EUROPEAN FINANCIAL SUPERVISION
Response by the Association of British Insurers to the European Commission’s communication of 27 May 2009
Executive Summary
The ABI shares the Commission’s analysis of the causes of the crisis. Weaknesses have been revealed in the supervision of financial services that justify substantial strengthening of the supervisory framework at EU level.
Strengthening of Europe’s supervisory framework should not be allowed to distract attention from the work that remains to be done to resolve the current crisis. Many European banks have still not cleared their balance sheets. National Governments’ investments in banks still need to be wound down in an orderly manner.
Nor will a revised structure in itself prevent another crisis. Every structure has weaknesses. The challenge is to recognise and mitigate against those weaknesses. We believe that the right choice has been made to retain day-to-day supervision at national level. But in this case a fundamental improvement is necessary in the quality of decision-making and enforcement in national supervisory authorities.
Regulators and policy-makers at national and EU level must also recognise that insurance and banking are different activities. Insurance is an integral part of the financial system, and life insurers in particular are not immune to the recent heavy falls in the value of financial assets. Nonetheless, the basic business model adopted in insurance is not the same as that for banking, and insurers are not for the most part involved in maturity transformation, or dependent on leverage. Short-term liquidity risk is not a significant concern for insurance companies. Insurers have broadly – with some notable exceptions – weathered the storm well. The insurance industry would be damaged by a thoughtless read-across of solutions proposed for the banking sector’s prudential stability. Rather, a framework should be created which reflects the different risk profiles of all institutions within the financial sector.
The establishment of the European Systemic Risk Board is a useful development, but the proposed membership is dominated by central bankers. The Board will need access to expertise in insurance supervision, to ensure that the consequences of its recommendations for insurance are fully understood. In addition, macro-prudential regulation is a recently developed concept, and more detailed reflection would be helpful on the issues the Board will discuss.
We also support in principle the strengthening of supervision at EU level through the European System of Financial Supervision. Some important relationships remain to be resolved in detail – for example, between home and host supervisors, between national supervisors and the European authorities, and within Colleges of supervisors. These relationships need to be articulated in procedures and timetables, and it will be important to get this right. Further elaboration is also needed of the approach to a single rulebook. We are convinced that this is the right direction of travel, but the process needs to be managed with care, following the usual Better Regulation disciplines. Some national super-equivalents, such as the UK Listing Rules, need to stay.
Introduction
1 The Association of British Insurers (ABI) is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK’s capital. They are the risk managers of the UK’s economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings, and investment matters. And through the ABI they come together to improve customers' experience of the industry, to raise standards of corporate governance in British business and to protect the public against crime. The ABI prides itself on thinking for tomorrow, providing solutions to policy challenges based on the industry’s analysis and understanding of the risks we all face.
2 The ABI has consistently welcomed the Commission’s work on European financial supervision in the wake of the de Larosiere report, and appreciates a further opportunity to provide input. Where we have not commented on specific proposals, it is because we agree, or do not have a view. We look forward to the legislative proposals early in the autumn.
3 The Commission’s communication sets out proposals in an EU context. Many insurers operate in a global context, and it is essential that Europe’s new rules take into account wider international developments, such as the proposals put forward by Secretary Geithner in the US. The pressure of the crisis must not be allowed to let regulatory fragmentation develop, let alone protectionism.
4 We do not share the Commission’s views on the need for a rapid timetable. It is more important to get this structure right than it is to get it agreed quickly.
5 The ABI EU register of interest representatives number is 730137075 – 36.
European Systemic Risk Board (ESRB)
6 The ABI accepts the case for a macro-prudential body at EU level. Insufficient connection has been made between macro-economic and monetary policy, and the insights from micro-prudential supervision. It is important that the ESRB works in close co-operation with the Financial Stability Board at international level, and with national macro-prudential bodies such as the Council for Financial Stability proposed in the British Government’s White Paper Reforming Financial Markets.
7 It would be helpful if participants in the financial markets could be given a clearer idea of the systemic issues the ESRB will examine. Since the crisis, commentators have identified systemic risk in a very wide range of issues. This body will need to show greater rigour in the identification of systemic issues. Otherwise the ESRB will look at too many issues, thus diluting the value of its recommendations. It would be helpful if the Commission could publish a short communication on this point in the autumn, alongside the legislative proposals, drawing on the work under way in the international financial institutions such as the Financial Stability Board and the International Monetary Fund.
8 We agree that the ESRB should have no legally binding powers. However, we hope that in the great majority of cases its recommendations can be made public, and that they can be made independently of the ECOFIN Council. Any political filter will inevitably lead to recommendations inconvenient to Finance Ministers being watered down.
9 Given that the remit of the body will cover insurance and asset management as well as banking, we are concerned that the body will be dominated by banking interests. The chair of the European Insurance and Occupational Pensions Authority (EIOPA) is the only member of the body with an explicit insurance remit, and this imbalance needs to be redressed. Mechanisms need to be built into the procedures of the body to ensure that the impact on sectors other than banking are fully taken into account. It is also important that the staff of the body have access to adequate expertise in the supervision of insurance, and experience of the differences between insurance and banking.
10 As representatives of companies whose business lies mainly outside the euro-zone, we can understand, and share to some extent, the concern of those who are reluctant to see the body headed by the President of the European Central Bank (ECB). On the other hand, it is inevitable that the ECB will play a major role in this body. We welcome the solution identified by the European Council that the ESRB chair should be elected by the members of the General Council of the ECB. However, further mechanisms need to be established in the procedures of the body to ensure that adequate attention is paid to non-eurozone issues.
European System of Financial Supervisors (ESFS)
11 We welcome the recognition that day-to-day supervision will continue to be done at national level. We also welcome the strengthening of EU level supervision through the development of CEIOPS into the new European Insurance and Occupational Pensions Authority, a role that we have described as a “supervisor of supervisors.” On the question of the number of authorities in the ESFS, there are arguments both ways. Sectoral supervision bodies have some advantages in terms of concentration of expertise; integrated bodies have other advantages in terms of a holistic approach. No model is perfect, and experience of the crisis suggests that there is no correlation between the structure of supervisors and their success. On balance, we support the decision to retain three sectoral bodies at EU level, to limit upheaval. However, close co-operation between these bodies will be essential to ensure that all are aware of the implications of their activities for other sectors. We therefore support the proposed over-arching Steering Committee. Our views of the appropriate structure at EU level have no bearing on our views on the appropriate structure at UK level.
12 No firm proposals have yet been made about how the new EU bodies are to be financed. It is important that they should be adequately resourced to carry out the functions they have been assigned, and we would welcome clarity from the Commission on this point.
13 The Commission’s communication envisages voting in the Authorities on technical rules by Qualified Majority (QMV). However, the option of voting by simple majority is canvassed for decisions on the application of existing laws. We would prefer QMV to be used in all cases.
14 We would prefer to see a clear distinction drawn between prudential supervision and conduct of business regulation. While harmonisation of conduct of business regulation offers advantages in terms of consistency of practice for cross-border firms, local retail markets have retained their distinct characteristics. The Commission should therefore make it clear that the new ESFS authorities will be concerned in the main with prudential supervision.
15 Not much thought has yet been given to the place of occupational pensions under the new regime. They are different in many ways from other financial services, with their primarily social purpose. There are also huge differences between occupational pensions in each member state. For example, we need to specify that by this term we are referring to employer-sponsored pensions in the UK. Further reflection is needed before using some of the mechanisms proposed in this communication to harmonise the field of occupational pensions. Ill-judged attempts at harmonisation could have genuinely systemic consequences, with implications for member states’ fiscal responsibilities. It would be helpful if the Commission could bring forward a communication in the autumn dedicated to this aspect of its proposals.
16 It is essential that the legislation sets out in detail the decision-making procedures of Colleges of supervisors, in particular how decisions will be taken. Every effort must be made to take account of the views of host supervisors, and to ensure complete transparency of information between supervisors. However, we are clear that ultimately decision-making power should rest with the home supervisor. If Colleges are to be effective decision-making bodies, it is important that their membership and decision-making structure do not give too great a role to bodies with no genuine interest in the well-being and international competitiveness of the institutions under supervision. For global institutions, pragmatic ways need to be found to take account of the views of non-EU supervisors.
17 We agree that this initiative should give further impetus to the harmonisation of technical standards, and convergence in supervisory practice. For insurers, the main forum in which this will happen is the implementing legislation for Solvency II. However, there are in some cases (though certainly not all cases) very good reasons for differences in national practices. For example, the super-equivalent elements of the UK Listing Rules - such as the ability for shareholders to vote on major takeovers - do not constitute a barrier to trade, and are greatly valued by investors. The Listing Rules are a key factor in the attractiveness of London as a place to invest, thus providing Europe with one of the world’s largest and most liquid capital markets. The direction is towards a single rule book, but all should recognise that this will not happen overnight. It is essential that the process for moving towards a single rule book should respect the Better Regulation principles of thorough consultation and rigorous cost/benefit analysis.
18 The issue of settling differences between national supervisors is controversial. This should be a rare event. The process of harmonising technical standards should reduce the scope for disputes between national supervisors over time. Most differences will arise in the context of supervisory Colleges, which will benefit from a clear decision-making procedure. It is nonetheless essential that the legislation sets out a clear procedure for settling disagreements between national supervisors. This should be a last resort mechanism, as supervisors’ decisions should not lightly be overturned. The procedure should provide every incentive and opportunity for agreement to be reached voluntarily. However, without a dispute settlement mechanism there is a real risk of regulatory fragmentation.
19 Finance Ministers’ conclusions refer to the risk that this mechanism will impinge on Member States’ fiscal responsibilities. This is a legitimate concern, but its scope needs clarification.
20 The Commission is proposing to give the European Securities and Markets Authority the responsibility for direct supervision of credit rating agencies and central counterparty clearing houses. We support this central supervisory role for credit rating agencies, mainly because the College structure and decision-making mechanisms agreed in the Credit Rating Agencies Regulation are overly cumbersome, and give too great a role to “user” supervisors with no direct interest in the continuing health and effectiveness of the agencies.