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February 6, 2009updated 13 Apr 2017 8:57am

European Union scrambles into action

Spurred on by the global financial crisis, the European Union has embarked on a wide-ranging reform of financial services legislation Jeremy Woolfe reports from Brussels on a major objective, one fraught with difficulty, to create legislative harmony among the 27 EU member states Pressures arising from the financial crisis are driving unprecedented urgency into plans embracing financial services legislation in the European Union (EU)

By Jeremy Woolfe

Spurred on by the global financial crisis, the European Union has embarked on a wide-ranging reform of financial services legislation. Jeremy Woolfe reports from Brussels on a major objective, one fraught with difficulty, to create legislative harmony among the 27 EU member states.

Pressures arising from the financial crisis are driving unprecedented urgency into plans embracing financial services legislation in the European Union (EU). The usual batch of incremental advances for the year is now over-shadowed by a drive to tackle underlying weaknesses, mainly due to the go-it-alone mindset of the 27 national finance ministries.

How to get the governments to work in harmony will no doubt be tackled in the forthcoming report from a high-level group of experts, set up by the European Commission (EC) in November 2008 and chaired by Jacques de Larosière, a former MD of the International Monetary Fund.

The group’s initial recommendations are due later this month, in time for European input into the next Group of 20 discussions in April. Following that, the EC is due to publish a comprehensive white paper detailing policy initiatives.

The failure of Brussels’ previous efforts to converge EU legislation can be put down to the EC having to move on tip-toe, that is, proceed with the utmost caution. Sadly, it had to, to avoid rousing dissent from the member states.

Hypocrisy abounds

The present Brussels spirit is well expressed by internal market commissioner, Charlie McCreevy. He refers to “a good deal of hypocrisy and double-speak” from national governments. In one of a series of recent speeches he complained bitterly that while they may be “pretty well unanimous” when they get together to address key issues, when it comes to action “the consensus breaks down”.

However, McCreevy continued, “never again will the political climate be so favourable for making a meaningful step forward”. This sums up the current scramble to seize the legislative initiative.

Much attention is focused on the governance issue to upgrade oversight, as covered by the three financial services advisory committees, the so-called ‘Level 3 Committees’. For insurance, there is the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), based in Frankfurt. The other two, in Paris and London, cover securities and banking.

So far, the three can do little more than advise. Now, the dream is to build a common supervisory culture, by turning them into a kind of super-regulatory body for Europe, having a common supervisory role.

Giving the committees teeth could result in the establishment of a European version of the US’s Securities and Exchange Commission. That would certainly be a significant step. But, warns one representative bystander, Nicholas Véron of the Bruegel think-tank in Brussels, any decision to go ahead is not one “[national] policymakers can take lightly”.

A positive development

Happily, at least one positive move is taking place. This is an EC announcement it is asking the council of the EU and the European Parliament to agree to direct funding from the community budget to the three advisory committees and other bodies influential on standards setting. The grants proposed would total €36.2 million ($47 million), cover the period from January 2010 for three years, and be available for specific projects only.

Also, during 2009 the EC also plans a “cross-sectoral stock-taking exercise” to look at “the coherence, equivalence and actual use of sanctioning powers among member states”. It will investigate the “variance of sanctioning regimes”.

When it comes down to issues particularly relevant to insurance, work will continue as usual on Solvency II, with a view to implementation by the end of 2012. There will also be attention given to revise the capital requirements directive (CRD).

Here McCreevy has somewhat wryly expressed hope that the final format for the CRD will be “robust, and not amended to a point where it is riddled with loopholes and get-out clauses, or rendered so complicated or multi-faceted via amendments such that the key measures and disciplines contained in the original proposal can be too easily gamed or circumvented”.

Last summer, the EC passed on its anti-discrimination directive proposal to the European Parliament and to the council. The parliament, which has a consultative role, will vote in March 2009, while discussions in council will continue through the year. A unanimous vote is necessary for adoption.

Brussels-based insurance and reinsurance body the Comité Européen des Assurances (CEA) points a finger at wording that recognises, in Article 2 (7), that insurers may use age or disability as relevant factors in the assessment of risk. It will be seeking to clear up doubts over the inclusion of medical experience and actuarial principles in the information sources for the risk assessment. It will continue to argue that risk differentiation does not constitute unfair discrimination.

Also on the Brussels agenda is the insurance guarantee schemes, under which the EC is considering the possible elements for harmonisation at EU level of national guarantee schemes for policyholders where an insurance undertaking is wound up.

The CEA’s basic position here is that it does not agree with the EC’s description of the status quo as adopting a caveat emptor (buyer beware) approach. It states that insurers are subject to stringent supervisory requirements to ensure consumers are able to claim on their insurer contracts. Life and non-life insurance companies, stresses the CEA, already have to hold sufficient own funds and maintain solvency margins as a buffer against unforeseen events.

Another issue for insurers in the 2009 Brussels programme concerns block exemptions. The system at present allows insurance undertakings to continue to gather and share market data with each other, but this concession is due to expire in 2010. During 2009, the CEA plans to continue to argue for continuation. The EC is due to publish its report during March.

A number of other significant issues are on the EC’s 2009 agenda. Among these is it intention undertake a plan for the regulation of credit rating agencies, revise deposit guarantee schemes, as well as initiatives on executive pay, and credit derivatives. The EC is also reviewing the existing regulatory framework surrounding hedge funds and private equity.

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