The EU’s Solvency II Directive (2009/138/EU, as heavily amended by the Omnibus II Directive 2014/51/EU) regulates the insurance industry in the EU. Part of this Directive covers remuneration requirements. These are found in Article 275 of the European Commission Delegated Regulation 2015/35.
While not nearly as prescriptive and detailed as CRD IV, AIFMD or UCITS V, these requirements include the obligation for the establishment and maintenance of remuneration policies and procedures to avoid conflicts of interest and promote sound and effective risk management.
Key Article 275 points:
- Remuneration policy to promote effective risk management and avoid conflict of interest.
- Independent remuneration committee required.
- Fixed and variable appropriately balanced (but no cap required).
- Performance related variable compensation to be based on individual and business unit performance, financial and non-financial criteria.
- Downward adjustments for current and future risks.
- Substantial portion of variable be deferred for no less than 3 years.
- Termination payment related to performance over whole period and not reward failure.
- No personal hedging.
Member states were required to have transposed Solvency II by 31 March 2015 and firms must implement the new regime, including the remuneration regulations, from 1 January 2016. The European Insurance and Occupational Pensions Authority (EIOPA) issued guidelines for the implementation. Some countries like the Netherlands had already implemented detailed regulations for financial services firms, including insurance companies, that more closely track CRD IV, other countries have not yet issued their own detailed guidance on the implementation of Solvency II but firms are expected to be ‘compliant’ with Solvency II from 1 January 2016.
Although Solvency II and the EIOPA guidelines are not as prescriptive, for example there is no bonus cap, they differ in a number of significant ways:
- There is more limited scope to disapply the Solvency II requirements on a ‘proportionate’ basis.The principle of proportionality has been much debated with the EBA’s proposal to remove it for the application for CRD IV but the insurance sector will be struggling with this now to work out how to apply it to some of their smaller businesses.
- It does not limit variable pay deferral to ‘significant’ bonuses.
Neither of the two UK financial services regulators, the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) has issued guidance. The PRA has recently conducted a survey of current remuneration practices in the insurance industry to help them develop their supervisory framework for 2016.
It is possible we may see some guidance on things like the amount of variable pay (but not a bonus cap), deferral and clawback but it is unlikely that this will take the form of Remuneration Code/Rulebook.
The PRA has confirmed that Solvency II applies to their performance year 2016 for bonuses paid in 2017. Businesses will need to consider the requirements listed in Article 275 to see how this matches up against your existing remuneration policy and see what changes might be required.
This will be a journey towards compliance over the year or so. It can be difficult for some businesses to implement all the changes they need to make in one go as consents or notice may be required to make the changes, shareholder approval may be needed for new plans but over the next year or so insurance firms will be expected to have implemented the requirements. The main area of difficulty will be to understand how the proportional approach applies in some EU countries and to some of the smaller businesses.