The commencement of the Solvency II regime has now been put off until January 2016. Even then grandfathering provisions will delay many aspects of the project until even later. It is, however, proposed that an interim regime should be applied, starting from the beginning of 2014. This is to encourage firms to prepare for the the directive coming into force 2 years later.
Solvency II: a recap
Solvency II was due to create a new regime for the prudential regulation of the European insurance industry. It has been plagued by delays. A number of key issues have held up agreement on the Omnibus II Directive for many months. The issues include how guaranteed long term products should be provided for and the capital treatment of insurance activities outside Europe. The impending European elections, however, suggest that a resolution may be imminent.
In the meantime the Commission has proposed a "quick fix" directive. This will require member states to have the rules in place for the Solvency II regime by January 2015 and to bring them into force a year later. Given the scale and complexity of the project, this is still a challenging schedule. Complying with it requires supervisors, firms and groups to devote considerable resources to the preparation process.
The interim regime
To encourage and support this process the European Insurance and Occupational Pensions Supervisors (EIOPA) has now published its final guidelines on interim preparation for Solvency II. The final guidelines follow a consultation earlier this year. EIOPA has responded to criticisms within the consultation by downscaling some of its proposals.
The guidelines are addressed to national supervisors. Article 16(3) of the EIOPA regulation says: "the competent authorities and financial institutions shall make every effort to comply with those guidelines and recommendations."
National supervisors must, within 2 months of official publication (expected to be on 31 October 2013), either comply or explain why they are not willing to do so. The first elements of the interim regime proposed in the guidelines should then (to the extent that supervisors comply) come into force on 1 January 2014. Some material will come in later. Some material only applies to firms or groups that meet materiality thresholds.
The guidelines are focused on Pillars II and III of the regime. They cover in particular governance, including a proposed requirement for a "forward looking assessment of own risks", which anticipates the Solvency II "own risk and solvency assessment" (ORSA). The guidelines also cover the internal models approval process and reporting requirements.
The initial draft of the guidelines, published earlier this year, attracted considerable criticism. Insurance Europe, for instance, has commented:
"The interim Guidelines should focus on the undertaking's level of preparedness. Instead of stating that national competent authorities should ensure that undertakings have in place certain elements of the Solvency II framework during the preparatory phase, the Guidelines should state that national competent authorities should ensure that undertakings are making appropriate progress towards the implementation of certain elements of the Solvency II framework during the preparatory phase."
Others have complained that EIOPA's proposals are too detailed and onerous and apply requirements derived not only from the settled level 1 text, adopted in 2009, but also from level 2 and 3 material which has not yet been formally published or consulted on. EIOPA itself acknowledges that some member states may not have the necessary powers to comply.
How will the PRA react?
The UK regulator has consistently encouraged its firms to prepare for Solvency II. At the same time it is sensitive to cost and resources considerations. Andrew Bailey, now the CEO of the Prudential Regulation Authority (PRA), has commented:
"A simpler but serviceable Solvency II regime could have been adopted, with a phased introduction that allowed it to be developed over time to reflect practical experience. It will be important in the future to give appropriate thought on implementation timetables and potential associated costs before placing large burdens on firms and regulators. Based on the experience of Basel II and now Solvency II this type of regulation can take several years to agree. Both regulators and industry should plan accordingly, and not impose costs on firms and ultimately consumers which could be avoided."
So the PRA can be expected to adopt a proportionate approach in determining whether it should "comply or explain" in whole or in part. It may consider that it has, to a large degree, already complied with the substance, if not the letter, of many of the guidelines.
The legal basis for the guidelines
EIOPA's power to issue these guidelines is questionable. Article 16 of the EIOPA Regulation, on which it relies, does not envisage guidance on how to transpose a Community Directive, which in law is essentially a member state competence. Further problems include the fact that the Solvency II directive is incomplete and not ready for transposition in its existing form. So the guidance is based on a legal foundation that does not yet exist.
Should there be a challenge?
That said, the European Court tends to be unsympathetic to technical arguments of this kind. So a challenge is not bound to succeed. It may not serve a useful practical purpose if made by a UK based firm. Firms in other European countries may be in a different position.
It must nonetheless be a matter for concern that EIOPA should adopt quite prescriptive measures based on such a shaky legal foundation. The EIOPA regulation makes clear that one of its purposes is to support the network of supervisors within Europe. This might perhaps have been done more effectively in this instance without attempting to impose any legal compulsion on member state supervisors and by framing suggestions in higher level terms.
Procedural issues
If the guidance is to be challenged, the procedure would be a judicial review under article 263 of the Treaty for European Union. There is a 2 month time limit. That time limit will run at the latest from official publication of the EIOPA guidance at the end of October.
