Twelve-hour days are more or less the norm for the 200 European Commission (EC) officials in Brussels writing up new legislation to rein in financial services. They are working in response to the 2007-2008 financial crisis and they follow norms set by various G-20 meetings. By January 2012 the Brussels legislative treadmill had come up with 29 proposals in 23 months, an unprecedented rate of production.
Well-known measures include the famous Capital Requirements Directive (CRD 4), which imposes reserve capital investments for banks, and the European Markets Infrastructure Regulation (Emir) on derivatives. There is also the Market Abuse Directive (MAD), and the Audit Directive, which is intended to open up markets for the auditing of large companies beyond the big-four auditing companies.
For the life insurance industry, closer to home is the controversial Financial Transaction Tax (FTT), which would apply a tax on specific transactions, or so-called “taxables”. The EC has stated that, from 1 January 2014, the exchange of shares and bonds could be taxed at the rate of 0.1% and for derivatives contracts at 0.01%.
CEA not impressed
In response, European insurance and reinsurance industry body the Comité Européen des Assurances (CEA), writes that it “strongly believes” that arguments by the EC in favour “do not support” its introduction. The body, whose members have almost €7.5trn ($9.9trn) invested in the global economy, continues that it “does not share the view that the insurance sector is under-taxed”. It also dismisses arguments that exemption from value added tax is an argument for additional taxation.
Also strongly opposed to the FTT is the Alternative Investment Management Association (AIMA), the global hedge fund association. The AIMA complains that the FTT could lead to a significant decrease in cross-border trading of financial instruments in the EU. Hence, stresses the organisation, it could undermine the single EU market. It would result in a significant slowdown in trading of financial instruments like shares, bonds and derivatives in the EU. In short, it would have widespread, unintended damaging consequences.
Less obvious threat
Perhaps less obviously relevant to the life sector, but wrongly, is the Markets in Financial Instruments Directive (MiFID), which was launched in 2007.
MiFID rules provide harmonised regulation for investment services across the 30 member states of the European Economic Area – the 27 European Union (EU) member states plus Iceland, Norway and Liechtenstein.
October last year saw the unveiling by the EC of a vast array of revisions to the package. Known as MiFID II, these are now passing though the committee stage at the European Parliament.
One implication for life insurers is that interest groups fronting up the consumer retail investor passes are pressing for revisions that would impact on inducements to sell, that is, would regulate sales commissions.
Organisations, such as EuroInvestors and Finance Watch, say that the EC’s present version does not give adequate protection to retail investors purchasing financial products from banks.
In themselves, whatever rules the European Parliament eventually applies to Articles 24.3 to 24.5 in MiFID II itself would not affect the life business.
However, the point here is that if the parliament goes on to clear its own thoughts into law (which would also be subject to approval by national finance ministers), in due course the new version could well be taken up not only in MiFID II, but probably also in subsequent rules.
In this case, they will affect the life insurance industry directly. The subsequent sets of rules involve, for one, the Packaged Retail Investment Products (PRIPs) Directive, for which EC proposals for revisions are expected early in the summer.
MiFID II principles could also impact on the outcome of the Insurance Mediation Directive (IMD) of 2007, for which the EC is expected to unveil its proposed revisions rather sooner, around the end of February 2012.
At present, the matter rests in the hands of the Member of Parliament most concerned, German Member of the European Parliament Markus Ferber, the “rapporteur” (coordinator). After studying 190 responses, covering something like 4,000 pages, to a questionnaire, he is likely to suggest amendments to the draft directive in a month or two.
As it happens, neither IMD nor PRIPs is expected by retail investor interests to include over-arching strictures on so-called “sales inducements”, such as bans on sales commissions buried in premium payments. However, this could change during the following European Parliamentary proceedings.
Tough line by regulators
Support for a tough line by regulators comes in a hint from Steven Maijoor, head of the EU’s Paris-based European Securities and Markets Authority. Maijoor’s view is that the current level of protection of retail investors in the EU is inadequate.
During an interview on progress by the EU’s three new authorities, which include the European Insurance and Pension Authority (EIOPA), based in Frankfurt and which were set up over a year ago, Maijoor was referring to mutual funds. However, he did say that he wants to see the same level of retail protection for all products, mentioning, specifically, products sold by insurance companies.
The CEA, in a position paper on the IMD, sets out that if the EC decides to take steps to improve transparency over the way intermediaries are remunerated, “it should follow a minimum harmonisation approach”.
However, its absence of a dogmatic reaction is interesting.
The Brussels-based body goes on to seek an appropriate solution that would encourage mandatory, automatic disclosure of the form of (fee/commission) and source of (insurance company or policyholder) the intermediary’s remuneration, regardless of the type of insurance product.
Workplace-based pensions, that is pension schemes for staff and supported by their employers, are under scrutiny in Brussels, with attention on the Institutions for Occupational Retirement Provision (IORP) Directive of 2003.
For life insurance, the issue is the application of Solvency II rules to such pension schemes. Representatives of the workplace based schemes are strongly against implementation of Solvency II regulations. Unsurprisingly, life insurance interests are asking for a level playing field.
In one of at least two major consultations with stakeholders, the CEA states that reviews of IORPs must be based on two principles: “that the same rules and capital requirements should apply to the same risks and that substance should take precedence over form”.
The federation stresses that the risk-based Solvency II principle “should serve as the basis for applying ‘same risks, same rules, same capital’ to all financial institutions offering occupational pension products”.
There is no doubt that heated debate on regulatory reforms – some would argue regulatory overkill – will be the order of the day in 2012 and beyond.