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%.
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.
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
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
Tough line by
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.