectedin themedium term.
Historicallylowinterest ratesare depressing theearningsof almost all
supervised institutions.
Banks and insurers,especiallylife insurers, are beingforced tofind
investmentsthat generatehigher returns.
This means, however, that theyare alsotakinggreater risks.
Low interest ratesalsoposea danger tosupervised institutionsin the
Swissreal estatemarket.

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Thelegal and reputational risksassociated with cross-borderfinancial
servicescontinuetobe of major importance.
Thecompaniesin question must recognisetheneed for strategic
reorientationand deal appropriately with legacyissues.
Strategic goal 1
Thestabilityand crisisresistanceof the Swissfinancial centre are
strengthenedthrough internationallyrecognisedprudential standards
and consistent compliancewiththem.
If market exitstake place,theydo soin a waythat isorderly and quick,
and result in the least possibledamage tofinancial market clients.
Businessconduct
Promoting integrity, transparency and client protection in
businessconduct
Current legislationdoesnot guaranteeadequate client protection asfar
asthe businessconduct of financial intermediariesis concerned.
In thisrespect, Switzerlandlagsbehindinternationalregulatory
standards.
In the first place,Swissclientsare at a disadvantagecompared withnon-
Swissclientsbecausetheyare oftennot adequatelyand transparently
informed.
Secondly, there isa risk that theSwissfinancial centrecould attract
undesired market participants.
Thirdly, client protection that isnot fullyequivalent can havean adverse
impact on theability of Swissfinancial serviceproviderstogain accessto
other markets.

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Regulationsthat donot meet appropriate, internationallyrecognised
minimum standardsweakenthe reputationof a quality-oriented
financial centre.
Thepatchy client protection regulationsat point of saleare one example
of this.
Thesupervisorylegislationprovidesfor a variety of authorised
institutionswithdifferinglicensingrequirements.
Not every licenceleadstoongoing monitoring by theauthorities.
As far asthequalityand intensityof licensingand supervision by
FINMA are concerned, there is a transparencydeficit for financial
market clients.
Strategic goal 2
In order toenhancethe reputation of thefinancial centre and promote
fair businessconduct and integrityon the part of financial market
participants,FINMAconsistentlyimplementslicensingprocedures,
createstransparencyregardingthevarying degreesof supervisory
intensity, and promotesinternationallyrecognisedregulationson client
and investor protection.
National and international cooperation
Joining forcesat the international level and working together
efficiently at the national level
Thescope and intensityof international activitieshave increased
markedly. Thistrend will persist intothenear future.
FINMA must prioritisethedeployment of itsresourceson international
initiativeseffectively.

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Against thisbackdrop, cooperationat thenational level withother
institutionsand authoritiesmust bestreamlined sothat Switzerland‟s
interestscan be more effectivelyrepresented at the international level.
Because of the different mandates of the authorities involved, their
responsibilities have to be prioritised differently depending on the
situation:
•TheFederal Department of FinancepromotesSwitzerlandasa placeto
dobusiness.
The State Secretariat for International Financial Matters works to
strengthen the international position of Switzerland in the field of
financeand tax.
It representstheinterestsof Switzerlandvis-à-visother countries in
international financeand tax mattersand is leading the international
negotiationsin theseareas.
•FINMA fulfilsitsinternational remit from thepoint of view of a
financial market supervisor.
In the field of financial stability, FINMAworkscloselywith the Swiss
National Bank.
Responsibilityfor supervisingthe individual financial institutionslies
with FINMA.
It is cruciallyimportant that the differingstatutoryresponsibilitiesand
decision-makingpowersare preserved.
Strategic goal 3
In its international activities,FINMAconcentratesitsresourcesand
usesthem toaddressimportant core issues.

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In the context of national cooperation, theinformation flow is efficient
andthe decision-makingscope of theauthoritiesis clear.
Regulation
Engaging expertise and regulating in light of its supervisory
goals
Financial market supervisorylaw definesFINMA‟scompetencesin
financial market regulation.
FINMA generallyregulatesby wayof circularswhichexplainhow
financial market regulation is tobe applied. It alsoregulatesby wayof
ordinanceswherethis is enshrined in thelaw.
Financial market legislation, on theother hand, is a political
responsibility. The legislaturedefinestheregulatory framework binding
on FINMA.
Thefinancial market lawsare thereforetheresult of a political process
andhencethe subject of political discussionsand compromises.
In accordance with its supervisory mandate, FINMA is guided by its
supervisory goals, explaining its position early and transparently, but
without takingpart in political debates.
Strategic goal 4
FINMA analysesexistingregulationsand legal trendsfrom the
perspectiveof financial market supervision, proposesrelevant
amendments,usesitsspecialist expertiseto support the proposed
regulationsthat areimportant and highlightsitsownconcernsearlyand
transparently.
Withinits area of responsibility, FINMA regulatesonlyin sofar asthisis
necessaryin light of its supervisorygoals.

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The UK Prudential Regulation Authority (PRA)
On 1April 2013thePrudential RegulationAuthority (PRA) will become
responsiblefor the prudential regulation and supervision of banks,
buildingsocieties, credit unions,insurersand major investment firms.
In total thePRAwill regulate around 1,700financial firms.
ThePRA‟s roleis defined in termsof twostatutoryobjectivesto promote
thesafety and soundnessof thesefirms and, specificallyfor insurers, to
contributeto the securing of an appropriate degreeof protection for
policyholders.
In promoting safetyand soundness, thePRAwill focusprimarilyon the
harm that firms cancauseto the stabilityof theUK financial system.
Astablefinancial system is one in whichfirms continueto provide
critical financial services– a precondition for a healthyand successful
economy.
ThePRAwill make forward-lookingjudgementson the risksposed by
firmsto itsstatutoryobjectives.
Thoseinstitutionsand issueswhichposethe greatest risk to thestability
of the financial system will be the focusof itswork.
ThePRAwascreated by theFinancial ServicesAct (2012) and will be
part of the Bank of England.

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It will have closeworkingrelationshipswith other partsof the Bank,
includingthe Financial Policy Committeeand the Special Resolution
Unit.
ThePRAwill workalongsidethe Financial ConductAuthority (FCA)
creatinga “twinpeaks” regulatory structure in the UK.
TheFCA will be a separateinstitutionand not part of theBank of
England.
The FCA will be responsible for promoting effective competition,
ensuring that relevant markets function well, and for the conduct
regulation of all financial servicesfirms.
This includesactingto prevent market abuseand ensuring that
consumersget a fair deal from financial firms.
TheFCA will operatethe prudential regulation of thosefinancial
servicesfirms not supervised by the PRA, such asasset managersand
independent financial advisers.
Prior to1April 2013, theFinancial ServicesAuthority (FSA) will continue
tobe responsiblefor prudential and conduct regulation in the UK.
The Bank of England will have a responsibility for financial stability,
based on an amended statutory objective to protect and enhance the
stability of the financial system of the United Kingdom.
And, in support of this objective, the Financial Policy Committee(FPC)
will be establishedwithinthe Bank, charged with identifying,
monitoring and takingactiontoremoveor reducesystemic risks.
TheFPC, which alreadyexistsin interim form, will be ableto make
recommendationsand give directionsto the PRA and the FCA on
specific actionsthat should be taken in order to achievethe FPC‟s
objectives.

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Sourse:Andrew Bailey, ExecutiveDirector of the Bank of England and
ManagingDirector of the Financial ServicesAuthority‟sPrudential
BusinessUnit, and SarahBreeden and Gregory Stevensof theBank‟s
PRATransition Unit

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Theletter
Latest update aswetransition to the Prudential Regulation
Authority (PRA)
This letter givesyou more information on what you need todo tobe
ready for „legal cutover‟(LCO) on 1April 2013.
ThePRA‟s approach to supervision wasoutlinedin thetwoapproach
documents– one for insurersand one for deposit-takersand investment
firms.
We will publish revisedversionsof thesedocumentsat LCO, and
thereafterthedocumentswill act asstanding referencesfor firmsonthe
PRA‟ssupervisoryapproach, key PRA policies,and how weintend to
meet our statutory objectives.
Belowis an overview of the keymessagesfrom the approach documents:
- The PRA will have two statutory objectives to promote the safety and
soundness of firms and specific to insurers, to contribute to securing
an appropriatedegreeof protection for policyholders.
Astablefinancial system, that is resilient in providing the critical
financial servicesthe economyneeds, is a necessarycondition for a
healthyand successful economy.
- ThePRAwill not operate a zero-failure regime.
ThePRAwill, however, seekasfar aspossiblewithresolution
arrangementsin place, toensure that anyfirms that fail dosoin a
waythat avoidssignificant disruptiontothe supplyof critical
financial services, includingan acceptabledegree of continuityof
cover for policyholders; and

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- ThePRA‟s approach to supervision will be clearlybased on
judgement rather than narrowlyrules-based, Supervisoryjudgements
will be forward-looking, taking intoaccount a widerangeof possible
risksto the PRA‟s objectives.
Theapproach documentscan be accessedvia the FSAwebsite:
Bankinghttp:/ / www.fsa.gov.uk /static/ pubs/ other/ pra-approach-
banking.pdf
Insurancehttp:/ / www.fsa.gov.uk/ static/pubs/ other/ pra-approach-
insurance.pdf
In December 2012,I gave a short interview entitled“Anew approachto
financial supervision:thePrudential RegulationAuthority” whichcan be
viewedhere:
http:/ / www.youtube.com/ watch?v=yJDp1XY3DJM
Thefollowingis an update on certain aspectsof thetransitionwherewe
can now provide greater clarity.
1. Changesin policy
Individual Guidance
ThePRAwill have a different regulatoryand supervisory focusthan the
FSA, includinga new set of objectivesand a different approach to
supervision, asset out in the approachdocuments.
This meansthat guidancepreviouslyissuedtofirmsby FSAsupervisors
toindividual firms will not have been issuedwith PRA aimsand
objectivesin mind.
Therefore, apart from the four categorieslistedbelow,FSAindividual
guidancewill not automaticallybe permanentlytransitionedor
confirmedby thePRA.

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Guidanceto be transitioned
Thefollowingfour categoriesof „individual guidance‟will be
automaticallytransitionedat LCO:
1.Individual Capital RequirementsGuidance, includingcapital planning
buffersfor banks and capital guidanceissuedto insurers
2.Individual LiquidityGuidance
3.Individual guidancegiven by the FSAthat enablesa firm tomove
from a higher proportionalitytier toa lowerproportionalitytier as
provided for in the FSA‟s „General Guidanceon Proportionality: The
Remuneration Code(SYSC19a) & Pillar 3 disclosureson remuneration
(BIPRU 11)‟
4. Guidanceon the completion and submission of RegulatoryReturns
Other Guidance
Firms should review all individual guidanceand their associated
behaviour in accordancewithsuch guidanceand assessthe
appropriatenessof that behaviour in linewiththe PRA‟s statutory
objectives.
Firms should in many casesbe able todothisbyexercisingjudgement
and without consultingthe PRA.
Firms should document this review.
In certain cases, firmsmay wishtorequestthat the PRA (FSAuntil
LCO) review itemsof FSAindividual guidancewhichare:
1.Not includedin thecategories identified above;and

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2. Where the firm wishesthePRA toexplicitlyconsider and confirm
whetherbehaviour or actionsin linewiththat guidance will remain
appropriatein the PRA.
This is not an opportunityto request that all previously issued individual
guidanceshould beretained.
Betweennow and 30September 2013, firms may submit a list of those
itemsof individual guidancewhich theywishthe PRAtoreview, together
withtheir own assessment of whetherthebehaviour or actionsset out in
theguidancewouldcontributetowardsthe advancement of thePRA‟s
objectives.
Relationshipmanaged firms should submit requestsfor review totheir
supervisor,and non-relationship managed firms should submit them to
theCustomer Contact Centre at email addressfcc@fsa.gov.uk until 2
April 2013and the PRA firm enquiriesat email address
PRA.Firmenquiries@bankofengland.co.uk from 2April 2013onwards.
Firms will be abletocontinuetorely on guidancereferred for review
until the PRAreachesa decisionon whetherthe guidanceremains
appropriateor otherwise.
Supervisorswill confirm thetimetablefor the review followingthe
submission of thefirm‟s list;reviewswill be completed no more than 18
monthsafter LCO.
Our judgement and anyresulting responsethat wegive toa firm will
focus on theadvancement of the PRA‟sobjectives.
Any guidancethat isnot referred to the PRA for review will ceasetohave
anystatusasformal PRAindividual guidancefrom 30 September 2013.
This doesnot mean that firms should automaticallychangetheir
behaviour.

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If firms deem that their behaviour isappropriate, theyshould continueto
act in that way.
If firms decidetoalter their behaviour, now or in the future, theyshould
discussthis with their supervisor,in linewith Principle11.
This approachtoindividual guidancedoesnot changerecent
assessmentsof the risksthat wesee asbeing posedby a firm‟sbusiness.
In particular, westill expect Risk Mitigation Planpoints(reflectingthe
FSA‟s objectives)outlined in previousARROW lettersto beconcluded,
wherewejudgethat theywill contributetoadvancingthe PRA‟s
objective.
Existingwaiverswill alsobe automaticallytransitionedtothePRA.
Threshold Conditions
TheexistingFSAThreshold Conditionswill be replaced in their entirety
bythe ThresholdConditionsbeingintroducedby HMT via secondary
legislationpursuant to the Financial ServicesAct 2012.
TheThreshold Conditionsin theorder that hasbeen laid before
parliament are essentiallyin the form HMT consultedon in October
2012.
Thenew conditionswill take effect at thesametime asthe rest of the
amendmentstoFSMA areintroduced, on 1April 2013, for both existing
authorisedfirms and all in-flight cases.
TheFinancial Servicesand MarketsAct (Threshold Conditions) Order
2013,aslaid beforeparliament, can be viewedat:
http:/ / www.legislation.gov.uk/ ukdsi/2013/9780111533802/ pdfs/ ukdsi_
9780111533802_en.pdf

P a g e | 28
2. Interaction with the PRA
PRA webpresence
Anew web pagefor thePRAis now available on the Bank of England
websiteat www.bankofengland.co.uk/pra
This will be the webaddressthat firms should use from LCO.
At this stagefirms can find a brief introduction tothePRA on the
website.
Corporate information “About the PRA” will be addedand pageson
policy and PRA newsand eventswill be published.
Thecore operational informationon authorisationsand supervisionwill
bepublishedat LCO.
Firms arewelcometosend feedback includingcommentsand ideas
about the PRA webpresenceto pra.webcontent@bankofengland.co.uk.

P a g e | 29
Firm Enquiries
TheOctober 2012approach documentsexplained that firmswhodonot
havea dedicated supervision team should usethe Firm Enquires
Functionastheir first point of contact withthe PRA.
ThePRAFirm Enquirieswill be operational from 2April 2013and its
contact details are:
Telephonenumber 02034617000(operatinghours9:00 – 17:00)
Email PRA.Firmenquiries@bankofengland.co.uk
TheFSAcontact centre must be used for all enquiriesup to 2April 2013.
However, during Marchsome callstothecontact centre will be
transferredtothePRA‟s Firm Enquiries, in preparation for takingfirm‟s
enquiriesat LCO.
3. Publication of the PRAHandbook
As previouslystated, at LCO, certain provisionsfrom the FSAHandbook
will be split betweenthe FCAand the PRA.
Twonew Handbookswill be created:one for the PRA and one for the
FCA.
Most provisionsin the FSAHandbookwill be incorporatedintothe
PRA‟sHandbook, the FCA‟sHandbook, or both, in linewitheach new
regulator‟sset of responsibilities.
Theintentionisto publish the PRA Handbook in March 2013.
After LCO, the PRA will amend itsown suite of policy material as an
independent body in accordance with the processes laid down in the
Financial Services Act 2012, including cooperation with the FCA and
external consultation.

P a g e | 30
4. Enforcement Consultation
We published the consultation on the PRA's approach to enforcement,
including proposed statutory statements of policy and procedure, on 20
December 2012.
Theconsultation ison the FSAwebsite,wewelcomeany commentson
theproposalsby 28February 2013.
http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-39.shtml
Attached isa set of updated FAQsand additional information.
Yourssincerely

P a g e | 31
FAQson transition to the PRA
1. General questions
At what stageistheFinancial ServicesBill?
TheFinancial ServicesBill receivedRoyal Assent on 19 December 2012
andbecame theFinancial ServicesAct 2012(TheAct).
Somesectionsof TheAct –came intoforce on 23January 2013, in order
toenablethe Treasurytomake secondary legislation, and toensure that
thenew regulatorscan prepare for their respectiverolespost legal
cutover.
Therest of the provisionsrelatingto thenew regulatory regime will
comeintoforce on 1April, thedatedesignatedfor legal cutover tothe
new structure.
TheAct will be supported by secondarylegislationand Treasuryhas
consultedon a number of draft orderswhichwill need to be madeprior
tolegal cutover.
Theordersdetailingthenew Threshold Conditions,allocating
responsibilityfor making rulesin relationto FSCSbetweentheFCA and
thePRA, amendingcertain mutualslegislation, determining whichtypes
of holding companythe regulatorsnew powersover qualifying parent
undertakingsapplytoand specifyingwhichregulated activitieswill be
subjecttothePRA‟sregulationhave alreadybeen laid beforeParliament
and areexpected to be approved byboth housesby mid-March.
http:/ / www.legislation.gov.uk/ ukdsi/2013/9780111533802/ pdfs/ ukdsi_
9780111533802_en.pdf
How will thePRAdeterminewhich investment firmsshouldbe
designated forprudential regulation bythePRA?

P a g e | 32
We publisheda draft statement of policyon the designation of
investment firmsbythe PRAin October 2012:
http:/ / www.fsa.gov.uk /static/ pubs/cp/ boe-pra-cp.pdf
Thepolicystatement and the firms tobedesignatedby thePRA will be
finalisedahead of legal cutover.
ShouldI continue to submit myreturn throughGABRIEL?
ThePRAwill have itsowndata collectionand qualityassuranceteam –
theRegulatory Data Group - which will take over thePRAregulatory
data related workpreviouslyundertaken by theFSA‟s Data Monitoring
Team (theFSA‟s central data collectionteam).
For firms who report regulatory data via GABRIEL there will be no
change to this reporting and you will continue to use the GABRIEL
system toreport asyou do now.
GABRIEL will be operatedby FCA. Firms are tocontinuetousetheir
current URL and login details toaccessthesystem.
Theexistingdata itemswill remain withonlyminor changestothe
wording.
Any technical queriesabout thesystem should be raised withtheFCA
Contact Centre on 0845606 9966or email addressfcc@fsa.gov.uk.
Whereshould I submit myfirm‟semail/ paperreturns?
For firmswhoreport regulatorydata via email or in hard copy (paper)
more detail of whereto submit your returnswill be provided on the
PRA‟sinternet site www.bankofengland.co.uk/prasoon.
Wherefirms providedata directlyto FSAsupervisorsor policy teams,
you will continueto dosoafter LCO.

P a g e | 33
If, after LCO, you are unsure where to report data, please firstly check
the PRA‟s internet site under the section on regulatory data or contact
PRA‟sFirm Enquiries.
Contact details will be:
Telephonenumber 02034617000
When will thePRAreleasefurther contact details/ newaddress?
Movesto20 Moorgateare takingplacein stages, having started in early
January2013.
Belowis a tablelistingthe move datesfor each division:
Supervisorswill confirm outstanding contact details such astelephone
numbers,email addressesand email addressesaround their move dates.
For firmswithPGP encrypted keys, communicationon new access
codeswill alsobe included.
Will theFCAand PRAhaveseparate registers?
There will be one registermaintainedby theFCA. It will be availableto
all firms, reflectingtheposition of both thePRA and theFCA.

P a g e | 34
Will I retain thesameregistration number?
Yes.Your FSAnumbers will be carriedacrosstothe new Register.
Will therebeaPractitioner Panel?
Yes.The PRA will establisha PractitionerPanel.
2. Authorisationsand transitional arrangements
What will happen to ourexisting permissionsand waivers?
Transitional arrangementsfor „grandfathering‟existingprovisionsare
dependent on secondarylegislation.
We are in discussionwithHM Treasury, with a view to the legislation
providingthat existingPart IV permissions,controlled functions,
passports,limitationsand requirementsare grandfatheredwithout the
need for a firm to take action.
Exact detailsof grandfatheringarrangementswill be finalisedonce
secondarylegislationhasbeen published.
We also published more detail on transitional arrangements for approved
persons, and on Handbook transitionals more generally, on 25 January in
CP13/3
What happensif weare applying foraneworvaried permission or
waiversover theperiod includingLCO?
ThePRAwill ensurethat applicationsto the FSAthat aremade before
legal cutover but not determined until after legal cutover are transitioned
tothe appropriate regulator and made against the appropriatestatutory
tests.

P a g e | 35
Exact detailsof „in-flight‟authorisation arrangementswill be finalised
oncesecondary legislationhasbeen published.
When will weknowthefinal changesbeingmadeto theApproved
Personsregime?
There is more detail on our approved personregime in ourApproach
Documentsand in the consultationpaper (CP12/26) coveringchangesto
theapproved personsHandbook sections.
This paper can be accessedhere:
Consultationfor CP 12/26 closed on 7 December 2012,weare currently
reviewingtheproposalsin light of responsesto theconsultation and
expect the final PRA ruleson approved personsto be madebythe PRA
Board at or around LCO, whenother substantivechangesto the
Handbook will alsobe made, and accompanying PolicyStatements
issued.
Pleasesee section4„Policy Material‟below for more detail on finalising
thePRAHandbook.
We alsopublishedmore detail on transitional arrangementsfor approved
personson 25th January in CP13/3
Will thenewthreshold conditionsbemorespecific?
HM Treasuryhaspublished indicativethreshold conditions.Dual
regulated firms will need to meet twosetsof conditions,oneset from the
PRAand oneset from the FCA.
For thePRA there will be threshold conditionsspecific toinsurersand
threshold conditionsfor all other firmsregulated by thePRA.

P a g e | 36
http:/ / www.hm-
treasury.gov.uk/ d/ condoc_fin_regulation_draft_secondary_leg.pdf
Will authorisation andthedifferent approval processestake moreorless
timewiththePRA?
Thestatutorytime limit on authorisationsin FSMAwill remain
unchanged after legal cutover.
ThePRAwill report against statutory timelimits.
ShouldI continue to useONAafter legal cutover?
Immediately after LCO, the ONA system will continuetobe used for the
submission of applicationsand notifications,withsome minor changesto
reflectthat it will be owned by theFCA, but accessibletoboth regulators.
Will firms still berequiredtodisclosewhotheyare authorised and
regulated by?
Yes.We have consultedon revised wordingof thisstatusdisclosureand
a proposed transitional, aspart of consultationon Handbook changes.
Thepaper can be accessedhere:
Will I berequiredtoresubmit anyinformationornotificationsthat are
submittedjustbeforeLCO?
No. Any submissionsor information received prior toLCO will not need
tobe resubmitted.
CP 13/3 outlinesHandbook transitionalprovisionsrelatedto
information submissions.
How will I knowwhereto send information ornotificationsafter LCO?

P a g e | 37
Whereinformationor notificationsare required under a rule, the
appropriatesubmission details will be updatedin thePRA‟s rulesor on
thePRAwebsite.
CP 13/3 setsout more information in relation to thetransition of time
limitsand notification requirementsin therulebook.
3. Supervision
What is thePRA's approachtosupervision?
ThePRA‟s approach to supervision wasoutlinedin thetwoPRA
„approach‟documents– one for deposit-takersand investment firms, one
for insurers– initiallypublishedin October 2012tofacilitatescrutinyof
thePRA‟s proposed approachasthe Financial ServicesBill passed
through Parliament.
Thedocumentsalsoset out some key policy material for firms.
We will publish updated versionsat legal cutover, and thereafter the
documentswill act asstandingreferencesfor firmson the PRA‟s
supervisoryapproach, keyPRApolicies,and the PRA‟s statutory
objectives.
When will mylast FSArisk assessment visit be?
We are currentlyplanning the transitionfrom theFSA‟s risk assessment
frameworktothe PRAframework.
Firms will be notified of how their supervisionwill be transitioned to
„continuousassessment‟from the Regulatory Period previouslyindicated
in anARROW or SupervisoryAssessment letter.
Thenew SupervisoryAssessment Framework will be a continuous
assessment model, focusing on judgementsabout keyriskstothePRA‟s
objectives.

P a g e | 38
For more detail refer totheApproach Documents.
When will I knowwhichcategory myfirm fallsinto?
Acorepart of the PRA‟s work will be toassessthesignificanceof a firm
toitsobjectives.
With this in mind wehave divided all firms intofive „categories‟of
impact.
Before LCO wewill write tofirms notifying them of their categorisation.
Will myfirm still berequiredtocomplywith FSARiskMitigation
Programme(RMP) items?What will happentoRMP?
We have streamlined thenumber of actionsin the RMP and split them
intoconduct and prudential actions.
Your supervisor will have communicated with your firm to confirm the
outstanding RMP actions, and your firm is accountable to the relevant
regulator for their resolution.
Whowill bemyPRAsupervisor?
One of themajor changeswemade in 2012wastoestablishprudential
and conduct supervisionteamsfor dual regulated firms.
You should now be awareof your PRA supervisor.
If you have not been allocateda supervisoryou should continueto
contact usthrough the FSAContact Centre.
At LCO the PRAwill have itsown Firm Enquires, contact details will be:
Telephonenumber 02034617000

P a g e | 39
Will individual capital guidanceand individual liquidityguidancestill
apply?
Both the individual capital guidanceand individual liquidityguidance
issuedby the FSAtoPRA-regulated firmswill continuetoapply.
How will European and other policyinitiativessuch asSolvencyII and
CRD IV affect thePRA‟s supervision model?
Information about how the interactionof such initiativeswill affect the
PRA‟sapproach will be made availableaspart of the implementationof
thesepolicies.
4. Policy material
How will thePRAissuepolicymaterial after LCO?
ThePRAApproach Documentsset out that the PRAwill establishand
maintainpublishedpolicy material whichis consistent withitsobjectives,
clearin intent, straightforwardin presentationand asconciseaspossible.
As set out in our December letter, only a limitedamount of FSAnon
Handbook guidancewill be transferredtothePRA.
In addition, theletter accompanying theseFAQs setsout in detail our
approachto FSAIndividual Guidanceand the action required by firms.
5. Feesand costs
Will thecurrent feestructure beadopted bythePRA?
Firm‟s current feeswill seethem through this fee period. For the first fee
year under the PRA(expectedtobe 2013/ 14)the PRAfeesstructure will
bebased on adaptingthecurrent structure, makingonlythe necessary
changestoaccommodatedual-regulation.

P a g e | 40
Theseproposed changesare in the feespolicy Consultation Paper
(CP12/28)
http:/ / www.fsa.gov.uk /static/ pubs/cp/ cp12-28.pdf
How will feesbeset next year?
For thefirst year under the PRA (expectedto be 2013/14) thePRA fees
will be set to recover the annual funding requirement it needsto meet its
statutoryobjectives.
This funding requirement and thefee ratestorecover will be included in
thePRAfeesratesConsultation Paper (CP) expectedto be published in
April 2013.
How is creatingthePRAgoingto bepaid for?
Thefeesthat wecharge firms fund the FSAand thetransitionwork that
weare doingfor thenew regulator.
We have set out the regulatory reform costsin this year‟s businessplan.
TheAct makesprovision for the PRAtorecover, from the industry, the
regulatoryreform transition costsof theFSAand the Bank of England.
6. Co-ordination with the Financial Conduct Authority
On what basiswill theFinancial ConductAuthority (FCA) and the
Prudential RegulationAuthority(PRA) worktogether?
Thedraft Memorandum of Understanding (MoU) betweenthe FCA and
thePRAsetsout a high level frameworkfor how thetworegulatorswill
worktogether withinthe new regulatorysystemprovided for by theAct.
It will be vital that the twoauthoritiespursue their own mandates,
respectingthe UK‟sTwin Peakssupervisorysystem.

P a g e | 41
But it will alsobe essentialthat theycoordinateactivitiesin some areas,
and cooperatein others.
TheMoU setsout thesearrangementstohelp ensure theyare effective
and efficient.
There will alsobe a separateMoU coveringthe specific issuesraised by
thejoint regulationof with-profitsinsurance contracts.
BoththeFCA and PRAarevisitingusnext year, howdoyou intend to
separatethetwoareas?
TheFCA and PRA are twodifferent regulatorslookingat different
aspectsof thebusiness, although there isa requirement to share
information. Detail of the FCAand thePRA‟sassessmentsand
expectationsof firmsare set out in therespectiveApproach Documents
7. Current & forthcoming publications
There area varietyof publicationsthat firms should be awareof,
including:
- Banking- TheBank of England, Prudential RegulationAuthority
approachdocument tobanking supervision
http:/ / www.fsa.gov.uk /static/ pubs/other/pra-approach-banking.pdf
- Insurance- The Bank of England, Prudential RegulationAuthority
approachdocument toinsurancesupervision
http:/ / www.fsa.gov.uk /static/ pubs/other/pra-approach-banking.pdf
- Designationof investment firms by the PRA - this document setsout
how thePRA will exercisethepowersthat will be conferred under
FSMA 2000, Order 201(the draft Order).

P a g e | 42
http:/ / www.fsa.gov.uk /static/ pubs/other/designation.pdf
Draft Memoranda of Understanding (MoU)
- Draft MoU betweentheFCA and the PRA
http:/ / www.fsa.gov.uk /static/ pubs/mou/ fca_pra.pdf
- Draft With-ProfitsMoU betweenthe FCAand the PRA
http:/ / www.fsa.gov.uk /static/ pubs/mou/ draft-with-profits.pdf
- Draft MoU betweenthePRAand the FSCS
http:/ / www.fsa.gov.uk /static/ pubs/mou/ fca_pra.pdf
- Draft MoU betweenthe HMT, Bank, PRAand FCA on international
organisations
http:/ / www.hm-
treasury.gov.uk/ d/ fin_fs_bill_mou_international_organisations_jan2012.
pdf
- MoU betweenHMT, Bank (includingthePRA) on financialcrisis
management
http:/ / www.hm-
treasury.gov.uk/ d/ fin_fs_bill_mou_financial_crisis_management_jan201
2.pdf

P a g e | 43
Opinionof the European Insuranceand
Occupational PensionsAuthority on
SupervisoryResponsetoa
Prolonged Low Interest Rate
Environment
Introduction and Legal Basis
1.This Opinion is issued under the provisionsofArticle 29(1) (a) of
Regulation(EU) No1094/2010of theEuropean Parliament and of the
Councilof 24November 2010(hereafterthe „Regulation‟).
As established in thisArticle, EIOPA shall play an activerole in building
a common Union supervisoryculture and consistent supervisory
practices,aswell asin ensuringuniform proceduresand consistent
approachesthroughout the Union.
2.This Opinion isbeingissued in fulfilment of EIOPAs responsibilities
tofacilitateand coordinatesupervisory actionsunderArticle 18(1)and
Article 31(e) of the„Regulation‟.
3.Theinformation gatheringrequirementsin the Opinion areincluded
under theprovisionsofArticle35of the „Regulation‟.
4.This Opinion isaddressed tothe national competent authorities
represented in EIOPA‟s Board of Supervisors.
5.TheOpinionincludesan appendix setting out keytasksfor EIOPA
andNational SupervisoryAuthorities.
Context
6.TheJapaneseexperiencein the 1990sand early2000sdemonstrates
both theplausibilityof a prolonged period of low interest rates,aswell as
theimpact of such a scenario.

P a g e | 44
Many Japanese life insurers had built up substantial books of guaranteed
business from the 1980s and were vulnerable to a prolonged period of low
interest rates.
Theresult wasthat between1997and 2001,seven Japanesefirms failed
and legislationwaspassedtoallowinsurersto alter guaranteedrateson
policieswheretheyface a high probabilityof bankruptcy.
7.EIOPA hasbeen highlightingfor some timethe potential solvency
risksarising from a prolonged period of low interest rates.
In 2011EIOPAcarriedout a stresstest includinga “lowyield scenario”
toassessthe effectson the EU insurancesectorof a prolonged periodof
lowinterest rates/yields.
Twoscenariosinvolvingdifferent profilesfor yieldsweretested.
Theexerciseconcludedthat “5% to 10% of the included companies
wouldfacesevere problems, in thesensethat their MCR ratiowouldfall
below 100%.
In addition, an increasednumber of companieswouldobservethat their
capital positionwoulddeterioratewithMCR ratesonlyslightlyabove the
100%mark, wherebythey could become vulnerable toother potential
external shocks.”
It is alsohighlightedin therecentlypublished EIOPARiskDashboard
asa significant risk identified by national supervisoryauthorities.
8.TheEIOPAFinancial Stability Report for thesecond half of 2012
highlightsthecomplex and uncertain financial and economicsituation
facingEuropeaninsurers.
EIOPA hasfocusedtodateon insurersbut the lowinterest rate
environment isalsohaving an impact on occupational pension funds.
EIOPA plansto explorethismore fullyduring the course of 2013.

P a g e | 45
9.On one hand, weak economic conditionsacrossthe European
economyimplythat monetary conditionsin theEU are likelytoremain
adaptabletotheprevailing economicenvironment.
This is reflectedin theofficial interestratesin Europe that remain at low
levelsand on a downwardtrend.
On theother hand, European government bond yieldscontinuetobe
divergent withsome countriesexperiencingnegativereal yieldsat some
maturitiesdue to a flight toquality, while othersare experiencinghighly
positivereal yieldsacrossmost maturitiesreflectingcreditworthiness
concernsand other uncertainties.
10.Longterm interestratesare of critical importancetolife insurers,
sincethese institutionstypically have long-run obligationsto
policyholders that becomemore expensive in today‟s termswhenmarket
ratesarelow.
Consequently, thefinancial positionof thesefirms typically deteriorates
under such conditions, in particular wherethe duration of liabilities
exceedsthat of assets.
This problem is even more pronounced where guaranteed ratesof return
havebeen offered topolicyholders.
11.Aprolongedperiod of lowinterestratesmay alsohave an adverse
impact on non-life insurerspursuing a businessmodel whereinvestment
returnsareused tocompensatefor weakunderwritingresults.
In some cases,buoyant investment returnshave facilitatedintenseprice
competitionfor market share withsomefirms operatingwithtechnical
underwritinglosses.
If underlying insurancebusinessisbeing supportedby investment
returnsthisbusinessmodel will be challengedby a prolonged lowyield
environment if nomanagement action is taken to changethebusiness
model.

P a g e | 46
12.Non-life insurers may also be affected in a situation where low yields
do not provide sufficient returns to counteract the effects of inflation on
longer tailed business.
This is a more difficult situation, since it requiresinflation hedging over
a long maturity.
13.Theprecisetimingof whenthe effectsof a prolonged low interest
rate environment wouldmanifest themselveson insurers‟balancesheets
dependson the accountingmethodology in use, aswell asthe business
linesbeing written.
14.If market value isin use, the impact is very rapid sinceany declinein
benchmark interestrates isreflectedin the discount rateapplied to
liabilities.
This effect being amplified wherethe duration of liabilitiesisgreater
than that of assets.
Theoutcome isthat availableassetstocover solvencyare eroded.
Arelatively small number of EU jurisdictionsutilisemarket value in
insuranceat present and they have alreadyfelt theimpact of low interest
rates.
15.If historic cost accountingis used then theimpact on an insurer‟s
balancesheet appearsmore slowlysinceit emergesthrough lowerprofits
or lossesthat are ultimatelytaken to thebalance sheet.
Thefact that the effectsof lowinterest ratesare slowtoemergein
balancesheet termsdoesnot mean theproblem isnot there and there is
a real risk that firms could build up hidden problems.
This arguesfor the examinationof a wider set of metricswhenassessing
the performanceand conditionof firmsexposed to thisrisk.

P a g e | 47
Examinationof market value and historiccost accountingbalance
sheetscan provideuseful comparative information, while analysisof
firms‟cashflowsprovidesan insight intoemergingimbalances.
16.In life insurance, guaranteed businessis the most exposed to a
prolonged period of low interest ratessincethere may be a “yield spread
compression”.
In thiscase, asassetsare (re)investedtheachievablespreadbetween
returnson assetsand guaranteed ratesshrinks.
This reinvestment risk is the primary meansbywhichthe impact of low
interest ratesaffectsthe financial positionof firms in a historic cost
accountingenvironment.
17.In terms of official solvencyrequirements,SolvencyI is mainlybased
on historic cost accountingand isnot a risk basedframework.
As a result, the potential solvencyimpact under SolvencyI is limited and
may takesome timetoemergein termsof solvencycover.
Nevertheless, somenational supervisoryauthoritiesrate a prolongedlow
interest rate environment asan important risk for the insurancesector.
18.Theimplementation of SolvencyII wouldseea move tomarket value
and a riskbasedsolvency requirement that would explicitlycalculatethe
interest rate risk capital chargeand woulddiscount insuranceliabilities
usingrisk free ratesasa basis.
In thiscontext, it is important that insurersdo not store up risksthat
may crystalizesuddenlywiththe implementationof SolvencyII.
Any delay in the full implementationof SolvencyII should beused asa
window for national supervisoryauthoritiesand insurersto deal withthe
issue.

P a g e | 48
19.Theimpact of thecurrent period of lowinterestrateshasbeen felt in
several European jurisdictions,wherethenational supervisory
authoritieshave alreadytaken a rangeof different measurestodeal with
theissue.
20.Internal research by EIOPA has highlighted the challenges faced by
national supervisory authorities and individual insurers in responding to
therisksposed by lowinterest rates.
In termsof guaranteedbusiness, there are noimmediate options
availablein relationtoexistingbusinesswhichmust be addressed
through more medium term measures,such asincreasedreserving.
New business,on theother hand presentsmore optionsin termsof
changesin product design to “de-risk” them or changesin the mix of
business.
Firms have alreadystarted torespond by utilisingtheseoptions.
Taking the above into consideration, EIOPA recommends the
following supervisory responses:
Scoping the Challenges
21.National competent authorities,if theyhave not alreadydone so,
should actively assessfor theinsuranceindustry in their jurisdictionthe
potential scope and scaleof the risksarisingfrom lowinterest rates.
National competent authoritiesshould then report toEIOPAtheir
findingsregarding potential scope and scaleof risks.
22.EIOPAwouldcoordinate a further exercisetoassessthe conditions
that would be requiredfor significant adversesolvencyand/ or systemic
stability problemstoarise, aswell asto estimatewhensuch problems
wouldarise.

P a g e | 49
23.National competent authoritiesshould intensifythemonitoring and
supervision of insuranceundertakingsidentifiedashavinggreater
exposure tothe risksposed by a lowinterest rate environment.
This should followa clear escalation of supervisory activitydependent
on thesituationof the individual firm being considered.
Promoting Private Sector Solutions
24.Unsustainablebusinessmodels in particular should facechallenge
from supervisorsat an earlystage and it is expected that insurance
undertakingsshould be encouragedtoresolvetheir ownproblems.
Even in thosecountries where thecapital impact of low interest rateshas
already been recognizedthrough market-consistent accounting, a threat
tobusinessmodelsstill exists.
Persistent low interestratesmay damage theunderlying value
proposition of insurers,resultingin a downwardpressure on salesand
consequentlypressureson expenseratios.
Additionallylowinterestratesmay encourageother businessmodel
changessuch asalterationsin asset allocationsin a “searchfor yield”,
whichmay create new riskson the asset sideof thebalancesheet.
25.National competent authoritiesshould actively engagewith
insuranceundertakingsin exploring private sector measurestoaddress
therisksraisedby a prolonged period of lowinterest rates.
Theyshould takeintoconsiderationthemaintenanceof thestability of
firmsand policyholder interestsin this engagement.
In particular, theyshould consider the balanceof risk exposure between
insuranceundertakingand policyholders.

P a g e | 50
This effort should cover both “in-force” business(policiesalready
written) and new business.
26.National supervisoryauthoritiesshould explorewith insurance
undertakingsmeasuresto improveundertakings‟ownfinancial
resilience.
This is especiallyimportant in relation to“in-force” business, where
measuressuchasincreasedreserving are likely tobe the onlyoptions.
In termsof new business,if product redesign is not beingconsidered,
then national supervisory authoritiesshould explorewhat measures
firmswould taketo ensure their financial resilience.
27.National supervisoryauthoritiesshould explorewith insurance
undertakingsthe other measuresthat could be taken regarding new
contracts.
Such measuresmight includeadaptation product designsin such a way
asto addressthe risksarisingfrom lowinterest rates.
Thelatter could includea de-riskingof productsor measurestoincrease
their flexibility.
SupervisoryAction
28.If national competent authoritieshave taken or are considering
takingmeasuresthat wouldbe appliedtoall firms in their jurisdiction
facingthese risks, EIOPA recommendsthat such measuresshould
incorporate, asappropriate, conditionalityand exit featuresif needed.
It is expectedthat conditionalitywouldset out clear criteriafor availing
of the measuresbeingoffered.
Equally, there should be clear exit criteriafor the cessationof such
market wide measures,if feasible.

P a g e | 51
29.If national competent authoritiesare consideringtakingmarket-wide
measuresthentheyshould notify EIOPAand its Membersof this
intention.
This will allowbetter coordination of measuresacrossjurisdictionsin
termsof timing and broad design.
Discussionof proposedmeasureswithEIOPA Member authoritiesthat
havealreadytaken such action wouldalsohelp toimprove policy design.
30.EIOPAwouldengagein a follow-upexercisewith Membersin 2014
toexplorewhat actionshave been taken in light of this Opinion.
Aformal report wouldbe prepared for considerationat theEIOPABoard
of Supervisors.
This opinion and itsAppendix (Summary of recommended Key Tasks
and Deliverables) will be published on EIOPA‟s website.
Done at Frankfurt am Main, 28February2013
[signed]
Gabriel Bernardino
Chairperson
For theBoard of Supervisors

P a g e | 52
Appendix – Summary of recommended Key Tasksand
Deliverables
National SupervisoryAuthorities(NSAs)
1.NSAstocarry out a coordinatedexercisetoquantify the scaleand
scopeof therisksarising from aprolonged lowinterest rate environment
(coordinationby EIOPA– see below point 2).
2.Tointensifythe monitoring and supervisionof insurersidentifiedas
facinggreater exposure tothe risksposed by a prolonged low interest
rate environment.
3.Toengagewithinsurerstoexploreprivate sector measuresto address
the impact of lowinterestratesthat balanceboth financial stability and
policyholder interests.
This would includeexplorationof actionsthat firmscould take to
improvetheir financial resilience.
In particular, NSAs wouldactively challengebusinessmodelsthat are
identifiedasbeing unsustainableand toencourage insurerstotake
appropriateactions.
4.Toexploremeasuresto “de-risk” new businessand alsomeasures
related to“in-force”businesstoimprove financial resilience.
5.Toreport progressin theseareasto EIOPA, preferably, on a half
yearly basisand toparticipatein an EIOPAcoordinatedstocktake in
2014.
6.Where NSAs areplanningto, or are about to, take supervisoryaction,
tonotify EIOPAand its Members.

P a g e | 53
EIOPA
1.Todevelop withNSAsan agreed frameworkfor thequantitative
assessment of the scopeand scaleof therisksposed by a prolonged low
interest rate environment.
2.Tocoordinatethe exercisedescribedabove under point 1and collate
resultsfor reflectionback toNSAs.
3.Todevelop a reportingtemplate for NSAstoreport on a –preferably–
half yearly basis progressin supervisoryinteraction with firmson this
subject.
EIOPA will workwith NSAsto agreedetails of the information to be
reported, sothat thiscan be effectivelycollated, analysed, and reflected
back toNSAs.
4.Toundertake a stocktaking exercisein 2014toassessprogressin
dealingwiththeimpact of a prolongedperiod of lowinterest rates.

P a g e | 54
The European crisisand the development of
the European Union
Speechby Mr LarsRohde, Governor of theNational
Bank of Denmark, at the EuropeanAffairs
Committee‟sconsultation:“TheEuropean crisisand
thedevelopment of the European Union”, former
Upper Chamber of the DanishParliament,
Copenhagen
Thank you for inviting
me to speak here today.
TheEU member states
havebeen severely
affected bythe financial
crisisand thenthe
sovereigndebt crisis.
Therecessionisnow in
itsfifth year.
Many measureshave been takentocontain thecrisis, and more are in
thepipeline.
Beinga small, open economy, Denmark is highlyvulnerable to
developmentsin theEU.
We participatein manycommunityefforts, but not in the monetary
union.
We have opted out, but at the same time the krone is tied closelyto the
euro.

P a g e | 55
Thepurposeof keepingthekrone stableagainst theeuro is toavoid
exchange-rateuncertainty– which is very important toan economy such
asthe Danishone, with exportsaccountingfor almost half of the gross
domestic product.
At the same time, inflationand inflation expectationsare anchored to an
area pursuing stability-oriented economicpolicieswithlow and stable
inflation.
Thefixed exchange-rate policymeansthat fiscal policyis theinstrument
at our disposal tostabilise the economy.
This arrangement hasserved uswell for 30years.
Denmark‟seconomicpolicy enjoysconsiderable credibility– alsoin the
financial markets.
This is whywehavefor sometime been – and indeed, wearestill – seen
asa safe haven for international investors.
This hasresulted in historicallylowinterest rates.
Despitethemost recent increase, DanmarksNationalbank‟sdeposit rate
is still negative.
Thelow level of interest rateshasmitigatedthe real economic
consequencesof thefinancial crisis.
But at some point interest rateswill normalise.
Thestabilityof the anchor currency– i.e. of the euro area – is important
tothe Danish economy.
Thepolitical system in a non-euro area EU member state suchas
Denmark must perform a balancingact – how far should wegoin terms
of participation?

P a g e | 56
This questionwastopical in relationto theissueof closer fiscal
cooperation, asit is in the current processtowardsa bankingunion.
In the early1990s,the European foreign-exchangemarket came under
strongspeculativepressure and one currencyafter the other came under
attack.
Thecrisisculminated in 1993with speculation againsttheExchange-
Rate Mechanism, ERM, existingat thetime.
Some20years downthe line, the financial crisisand sovereigndebt
crisisin certain European countrieshave onceagain put theEuropean
economiccooperationunder pressure.
Themost recent crisishasdiffered from the situation in theearly 1990s
wheneach EU member statehad itsowncurrency.
If national currencieshad not been replacedby the euro in 1999, we
could very well have seen an extensivecurrencycrisison top of the
financial crisisand the sovereign debt crisis.
For theeuro area, theeurohaspreventedthis.
TheDanishkrone, on the other hand, washit by short-term currency
unrest in the autumn of 2008, aswereother small currencies.
Subsequently, the sovereigndebt crisishas, from timeto time, ledto
pressure on the krone, but this hasbeen upward pressure due to large
capital inflows.
Afixed-exchange-ratesystem isnot in itselfan effectivebulwark against
irresponsiblepolicies.
Theeuro area sovereign debt crisiscould verywell have taken a far more
dramatic path, leadingto disorderlysovereigndefaults, without the
varietyof pan-European initiativestosolve the sovereign debt crisisthat

P a g e | 57
weretheresult of theeconomic-politicalcooperation betweentheeuro
area member states.
Theintroduction of theeuroback at theturn of the millennium caused
interest ratesto drop markedlyin many euro area member states,and
yield spreadswithin theeuro area wereall but eliminated.
But the interest-rategainswerenot used for consolidation.
Instead, theyboosted domestic demand.
As a result, competitivenesswaseroded, and thesemember statessaw
increasingcurrent-account imbalances.
At the same time, housing bubblesemergedin several member states,
andthislater causeddistressfor thebanksthat had helped tofund
property projectsat inflatedprices.
Theeuro area systems for monitoring and addressinggovernment
deficitsand other macroeconomic imbalancesproved to be completely
inadequate.
This wasone of the reasonswhythe imbalanceswereallowedto develop
– and to becomemuch more seriousthan theyhad been ahead of the
crisis in theearly1990s.
Furthermore, risk premiumson the government bondsof thesemember
stateswereunsustainablylow for a longperiod after the introductionof
theeuro.
Hencemarket pressuresfor political action werecorrespondinglylow.
This changed abruptlywhenthe financial crisisand sovereigndebt crisis
set in.

P a g e | 58
Sincemany countrieshad failed to take advantage of the favourable
economicclimatein the earlyyears of thiscentury toconsolidate public
finances,their positionwasweakwhen the crisis struck.
Still, most countries eased fiscal policy in 2009aspart of concerted
European effortstooffset thenegativeimpact of the crisison growthand
employment.
This caused further deterioration of public finances,and for several euro
area member statesit led to an outright sovereign debt crisis.
One reason wasthat thebanks‟non- performingloanseventually
became a problem for the public sector, therebyweighingdown on
government
finances.
In many countries, fiscalexpansion during the boom immediatelybefore
thecrisishasnow madewayfor extensiveconsolidation.
In other words,fiscal policy hasamplified cyclical fluctuationsinsteadof
dampeningthem.
Therefore, thelesson to usall – from theERM crisis in the early1990s
and recent years‟financial crisisand sovereign debt crisis– isthat it is
important toaddressmacroeconomic imbalancesin time toprevent
systemic risk.
Thefinancial crisisand thesovereign debt crisisrevealed a clearneed to
strengthen politicalcooperationbetweeneuro area member states.
Themost recent crisishasexposed at leasttwofundamental weaknesses
in the EU‟seconomiccooperation.
Firstly, thepressure for budgetarydisciplinewasnot strong enough.
Secondly, the one-sidedfocuson fiscal policy wastoonarrow.

P a g e | 59
Acomprehensive view of themember states‟economic situationis
required.
It is alsoevident that pricestabilityalone is not sufficient toensure
financial stability.
In recent years, theEU member stateshaveadopted a seriesof new rules
aimed at addressingtheseweaknesses, includingtheFiscalCompact,
whichtightenstherequirementsfor fiscal discipline.
In addition, theEU member stateshave adopted rulesfor surveillanceof
macroeconomicimbalances, under whichthe European Commissionis
to monitor whethera member stateis building up excessiveimbalances.
There is nowmore focuson systemic risk, and a European Systemic
RiskBoard, ESRB, hasbeen set up.
In Denmark, wehave introduced the Systemic Risk Council, whose
memberswereappointedlast Thursday.
Although Denmark has, in many ways, navigated the financial crisis
better than many other countries, we have generally had to learn the
sameeconomic policylessonsasothers.
In Denmark, too, fiscalpolicy in the pre-crisisyears reinforced the boom
rather than dampening it.
Among other things,thisledto higher wageinflationand weaker
competitiveness.
As a result of the procyclical fiscal policy, thedownturn wasmore severe
than it wouldotherwisehavebeen.
But theunderlying fiscal policywassounder than in the member states
now experiencingproblems.

P a g e | 60
This is true both in termsof cyclical stabilisationand long-term fiscal
sustainability, although welost focusin thepre-crisisyears.
Theconclusion tobe drawnfrom developmentsin the 2000s, not onlyin
Denmark but throughout the EU, is that if fiscalpolicy isprocyclical in a
boom, it will have to be procyclical alsoin thesubsequent downturn.
Obviously, this isnot expedient.
Denmark haschosen to adopt the Fiscal Compact asa frameworkfor
futurefiscal policy.
This hasbeen reflectedin a Budget Act witha more stringent sanctions
regimevis-à-vis local and regional government – thelevelsat whichit
has, historically, been most difficult to observe budgetsand agreements.
Majorstepshave alreadybeen takentostrengthen economic cooperation
in theEU with stronger budgetary disciplineand increased
macroeconomicsurveillance, but all thesame it is essential that there is
still political will to ensure that the policiespursuedhave a strong
medium-term orientation while alsodampening, not amplifying cyclical
fluctuations.
It is important to observethespirit aswell asthe letter of thecommon
rules.
This alsoappliesin theevent of a future banking union.
***
Thefinancial crisiswassucceededby a sovereign debt crisisin the EU.
This hasrevealed closenegative interaction betweentheeconomyand
bank financesin a number of member states.
Toprevent the credit lendingfrom collapsing, governmentshavehad to
usepublic fundsto support the bankingsector.

P a g e | 61
At the same time, the sovereigndebt crisishasmade thesegovernments
more dependent on the banks, whichbuy up a largeshare of the
domestic government bonds.
Fiscaldevelopmentshave raised concernsabout thesemember states‟
abilityto continuetosupport the bankingsector.
This hashad a negativeimpact on thebanks‟accessto funding and
reinforcedthetendencyfor bankstoreducetheir lending.
Sincelowerlendingvolumesmay further curb economic activity, the
economicchallengesbecomeeven greater.
In the short term, thebanking union representsan attempt tobreak the
negativeinteractionbetweengovernmentsand banks.
Thevision behind the banking union istoprevent criseslike theone
seen in recent yearsand tomitigatetheimpact if a crisis should,
nevertheless, arise.
Theaim isto shielddevelopmentsin thefinancial sector from
developmentsin public financesin individual member states– and vice
versa– and increasefinancial stability.
In the longer term, a banking union is tohelp support financial
integration in the EU, and hencethe singlefinancial market.
Vulnerableeuro area member statesare facingmajor challengesin
relationtoboth public financesand the financial sector.
Abanking union doesnot necessarilyaddressthesechallenges.
Thereformsrequired in thesemember stateswill undoubtedlybe costly
andhave real economicimplications.

P a g e | 62
It is imperative to find a solution to existing challengesin vulnerable
states and banks so as to bring them back on the right track without
unduedelay.
DanmarksNationalbank supportstheoverall vision for a bankingunion.
Abanking union makes goodsensein an integratedfinancialmarket,
wherefinancial institutionsare freetooperate acrossnational borders.
Thesinglemarket for financial serviceshascontributedtostrengthening
competitionand the supplyof credit, tothe benefit of both the Danish
financial sector and itscustomers.
Integration withinthe European financial sectorincreased until 2007,
but hassincethe onset of the financial crisis been decreasing.
Like theother EU member states, Denmark has an interest in a well-
functioningsinglefinancial market.
I seemerit in the current discussionson theestablishment of a banking
union asamechanism for supporting financial integrationin the EU.
Developing the individual elementsof a bankingunion will be a huge
task.
If the vision is toberealised, thebankingunion must comprise at least
threeelements:
(1) a singlesupervisorymechanism,
(2) a singleresolutionmechanism for failingbanks, and
(3) a singledeposit guaranteescheme.
Initially, focus has been on establishing a single supervisory mechanism
under the auspices of the European Central Bank in order to solve some
of the problemscurrentlyfacedby some European banks.

P a g e | 63
Thesinglesupervisory mechanism is primarily aimed at euroarea
banks,but non-euroarea member statesmay opt in.
Theframeworkconditionswill differ, dependingon whetherthemember
statein question hasadopted the euro.
At present it looksasif non- euro area member stateswill be ableto
participatein thesinglesupervisory mechanismon an equal footing with
euroarea member states.
This is positive.
Theset-up witha singlesupervisorymechanism can enhancethe
credibilityof financial supervision in theEU, especiallyin theeuro area,
and will contributetofinancial stability, whichwill alsobe an advantage
for the Danish economy– whether or not wedecidetojoin.
TheCommission is expected to tableproposalsfor the remaining
elementsof thebanking union later this year.
Thecontent is asyet unknown, and it isdifficult topredict the final
set-up.
Thedistribution of costsis a politicallysensitiveissue, not least in terms
of whether legacyassetsare tobe includedin the equation.
Theestablishment of a strong singledeposit guaranteescheme, and not
least a crediblesingleresolutionmechanism withbail-infor failing
banks,is essential if theEU is to succeed in containingthe negative
contagion from banksto governmentsin a future banking union.
In Denmark wealreadyhave a credibleresolution mechanism, and we
haveretained ourAAA ratingthroughout the crisis.
Both have serveduswell.All the same, it cannot be ruled out that
Denmark‟sindependent resolution approach hasincreased thebanks‟

P a g e | 64
fundingcostsin theshort term, soit isimportant toestablisha single
European frameworkfor resolution of banks.
TheDanishbankingsectoris characterisedby substantial cross-border
activitiesamong thelargest banks.
Theconsolidatedassetsof Danish banksamount to almost four times
Denmark‟sGDP.
In addition, theratio of thelargest Danish bank's consolidatedassetsto
GDP is among thehighest in the EU.
Due to the sizeof the banking sectorand the high degreeof
concentration, a singleEuropean insurancescheme, asprovided for by a
bankingunion, will, other thingsbeingequal, be attractivefrom a Danish
point of view.
After all, insuranceschemesworkbest whenmany equal policyholders
sharetheburden.
***
Overall, I believe that it wouldbe an advantage for Denmark to
participatein thebankingunion oncethe remainingtwo legs– the
deposit guaranteescheme and the resolution mechanism – are in place.
Therefore it is important to remain firmly seated at the negotiation table
and contribute to ensuring a robust and effective set-up which Denmark
may join if wechooseto doso.
If a credibleframework is establishedfor a bankingunion, and tax payers
will not havetofoot the bill whenbanksfail in the future, thiswill have a
stabilisingeffect, not onlywithin the euro area but alsoin other member
states.
As I seeit, that isin itselfa strong argument in favour of Danish
participationin a bankingunion.

P a g e | 65
Thank you for your attention.

P a g e | 66
Summaryof the replies
Possible Recovery and
Resolution Framework for
Financial Institutions other than Banks
TheEuropean Commission held a stakeholder consultationon a
PossibleRecovery and Resolution Framework for Financial Institutions
other than Banks (hereafter – Consultation) between5October and 28
December 2012.
The initiative follows the adoption, on 6 June 2012, of a Commission
proposal for an EU framework in this area for banks and investment
firms.
Consistent withinternational-level workin this area, it examineswhether
andhow the failureof different kindsof nonbank financial institutions,
notablycentral counterparties,central securitiesdepositories,and
systemic insurancecompanies,should bemanaged by specificstepsto
ensure orderlyrecovery and resolution wherenecessary.
TheCommission servicesreceived 67responsestothe Consultation.
Theconsultation attracted a widerangeof view from stakeholders(see
figure 1).
Thebusinesscommunity wasthe most activestakeholder group, which
madeup two thirds of all responses(see figure 1).
Besides thepublic institutions,whichwererelativelyactiveparticipants
in theConsultation, the Commission servicesalsohad an opportunityto
hear the viewsof other important stakeholders,such astradeunion or
academics.

P a g e | 67
Avast majorityof businessesthat repliedtothe Consultation werethe
providersof different financial services.
Figure 2depictstheparticipation of businesscommunity in the
Consultation.
As regardsthegeographicaldimension, only four responseswerenot
from theUnion – all of them arrived from the United StatesofAmerica
(seeFigure4 below).
Responses3 came from half MemberStates(14out of 27).

P a g e | 68
Twothirdsof Union‟sresponses(41out of 63) came from theUK, DE
and organisationsrepresentingUnion-wideinterests.
For thetransparencypurposes,it should alsobe mentioned that among
respondentsfrom businessand employee/ customer organisations,two
thirds(33out of 49) of respondentswereorganisationsrecognised in the
TransparencyRegister, whichwasset up and is operated bythe
European Parliament and the European Commission.
This summary aimstoprovidedifferent interest groups‟viewson the
threecategoriesof financial Institutionsother than banks, asreflectedin
theConsultation:
1) financial market infrastructures;
2) insurancecompanies;
3) other non-bank entitiesand institutions.

P a g e | 69
1. FINANCIAL MARKET INFRASTRUCTURES
All identifiedstakeholdersgroups, except insurance,provided comments
on thepossiblerecovery and resolution framework for financial market
infrastructures(FMIs), i.e. central counterparties(CCPs) and central
securitiesdepositories(CSDs).
There is a broad agreement that specific measuresshould bedefinedfor
the recovery and resolution of FMIs astheyare central to thefinancial
system and often non substitutablegiven their unique role.
Thevast majority of respondentsagree that CCPs, carrying much more
risk than CSDs, should be the first onesto be subject to a specific EU-
frameworkfor recovery and resolution.
Stakeholders saw national insolvency rules as inadequate and were
broadly supportive of Commission proposals to improve resolution
process.
CCPsinsist on the need togivecareful considerationsto thepractical
implicationsof such a regimeon their operations.
Theyalsosuggest that the Commission should not rush intothe
definitionof a specific regime.
TheEMIR legislationhasdefined extremelystringent operating
standardswhichshould mitigatethe increasedrisks linked to the
broader range of derivativescontractscentrallycleared asa result of the
clearingobligation.
In their views, theCommission should instead playan active rolein the
development of appropriatepolicyresponsesat international level,
beforeproposinglegislationin that area.
There is a broad understanding that anyrecovery and resolution
frameworkshould beadapted to thespecific characteristicsof each type
of FMI.

P a g e | 70
In thisrespect the recoveryand resolution framework for CSDs should
bedifferent from therecovery and resolution frameworkfor CCPs, given
thesubstantial differencesbetweenthese twotypesof institutions,
notablyin termsof risk profile.
CCPsunderlinethat duetothe strong interdependenciesbetweenFMIs,
recovery and resolution regimesshouldbe coordinatedand effectivefor
all of them tomitigatepotential spill over effects.
Consequently, everyone isbroadlyin agreement that CCPsand CSDs
with banking licensesshouldbe subject toa framework specific to them
rather than the one for banks,by wayof a functional approach.
Thevast majority consider that resolutionmeasuresshould primarily
aim toensure thecontinuityof theessential servicesprovided by FMIs
whichis keyin order tosafeguard financial stability, and that robust
recovery planningunder the oversight of supervisorsisvital in order to
preservestability in the markets.
Few businessrepresentativeshoweverquestion if the objectiveof the
resolution should not be the protection of creditorsasit is thecaseunder
theinsolvencyprocedure.
Specifically, some asset managersbelievethat bail-in for CCPs would
not be an appropriateasa resolution tool, whichinstead should aim to
protect clients‟assets.
Tradeunionsunderlinethat, regardlessof thedesign of the framework
andthepowersinvested in theadministrator, there must be no
worseningof employees‟rightsin any aspect due toa company being
put under resolution.
As regardsthemanagement of a crisis situation, financial service
providersrecommend a clear distinctionbetweenthedifferent phases
(ordinaryproceduresin difficult situation, recovery, and resolution).

P a g e | 71
Such a distinctionin their view is of the utmost importancein order to
avoid any uncertaintyover whohasthe full responsibility.
Specifically, CSDs believethat all CSDs should be covered by the future
recovery and resolution frameworkand that such frameworkshould
emphasiserecoveryover resolution in view of the their systemic
importanceand lack of substitutability in their respectivemarkets.
There hasbeen a general support for reachinga common understanding
in thepoint of resolution (trigger), but differencesappeared on the
conditionsfor the trigger.
For instance, asset managers saw the trigger to be as close as possible to
insolvency and as long as resolution authorities have sufficient discretion
todetermine whether the resolution trigger hasbeen met.
Contrary to this,oneof theexchangesargued that “the intervention out to
bewhen a FMI showsearlysignsthat it may be a viablebusinessin the
short to medium term, taking intoaccount thenature of thebusinessand
thestagein itsdevelopment (e.g. start-upsmay need more leeway)”.
Stakeholdersalsobroadlyagree that supervisorsshould be ableto
requirechangestoFMI operationsaspart of recovery and early
intervention efforts, but there should be clarity and transparencyon the
criteria / circumstancejustifying suchintervention.
Specifically, trade unionswouldnot like to seerecovery coststo be
incurredby employees.
There is wideagreement on the necessarytoolsand powerstotransfer
operationstoa competing FMI or a bridgeentity, some notable
operational constraints(portabilityof positions,common technical
standards) notwithstanding.
Banks underlinedthat non-systemic partsof FMIsshouldbe liquidated
and stepsshould betaken to avoid concentration in the FMI market.

P a g e | 72
CCPschallengethepracticalityof solutionsbased on the transferof
businessto another, whileCSDsagree that resolution authoritiesneed to
havea broad rangeof resolutiontoolsavailableto them, but they insisted
that such toolsshould be adapted to their businessmodelsand services
provided.
On thetemporary stayon the exerciseof earlytermination rights,public
authoritiesare broadlyin favour, but banksand asset managers
expressedconcernstohave thetemporary stayasa general rule.
In their view,the temporary staymight exacerbatea crisis.
If it wereto be used, strict guidelineswouldhave toapply.
Specifically, CCPshighlight that, though useful under certain
circumstances, theresolution authority‟spowertohalt paymentsshould
not lead to an automaticsuspension of all transfers.
Respondents listed predictability, clarity, preciseness, transparency and
parity among principles governing loss allocation, but also clarity on the
impact on the employeesof an entityconcerned.
Many support effectiveand proportionatelossallocation toolsamong
non-defaultingmembers or avoidance of moral hazard on the sideof
management and shareholders.
Contrary to this,asset managersstronglydefend tocap liabilityof
clearingmemberstoa pre-determinableamount, and to exclude
allocationof lossestonon-defaultingparties.
Finally, trade unions would like to see employees‟ prioritized right to
salaries and other means of remuneration in cases of failing financial
institutions.
Everyone generallyagreeson theneed for effectivecross-border
cooperationbetweenrelevant authorities,but viewsdiverge somewhat
on therole and powersof possibleresolutioncolleges.

P a g e | 73
Therole of collegesand cross-borderrecognition of resolution measures
are consideredasimportant.
CCPshowever emphasizethat the coordinationbetween authorities
should not jeopardizethe prompt implementationof recoveryand
resolution frameworksin emergencysituations,whereasCSDsconsider
that there should beno more resolutionspecificcross-border
arrangementsbetweennational authoritiesthanthoseprovidedfor
normal supervisorytasks.
Banks highlightedthat beforeany recovery and resolution frameworkis
implemented, the rulesand regulationsfor establishingFMIsaswell as
therulesensuring the protectionof participantsassets,portability of
assets,and segregation needtobe established.
In the same vein, banks invitethe co-legislatorstotakeintoaccount the
new legislation:EMIR1 and alsoforthcoming CSD Regulation(CSDR)
andSecurities Law Legislationwhichaddressesquestionsrelatedto
custodyand thetransfer of securities.
Moreover, banksurge the European Commission to consider
conclusionsof the CPSS-IOSCO consultativereport on recovery and
resolution of FMIs,towhich banksresponded, in order toensure
international consistency.
2. INSURANCE AND REINSURANCE FIRMS
While a wide range of stakeholders provided their viewson FMIs, only
public institutions and insurers commented in detail on the part of the
Consultation dealing with the resolution of insurance and reinsurance
firms.
Publicinstitutions,tradeunionsand consumer bodiesgenerallyperceive
insurersto give risetolesssystemic risk than banks.

P a g e | 74
Many public institutions consider that the traditional tools (run-off,
portfolio transfer) work well for traditional insurance business, and
observelittleneed tofurtherharmonisethem at EU-level.
Still, thereis considerable support for developingtheseand other powers
further, notablyfor larger cross-border groups,especiallywhentheyare
engaged in a rangeof nontraditional and non-insurance(NTNI)
activities.
Tradeunionsand consumer bodies view that some harmonisation of the
resolution frameworkat theUnion level wouldbe beneficial, but should
account a specific nature of the industry.
Most howevernote that SolvencyII will considerably enhance
supervisors‟powersof intervention, and manynote that the regulatory
responsesspecific to NTNI activitieson a systemic scaleshould wait for
andbe informed by theworkcurrentlyundertaken by the International
Association of InsuranceSupervisors(IAIS) on policymeasuresfor global
systemicallyrelevant insuranceinstitutions(G-SIIs).
Reflectingthis,there is general but not unequivocal support for further
studying the scopefor resolution toolswhichcould protect policyholders
aswell asfinancial stabilityin the event of an insurer‟sfailure.
However, responsesare not conclusiveon whetheror not detailed
recovery and resolution plansshould be prepared and resolution
authoritiesand collegesset up.
Insurersand insuranceassociationswereunanimousin voicing strong
concernson the proposal todevelop recovery and resolution measures for
theinsurancesector and theydonot seethe rationalefor additional
measureson top of the current framework whichdoesnot appear tohave
failed.
Themain criticismsand reasonswhytheproposal is not neededare the
following:

P a g e | 75
-need to first identifythe sourcesof systemic riskin insurance.
Theinternational debateis still open on whichactivities(mainlynon-
traditional and non-insuranceones) havethepotential for systemic risk
in insurance.
Henceno measuresshould bedecided upon (includingenhanced
recovery and resolution) until the scopeof application(definitionof
systemic relevance) is not clearlydefined.
Moreover, insurersdonot providecritical functionsessential for the
smooth functioningof financial servicesinfrastructure.
- consistency withinternational developmentsmustbeensured.
Theresult of any anticipationat EU level on the internationaloutcomes
could be a different interpretation(of both on systemic risk and on the
applicabilityof theFSBkey attributesof effectiveresolution regimesto
insurance) thantheglobal regulatorswiththe risk of creating
competitivedisadvantagesfor European insuranceundertakings.
-current frameworkis sufficient: the existingand forthcomingsupervisory
toolsand powerson recoveryand resolution (includingthoseenvisaged in
SolvencyII) are seen by insurersassufficient and adequatetoaddress
recovery and resolution in insurance.
Potential gapsmaybe filledby MemberStates.
- measuresthat work for bank donot work forinsurance.
Insurersfear that the Commission may proposea framework that was
originallythought havingbanksin mind and whichwouldnot workfor
insurance.
It is paramount that the featuresof the insurancebusiness(long-term
perspective, funding model, limited interconnectedness, high

P a g e | 76
substitutability) are taken intoaccount whenlookingat systemic risk
and at potential resolution scenariosfor insurance.
Thetools suggestedin the consultation paper werefelt asalready
availablefor supervisorsor not fit for insurance.
Specificallyon bail-in, all respondentsfailed to seetheusefulnessof this
tool in insuranceexcept one whomentionedthat thiscould be relevant
for mutual insurancecompanies in order toenhancetheir capital base.
On powers, views were mixed, ranging from those who believe that they
are already in place to those that think that not all of them are necessary
for insurance.
In conclusion, accordingtoinsurers,there is no evidencethat resolution
measuresare needed for insurance.
Accelerated insolvencyis not needed for insuranceand the focusshould
rather be on recovery.
Sincethe latter is alreadysufficientlycoveredin existing or forthcoming
framework,no additional measuresare needed.
Somerespondentsalsomentionedthat therisk posed to financial
stability by noninsuranceactivitiescan be effectivelymanaged through
enhancedsupervision and enhanced risk management and governance
requirements(e. g. ownrisk and solvencyassessment in SolvencyII).
Along these lines,norespondentsfavoured the appointment of a
resolution authority at EU level and onlya few respondentswould
welcomemore harmonization at the Union level.
Howeverthis should come together or possiblyasa follow-upactivityto
theimplementationof SolvencyII.

P a g e | 77
Somerespondentsfrom the insuranceindustry recognised that in
relationtocrossborder groups, due totheir potential for increased
systemic relevance,coordinationmay be improved.
However, thisis alreadyensured by Directive 2001/17/ EC (theInsurance
Winding-up Directive) and bythe existingsupervisorycollegesand the
increasedpowers(alsoon crisismanagement) that theywouldhave
under Solvency II.
Finally, a few respondentssuggestedthat theCommission should start a
full analysisof what powersare alreadyavailableat EU and national level
andwouldlike to get more clarityon the next stepson theCommission
workon InsuranceGuarantee Schemes.
3. OTHER NON-BANK FINANCIAL INSTITUTIONS
Many public institutionsare stronglyin favour of lookingfurther into
appropriaterecoveryand resolution arrangementsfor payment systems
whicharenot owned, operated or financiallyguaranteed by central
banks.
Variousrespondentsalsosignal that trade repositories, tradingvenues,
hedgefundsand moneymarket fundscould assume systemic relevance,
while noting that thelatter(and other activitieslikerepos) wouldbe best
lookedat under relevant shadow bankingwork-streams, rather than steps
in termsof recovery and resolution.
Investment fundsand asset managersarguedthat theyare lesslikely to
havesystemic implications.
This view islargely based on the likelihoodthat suchinstitutionsmay
experiencefinancial distress,and on theimpact of such distresson
financial markets,clientsand taxpayers.
Therefore, nospecificresolutionpowersare necessarytotransfer asset
management contractstoa new asset manager, asthis type of transition
doesnot createany turbulencein financial markets.

Solvency ii News March 2013

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Solvency ii News March 2013