1.P a g e | 1Solvency ii Association1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.solvency-ii-association.comDear member,Todaywewill start from GabrielBernardino.He givesusa good understanding of whereweare.Gabriel Bernardino, Chairman of EIOPAIMD2 and Solvency II The road to betterpolicyholder protection and financial stabilityWorkshop organisedby theEuropean Federation ofInsuranceIntermediaries(BIPAR) BrusselsGood eveningladiesand gentlemen,I wouldlike tostart by thankingBIPAR for theinvitationto speak toyou today and for theopportunitytomeet again withthe representativesof EU intermediaries.In my speech, I will bringforward some personal reflectionsabout thecurrent challengesin revisingtheregulatory frameworkin theinsurancearea, namely IM D2and SolvencyII and will finishby pointingout somestrategic reflectionson thewayto achievefurther consistencyof EUregulation and supervision.Solvency ii Associationwww.solvency-ii-association.com

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P a g e | 2Let mestart withIMD2.Thereview of the InsuranceMediationDirectiveis very relevant forEIOPA, becausethisdirectiveaffectsalmost all our stakeholders.Intermediariesare, and will continuetobe, a keylink in the retaildistribution chain.We recognisethat at EIOPA, in the samewaythat weseeprotection ofconsumersasa fundamental goal for usand an area wherewearerequiredto takea leadingrole.For us, intermediariesare an essential part of the insurancemarket andplaya crucial rolein consumer protection.Therefore, wewelcomethepublication of the Commissionsproposaltorecast the existing IMD (IMD2) in July2012.I must saythat it hascertainlybeen a long time in themaking ever sincethereview of IMD1wasfirst introducedintothe Recitalsof SolvencyIIbythe European Parliament and then our predecessor, CEIOPSsubsequentlyprovidedadviceto the Commissionon theDirectivein 2010with39 different recommendations.We support the Commissions objectives of making retail insurancemarkets work better and promoting a more level playing field by, forexample, extendingthescope of theDirectivetoincludedirect sales.Indeed, preventing regulatory arbitrage and promotingequal conditionsof competition arekeyobjectivesfor EIOPAtoo.From EIOPAs perspective, it is important that the final legislativetextcreatesa regulatory regimein the retail insurancemarket that canbeeffectivelysupervised both from a national and a Europeanperspective, bearingin mind thewidevariety of existingstructuresatnational levelfor supervisinginsurancedistribution.Solvency ii Associationwww.solvency-ii-association.com 3. P a g e | 3IM D2alsoneedstoadopt a proportionateapproachasregardstheobjectivestobe achieved.There needstobeproper considerationof existingmarket specificitiessuch asa very diverse rangeof distributionchannelsat national level,from high street brokers to multinationals.As I say, I welcomethe Commissionsproposal.Nevertheless, there are a number of pointswhereI wouldpersonallyrecommend further reflection:Transparencyof remunerationTheproposal introducesa mandatorydisclosureof thefull amount ofremuneration for life insuranceproductsand a 5 year transitional periodallowingfor an on request disclosureregime for non-life products;attheend of the 5 year period, mandatorydisclosurewould apply.Furthermore, insuranceundertakingsare onlyrequired to inform thecustomer about thenature and thebasisof the calculationof anyvariable remuneration receivedby anyemployee of theirs i.e. notdisclosureof thefull amount.For non-life insurance, I consider an on request regime asa better waytomove further at an EU level, whilemaintainingthe possibility forMemberStatesto imposestricter requirements.In my view, this wouldbe the best possibleand balanced solution toimprovethetransparencyof remuneration.Furthermore, both insuranceundertakingsand insuranceintermediariesshould havetocomplywiththesame high-level principlesasregardsinformation requirementsand conflictsof interest provisions.I alsobelieve that disclosureis not a panacea tomanagingconflictsofinterest.Solvency ii Associationwww.solvency-ii-association.com 4. P a g e | 4Theintroduction of a general dutyof care wouldhelp aswouldtheimplementationof proportionateand robust administrativeandorganisational arrangementsto help systematically identify and manageconflictsof interest.Scope Comparison WebsitesComparison websitesarecaught under theRecitals,but not under thedefinitionof insurancemediation, creatinglegal uncertainty.In my opinion, it is important that new forms of on-linedistributionsuchascomparisonwebsites,are properlycaught under thescope of theDirectivetoensurea level playing field and adequate protectionforconsumers.Somewouldarguethat they are alreadycaught by IMD1,but weneedmore clarityon this issue.Indeed, weare currentlyworkingon a Report on Good Practicesregardingsupervisory standardsrelatingtocomparison websiteswhichwehope topublish beforethesummer.It wouldalsobe useful if EIOPAcould clarify by meansof Guidelinestheapplicationof theDirectiveto aggregatorsor pricecomparisonwebsites.AdviceAdvice is defined under the proposal astheprovision of arecommendation to a customer, either upon their request, or at theinitiativeof the insuranceundertakingor the insuranceintermediary.I am surprised that thedefinition of advice wasnot personalised asatpresent it capturesgenericadvice aswell.We think a clearerdefinition of adviceis required whereadviceisprovided on the basisof a personal recommendation.Solvency ii Associationwww.solvency-ii-association.com 5. P a g e | 5Freedomtoprovideservices/ Freedom of establishmentTheproposal deletestheprovision providing for a European passportbased on a singleregistration and is not re-stated in the new Chapter IVregardingfreedom toprovideservicesand freedom of establishmentI am surprised that theprovision wasdeleted asit wasthe foundation ofIM D1soastoencourage thecross-border activitiesof insuranceintermediaries.In my view, thisneedstobe reinstated tosend out theright message.Cross-selling Theproposal recognisesthe practiceand risksof bundlingproductsand requires certaininformation disclosureon saleof bundled products.Tying is outlawed Tying and bundling is an issue that has regularlycropped up in discussions in EIOPA (with regard to sales of PPI orlinkinglife insuranceto salesof mortgages).Several of our Membershave taken action already at national level tocombat thispractice.I support actionon tying but a blanket ban on all tying hasimportantimplications,asthereare an enormousamount of tied productson themarket in the EU.We need alsoto considerthat a completeban might alsopreventconsumersfrom gettingcheaper deals.It is important to have the same approach in IM D2, MiFID II andMortgageCredit Directivetoensureconsistencyon this issue.This is an area wehaveforeseenwork under the Joint Committeeof theESAs.Solvency ii Associationwww.solvency-ii-association.com 6. P a g e | 6InsurancePRIPsTheproposal introducesspecial requirementsfor insurancePRIPs e.g.requirement toidentify, prevent, manageand discloseconflictsof interestwhensellinginsurance investment products.I believethat theseprovisionsshould bekept within IMD2and weshould avoid a simplecut and paste asthedistribution channelsinvolvedare very diversesoa onesize fitsall approachcould havemajor impact on themarket.Furthermore, I would definitely include in IMD2, the organisationalrequirements needed by distributors in order to manage conflicts ofinterest.At EIOPA, weare followingcloselythenegotiationsin the Council andParliament.It is very interestingtosee thewiderangeof different opinionscomingtothe fore on this issue.This is not surprisingbecauseIM D2seeksto perform a very trickybalancingact: enhancingthe possibilitiesfor cross-borderretail trade,but at the same time, raisingthe bar in terms of adequatesafeguards forconsumers.This balancingact iseven more difficult in the aftermath of the financialcrisis.EIOPA standsreadyto support theEU political institutionsin thenegotiationprocess.Let meknowturn to SolvencyII.TheEU isfaced with an outdated and fragmented regulatoryregime ininsurance.Solvency ii Associationwww.solvency-ii-association.com 7. P a g e | 7SolvencyII hasbeendeveloped during the last 13yearsto answertoconcreteneeds.It increasespolicyholder protection by usingthe latestdevelopmentsinrisk-basedsupervision, actuarial scienceand risk management.We should be proud that SolvencyII is basedon sound coreprinciples.Obviously, the financial crisishad a number of consequencesonSolvencyII.Some lessonswere incorporated early on in the regime, but otherchallenges are still creating uncertainties on the final design andcalibration.Thehuge market volatilityproved tobe a challengein a market-consistent regime, especiallyfor long-term guarantees.Thesovereigncrisisledto questionson the concept of the risk-freerate.Thechangesin banking regulation createpressure on theroleofinsurersasprovidersof long-term bank funding.Thelowinterestrateenvironment is threatening some insurancebusinessmodels, especiallyin life insurance.This year will be a crucial year for SolvencyII.So, what are wedoing?Following the agreement by the EU political institutions, EIOPA havelaunched the long-term guarantee assessment that aims to test variousmeasuresthat havebeen discussed in theOmnibusII negotiations.We are encouragedby thelevel of participation in thedifferent memberstates,coveringbig, medium and smallerplayers.Solvency ii Associationwww.solvency-ii-association.com 8. P a g e | 8EIOPA will present its final report in June.It is essential for policyholder protectionand financial stabilitythatSolvencyII appropriatelyreflectsthe long-term financial position andrisk exposure of undertakingscarrying out insurancebusinessof a long-term nature.We need a robust frameworkthat wouldprice correctlyany optionsembedded in thecontracts.We needto recognisethat guaranteeshave a price; there is nofreelunch.On top of the long-term guaranteeassessment, EIOPAseesit asof keyimportancethat therewill be a consistent and convergent approach withrespect tothepreparation of Solvency II.That is why, in December 2012,weissued our Opinionon interimmeasuresregardingSolvency II.Our plan is todevelop Guidelinesthat will ensure that nationalsupervisoryauthoritieswill start in 2014toput in placecertain importantaspectsof thenew prospectiveand risk basedsupervisoryapproach.TheseGuidelineswill cover the system of governance, includingriskmanagement and the processof developingan ownrisk and solvencyassessment, pre-applicationof internal models, and reporting tosupervisors.We are not anticipatingSolvencyII, but preparingsupervisorsandundertakingsfor the new regime in a consistent way.Theguidelinesare addressed tonational supervisoryauthorities and willbesubject tocomplyor explain procedure.Solvency ii Associationwww.solvency-ii-association.com 9. P a g e | 9We are workingin closecooperation withthe European Commissionandmaintaininganinformal dialoguewithEIOPAsInsuranceandReinsuranceStakeholder Group and thedifferent stakeholders.We planto havea public consultationon the GuidelinesinApril/ May2013and theywill be tabled to EIOPABoard of Supervisorsin theautumn.Going forward, oneof themost critical challengesin theEU supervisorylandscapeis toensure consistencyof supervisorypractices.I believethat theconvergence of supervisorypracticesisasimportant asthesinglerule book.By assuring that day-to-day supervisoryoversight of financialinstitutionsis done within a consistent framework, wecan effectivelycontributeto an increasedlevel of protection of policyholders andbeneficiariesin theEuropean Union.Thesinglemarket requiresit and EIOPAis committed todeliver it.Afirst step shouldbe the development of a SupervisoryHandbook thatwouldwork asa guidebook for supervisionin SolvencyII, settingoutgood practicesin all the relevant areasof supervision.This handbook will foster the implementationof a more consistentframeworkfor the conduct of supervision.EIOPA is starting to workin this area.I believethat it is fundamental to build on the experienceof what hasbeen achievedby EIOPAunder the current Regulation and start areflectionon the further steps(tasksand powers) needed to deliver atruly consistent supervisoryprocessand, in particular, to assure theconsistent oversight of cross-borderinsurancegroups.Furthermore, EIOPAneedstohave resourcestoplayitschallengingoversight role accordingtotheRegulation, by conductinginquiriesintoSolvency ii Associationwww.solvency-ii-association.com 10. P a g e | 10a particular type of financial institution, or type of product, or type ofconduct in order toassesspotential threats tothe stability of thefinancial system and make appropriate recommendationsfor action tothecompetent authoritiesconcerned.In order toperform this independent assessment in a transparent,efficient and risk basedway, EIOPAneedstoreinforceitshumanresources, should have accesstothe relevant individual informationavailableto the national supervisorsand alsohave direct accesstotheindividual institutions.Another strategicchallengeis thelevel of regulatory consistencyin thefinancial sector.I believeit isvery relevant toachievean appropriatelevel of convergenceof the rulesprotectingretail consumersin the different areasof thefinancial sector.Nevertheless, proportionalityand good senseshould prevail.By covering thedifferent anglesof disclosureand sellingpracticesin theinsurancemarket, IM D2should avoid the tendencytoapplya one-size-fits-all approach.Insurancebusinessand insuranceproductshave their own specificitiesthat need to be carefullyconsidered.Somemay argue that thesespecificitiesare a sufficient argument tomaintainthestatusquo. I dont believe that thisis the case.We needto recognizethat an evolution isalsoneeded in thewayconsumer protectionis ensured in the different distribution channels.We needto learnfrom themis-sellingeventsthat occurredin certainmarketsinvolvingproductslike PPI, unit-linkedproductsand pensions.Solvency ii Associationwww.solvency-ii-association.com 11. P a g e | 11Consumersattitudesand needsare changing, and that should be viewedpositively.Theinsurancemarket cannot and will not be out of this evolution.Insuranceintermediariesshould support thistrend and should viewIM D2asa good opportunityto improve consumer protection, preservetherelevant insurance specificitiesand increaseconsumer confidence.Thank you for your attention.Solvency ii Associationwww.solvency-ii-association.com 12. P a g e | 12StrategicGoals2013to 2016Note: The SwissFinancial MarketSupervisoryAuthority FINMA isan institutionunder public lawwith itsown legal personality.It is responsiblefor implementingthe Financial Market SupervisionActand financial market legislation.As an independent supervisoryauthority, FINMA actsto protect theinterestsof creditors, investorsand insuredpersons, and to ensure theproper functioningof the financial markets.Their protectionliesat the heart of FINMAs mandate.Consistent, risk-oriented supervisionIn its supervisory role, FINMA focuseson the prudential supervisionofbanks,insurers,collectiveinvestment schemesand other financialintermediaries.Prudential supervision is an ongoingactivityin whichFINMAscrutinisesthesupervised institutionsand themarket witha focus on thefuture.Its aim isto maintain the financial soundnessof theseinstitutions,primarilyby ensuringthat theyare solvent, have adequaterisk controlsandprovide assuranceof proper businessconduct.In order toset the right prioritiesin prudential supervision, FINMAconsistentlypursuesa risk-orientedapproach.FINMA cannot provide full-spectrum monitoring of all thesupervisedSolvency ii Associationwww.solvency-ii-association.com 13. P a g e | 13institutions.It must thereforeconcentrateon the key risksfor creditors,investorsand thesystem asa whole.Supervision of large, interconnected institutionsand segmentswithgreater inherent risk is necessarilymore intensethan for smaller marketparticipantswithlowerrisk profiles.Therisk-orientedapproach is reinforcedby continuousmonitoring ofthefinancial market and, more recently, targeted spot checks.In linewith international trends,FINMA has substantiallyincreaseditsactivitiesto identify system-wideand systemic risksat an earlystage.Thefocushere is on large, interconnectedfinancial institutionsandmarket participantsthat perform non-substitutablefunctions.FINMA aimstoensure that Switzerlandsfinancial institutionsmeet international norms in termsof capital, liquidityand resolvability.Systemically important institutionsmust exceedtheinternational norms.In the event of the insolvencyor bankruptcyof a supervisedinstitution,it is FINMAs tasktoprotect financial market clientsfrom theconsequences.If an institution getsintodifficulties,FINMA reactsrapidlyandprofessionallyto takethe necessarymeasures.If there is noprospect of successful restructuring, an orderly market exitmust be possible.FINMA analysestheconduct of financial market participants.However, in order toeffectivelyprotect financial market clientsfromabuses, clear rulesof conduct for financial servicesprovidersare imperative,asarebetter product documentation and increasedtransparency.Solvency ii Associationwww.solvency-ii-association.com 14. P a g e | 14FINMAsstrategic goalsPrudential supervisionStrengthening financial stability and crisis resistance throughprudential supervisionTheinterestrate situation, the changedenvironment in cross-borderbusinessand the pressureon marginsand pricesare presentingbanksand insurerswith major financial and organisational challengesintheir core business.Significant structural changein the Swissfinancial centre can beexpectedin themedium term.Historicallylowinterest ratesare depressing theearningsof almost allsupervised institutions.Banks and insurers,especiallylife insurers, are beingforced tofindinvestmentsthat generatehigher returns.This means, however, that theyare alsotakinggreater risks.Low interest ratesalsoposea danger tosupervised institutionsin theSwissreal estatemarket.Solvency ii Associationwww.solvency-ii-association.com 15. P a g e | 15Thelegal and reputational risksassociated with cross-borderfinancialservicescontinuetobe of major importance.Thecompaniesin question must recognisetheneed for strategicreorientationand deal appropriately with legacyissues.Strategic goal 1Thestabilityand crisisresistanceof the Swissfinancial centre arestrengthenedthrough internationallyrecognisedprudential standardsand consistent compliancewiththem.If market exitstake place,theydo soin a waythat isorderly and quick,and result in the least possibledamage tofinancial market clients.BusinessconductPromoting integrity, transparency and client protection inbusinessconductCurrent legislationdoesnot guaranteeadequate client protection asfarasthe businessconduct of financial intermediariesis concerned.In thisrespect, Switzerlandlagsbehindinternationalregulatorystandards.In the first place,Swissclientsare at a disadvantagecompared withnon-Swissclientsbecausetheyare oftennot adequatelyand transparentlyinformed.Secondly, there isa risk that theSwissfinancial centrecould attractundesired market participants.Thirdly, client protection that isnot fullyequivalent can havean adverseimpact on theability of Swissfinancial serviceproviderstogain accesstoother markets.Solvency ii Associationwww.solvency-ii-association.com 16. P a g e | 16Regulationsthat donot meet appropriate, internationallyrecognisedminimum standardsweakenthe reputationof a quality-orientedfinancial centre.Thepatchy client protection regulationsat point of saleare one exampleof this.Thesupervisorylegislationprovidesfor a variety of authorisedinstitutionswithdifferinglicensingrequirements.Not every licenceleadstoongoing monitoring by theauthorities.As far asthequalityand intensityof licensingand supervision byFINMA are concerned, there is a transparencydeficit for financialmarket clients.Strategic goal 2In order toenhancethe reputation of thefinancial centre and promotefair businessconduct and integrityon the part of financial marketparticipants,FINMAconsistentlyimplementslicensingprocedures,createstransparencyregardingthevarying degreesof supervisoryintensity, and promotesinternationallyrecognisedregulationson clientand investor protection.National and international cooperationJoining forcesat the international level and working togetherefficiently at the national levelThescope and intensityof international activitieshave increasedmarkedly. Thistrend will persist intothenear future.FINMA must prioritisethedeployment of itsresourceson internationalinitiativeseffectively.Solvency ii Associationwww.solvency-ii-association.com 17. P a g e | 17Against thisbackdrop, cooperationat thenational level withotherinstitutionsand authoritiesmust bestreamlined sothat Switzerlandsinterestscan be more effectivelyrepresented at the international level.Because of the different mandates of the authorities involved, theirresponsibilities have to be prioritised differently depending on thesituation:TheFederal Department of FinancepromotesSwitzerlandasa placetodobusiness.The State Secretariat for International Financial Matters works tostrengthen the international position of Switzerland in the field offinanceand tax.It representstheinterestsof Switzerlandvis--visother countries ininternational financeand tax mattersand is leading the internationalnegotiationsin theseareas.FINMA fulfilsitsinternational remit from thepoint of view of afinancial market supervisor.In the field of financial stability, FINMAworkscloselywith the SwissNational Bank.Responsibilityfor supervisingthe individual financial institutionslieswith FINMA.It is cruciallyimportant that the differingstatutoryresponsibilitiesanddecision-makingpowersare preserved.Strategic goal 3In its international activities,FINMAconcentratesitsresourcesandusesthem toaddressimportant core issues.Solvency ii Associationwww.solvency-ii-association.com 18. P a g e | 18In the context of national cooperation, theinformation flow is efficientandthe decision-makingscope of theauthoritiesis clear.RegulationEngaging expertise and regulating in light of its supervisorygoalsFinancial market supervisorylaw definesFINMAscompetencesinfinancial market regulation.FINMA generallyregulatesby wayof circularswhichexplainhowfinancial market regulation is tobe applied. It alsoregulatesby wayofordinanceswherethis is enshrined in thelaw.Financial market legislation, on theother hand, is a politicalresponsibility. The legislaturedefinestheregulatory framework bindingon FINMA.Thefinancial market lawsare thereforetheresult of a political processandhencethe subject of political discussionsand compromises.In accordance with its supervisory mandate, FINMA is guided by itssupervisory goals, explaining its position early and transparently, butwithout takingpart in political debates.Strategic goal 4FINMA analysesexistingregulationsand legal trendsfrom theperspectiveof financial market supervision, proposesrelevantamendments,usesitsspecialist expertiseto support the proposedregulationsthat areimportant and highlightsitsownconcernsearlyandtransparently.Withinits area of responsibility, FINMA regulatesonlyin sofar asthisisnecessaryin light of its supervisorygoals.Solvency ii Associationwww.solvency-ii-association.com 19. P a g e | 19The UK Prudential Regulation Authority (PRA)On 1April 2013thePrudential RegulationAuthority (PRA) will becomeresponsiblefor the prudential regulation and supervision of banks,buildingsocieties, credit unions,insurersand major investment firms.In total thePRAwill regulate around 1,700financial firms.ThePRAs roleis defined in termsof twostatutoryobjectivesto promotethesafety and soundnessof thesefirms and, specificallyfor insurers, tocontributeto the securing of an appropriate degreeof protection forpolicyholders.In promoting safetyand soundness, thePRAwill focusprimarilyon theharm that firms cancauseto the stabilityof theUK financial system.Astablefinancial system is one in whichfirms continueto providecritical financial services a precondition for a healthyand successfuleconomy.ThePRAwill make forward-lookingjudgementson the risksposed byfirmsto itsstatutoryobjectives.Thoseinstitutionsand issueswhichposethe greatest risk to thestabilityof the financial system will be the focusof itswork.ThePRAwascreated by theFinancial ServicesAct (2012) and will bepart of the Bank of England.Solvency ii Associationwww.solvency-ii-association.com 20. P a g e | 20It will have closeworkingrelationshipswith other partsof the Bank,includingthe Financial Policy Committeeand the Special ResolutionUnit.ThePRAwill workalongsidethe Financial ConductAuthority (FCA)creatinga twinpeaks regulatory structure in the UK.TheFCA will be a separateinstitutionand not part of theBank ofEngland.The FCA will be responsible for promoting effective competition,ensuring that relevant markets function well, and for the conductregulation of all financial servicesfirms.This includesactingto prevent market abuseand ensuring thatconsumersget a fair deal from financial firms.TheFCA will operatethe prudential regulation of thosefinancialservicesfirms not supervised by the PRA, such asasset managersandindependent financial advisers.Prior to1April 2013, theFinancial ServicesAuthority (FSA) will continuetobe responsiblefor prudential and conduct regulation in the UK.The Bank of England will have a responsibility for financial stability,based on an amended statutory objective to protect and enhance thestability of the financial system of the United Kingdom.And, in support of this objective, the Financial Policy Committee(FPC)will be establishedwithinthe Bank, charged with identifying,monitoring and takingactiontoremoveor reducesystemic risks.TheFPC, which alreadyexistsin interim form, will be ableto makerecommendationsand give directionsto the PRA and the FCA onspecific actionsthat should be taken in order to achievethe FPCsobjectives.Solvency ii Associationwww.solvency-ii-association.com 21. P a g e | 21Sourse:Andrew Bailey, ExecutiveDirector of the Bank of England andManagingDirector of the Financial ServicesAuthoritysPrudentialBusinessUnit, and SarahBreeden and Gregory Stevensof theBanksPRATransition UnitSolvency ii Associationwww.solvency-ii-association.com 22. P a g e | 22Solvency ii Associationwww.solvency-ii-association.com 23. P a g e | 23TheletterLatest update aswetransition to the Prudential RegulationAuthority (PRA)This letter givesyou more information on what you need todo tobeready for legal cutover(LCO) on 1April 2013.ThePRAs approach to supervision wasoutlinedin thetwoapproachdocuments one for insurersand one for deposit-takersand investmentfirms.We will publish revisedversionsof thesedocumentsat LCO, andthereafterthedocumentswill act asstanding referencesfor firmsonthePRAssupervisoryapproach, key PRA policies,and how weintend tomeet our statutory objectives.Belowis an overview of the keymessagesfrom the approach documents:- The PRA will have two statutory objectives to promote the safety andsoundness of firms and specific to insurers, to contribute to securingan appropriatedegreeof protection for policyholders.Astablefinancial system, that is resilient in providing the criticalfinancial servicesthe economyneeds, is a necessarycondition for ahealthyand successful economy.- ThePRAwill not operate a zero-failure regime.ThePRAwill, however, seekasfar aspossiblewithresolutionarrangementsin place, toensure that anyfirms that fail dosoin awaythat avoidssignificant disruptiontothe supplyof criticalfinancial services, includingan acceptabledegree of continuityofcover for policyholders; andSolvency ii Associationwww.solvency-ii-association.com 24. P a g e | 24- ThePRAs approach to supervision will be clearlybased onjudgement rather than narrowlyrules-based, Supervisoryjudgementswill be forward-looking, taking intoaccount a widerangeof possiblerisksto the PRAs objectives.Theapproach documentscan be accessedvia the FSAwebsite:Bankinghttp:/ / www.fsa.gov.uk /static/ pubs/ other/ pra-approach-banking.pdfInsurancehttp:/ / www.fsa.gov.uk/ static/pubs/ other/ pra-approach-insurance.pdfIn December 2012,I gave a short interview entitledAnew approachtofinancial supervision:thePrudential RegulationAuthority whichcan beviewedhere:http:/ / www.youtube.com/ watch?v=yJDp1XY3DJMThefollowingis an update on certain aspectsof thetransitionwherewecan now provide greater clarity.1. Changesin policyIndividual GuidanceThePRAwill have a different regulatoryand supervisory focusthan theFSA, includinga new set of objectivesand a different approach tosupervision, asset out in the approachdocuments.This meansthat guidancepreviouslyissuedtofirmsby FSAsupervisorstoindividual firms will not have been issuedwith PRA aimsandobjectivesin mind.Therefore, apart from the four categorieslistedbelow,FSAindividualguidancewill not automaticallybe permanentlytransitionedorconfirmedby thePRA.Solvency ii Associationwww.solvency-ii-association.com 25. P a g e | 25Guidanceto be transitionedThefollowingfour categoriesof individual guidancewill beautomaticallytransitionedat LCO:1.Individual Capital RequirementsGuidance, includingcapital planningbuffersfor banks and capital guidanceissuedto insurers2.Individual LiquidityGuidance3.Individual guidancegiven by the FSAthat enablesa firm tomovefrom a higher proportionalitytier toa lowerproportionalitytier asprovided for in the FSAs General Guidanceon Proportionality: TheRemuneration Code(SYSC19a) & Pillar 3 disclosureson remuneration(BIPRU 11)4. Guidanceon the completion and submission of RegulatoryReturnsOther GuidanceFirms should review all individual guidanceand their associatedbehaviour in accordancewithsuch guidanceand assesstheappropriatenessof that behaviour in linewiththe PRAs statutoryobjectives.Firms should in many casesbe able todothisbyexercisingjudgementand without consultingthe PRA.Firms should document this review.In certain cases, firmsmay wishtorequestthat the PRA (FSAuntilLCO) review itemsof FSAindividual guidancewhichare:1.Not includedin thecategories identified above;andSolvency ii Associationwww.solvency-ii-association.com 26. P a g e | 262. Where the firm wishesthePRA toexplicitlyconsider and confirmwhetherbehaviour or actionsin linewiththat guidance will remainappropriatein the PRA.This is not an opportunityto request that all previously issued individualguidanceshould beretained.Betweennow and 30September 2013, firms may submit a list of thoseitemsof individual guidancewhich theywishthe PRAtoreview, togetherwiththeir own assessment of whetherthebehaviour or actionsset out intheguidancewouldcontributetowardsthe advancement of thePRAsobjectives.Relationshipmanaged firms should submit requestsfor review totheirsupervisor,and non-relationship managed firms should submit them totheCustomer Contact Centre at email addressfcc@fsa.gov.uk until 2April 2013and the PRA firm enquiriesat email addressPRA.Firmenquiries@bankofengland.co.uk from 2April 2013onwards.Firms will be abletocontinuetorely on guidancereferred for reviewuntil the PRAreachesa decisionon whetherthe guidanceremainsappropriateor otherwise.Supervisorswill confirm thetimetablefor the review followingthesubmission of thefirms list;reviewswill be completed no more than 18monthsafter LCO.Our judgement and anyresulting responsethat wegive toa firm willfocus on theadvancement of the PRAsobjectives.Any guidancethat isnot referred to the PRA for review will ceasetohaveanystatusasformal PRAindividual guidancefrom 30 September 2013.This doesnot mean that firms should automaticallychangetheirbehaviour.Solvency ii Associationwww.solvency-ii-association.com 27. P a g e | 27If firms deem that their behaviour isappropriate, theyshould continuetoact in that way.If firms decidetoalter their behaviour, now or in the future, theyshoulddiscussthis with their supervisor,in linewith Principle11.This approachtoindividual guidancedoesnot changerecentassessmentsof the risksthat wesee asbeing posedby a firmsbusiness.In particular, westill expect Risk Mitigation Planpoints(reflectingtheFSAs objectives)outlined in previousARROW lettersto beconcluded,wherewejudgethat theywill contributetoadvancingthe PRAsobjective.Existingwaiverswill alsobe automaticallytransitionedtothePRA.Threshold ConditionsTheexistingFSAThreshold Conditionswill be replaced in their entiretybythe ThresholdConditionsbeingintroducedby HMT via secondarylegislationpursuant to the Financial ServicesAct 2012.TheThreshold Conditionsin theorder that hasbeen laid beforeparliament are essentiallyin the form HMT consultedon in October2012.Thenew conditionswill take effect at thesametime asthe rest of theamendmentstoFSMA areintroduced, on 1April 2013, for both existingauthorisedfirms and all in-flight cases.TheFinancial Servicesand MarketsAct (Threshold Conditions) Order2013,aslaid beforeparliament, can be viewedat:http:/ / www.legislation.gov.uk/ ukdsi/2013/9780111533802/ pdfs/ ukdsi_9780111533802_en.pdfSolvency ii Associationwww.solvency-ii-association.com 28. P a g e | 282. Interaction with the PRAPRA webpresenceAnew web pagefor thePRAis now available on the Bank of Englandwebsiteat www.bankofengland.co.uk/praThis will be the webaddressthat firms should use from LCO.At this stagefirms can find a brief introduction tothePRA on thewebsite.Corporate information About the PRA will be addedand pagesonpolicy and PRA newsand eventswill be published.Thecore operational informationon authorisationsand supervisionwillbepublishedat LCO.Firms arewelcometosend feedback includingcommentsand ideasabout the PRA webpresenceto pra.webcontent@bankofengland.co.uk.Solvency ii Associationwww.solvency-ii-association.com 29. P a g e | 29Firm EnquiriesTheOctober 2012approach documentsexplained that firmswhodonothavea dedicated supervision team should usethe Firm EnquiresFunctionastheir first point of contact withthe PRA.ThePRAFirm Enquirieswill be operational from 2April 2013and itscontact details are:Telephonenumber 02034617000(operatinghours9:00 17:00)Email PRA.Firmenquiries@bankofengland.co.ukTheFSAcontact centre must be used for all enquiriesup to 2April 2013.However, during Marchsome callstothecontact centre will betransferredtothePRAs Firm Enquiries, in preparation for takingfirmsenquiriesat LCO.3. Publication of the PRAHandbookAs previouslystated, at LCO, certain provisionsfrom the FSAHandbookwill be split betweenthe FCAand the PRA.Twonew Handbookswill be created:one for the PRA and one for theFCA.Most provisionsin the FSAHandbookwill be incorporatedintothePRAsHandbook, the FCAsHandbook, or both, in linewitheach newregulatorsset of responsibilities.Theintentionisto publish the PRA Handbook in March 2013.After LCO, the PRA will amend itsown suite of policy material as anindependent body in accordance with the processes laid down in theFinancial Services Act 2012, including cooperation with the FCA andexternal consultation.Solvency ii Associationwww.solvency-ii-association.com 30. P a g e | 304. Enforcement ConsultationWe published the consultation on the PRAs approach to enforcement,including proposed statutory statements of policy and procedure, on 20December 2012.Theconsultation ison the FSAwebsite,wewelcomeany commentsontheproposalsby 28February 2013.http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-39.shtmlAttached isa set of updated FAQsand additional information.YourssincerelySolvency ii Associationwww.solvency-ii-association.com 31. P a g e | 31FAQson transition to the PRA1. General questionsAt what stageistheFinancial ServicesBill?TheFinancial ServicesBill receivedRoyal Assent on 19 December 2012andbecame theFinancial ServicesAct 2012(TheAct).Somesectionsof TheAct came intoforce on 23January 2013, in ordertoenablethe Treasurytomake secondary legislation, and toensure thatthenew regulatorscan prepare for their respectiverolespost legalcutover.Therest of the provisionsrelatingto thenew regulatory regime willcomeintoforce on 1April, thedatedesignatedfor legal cutover tothenew structure.TheAct will be supported by secondarylegislationand Treasuryhasconsultedon a number of draft orderswhichwill need to be madepriortolegal cutover.Theordersdetailingthenew Threshold Conditions,allocatingresponsibilityfor making rulesin relationto FSCSbetweentheFCA andthePRA, amendingcertain mutualslegislation, determining whichtypesof holding companythe regulatorsnew powersover qualifying parentundertakingsapplytoand specifyingwhichregulated activitieswill besubjecttothePRAsregulationhave alreadybeen laid beforeParliamentand areexpected to be approved byboth housesby mid-March.http:/ / www.legislation.gov.uk/ ukdsi/2013/9780111533802/ pdfs/ ukdsi_9780111533802_en.pdfHow will thePRAdeterminewhich investment firmsshouldbedesignated forprudential regulation bythePRA?Solvency ii Associationwww.solvency-ii-association.com 32. P a g e | 32We publisheda draft statement of policyon the designation ofinvestment firmsbythe PRAin October 2012:http:/ / www.fsa.gov.uk /static/ pubs/cp/ boe-pra-cp.pdfThepolicystatement and the firms tobedesignatedby thePRA will befinalisedahead of legal cutover.ShouldI continue to submit myreturn throughGABRIEL?ThePRAwill have itsowndata collectionand qualityassuranceteam theRegulatory Data Group - which will take over thePRAregulatorydata related workpreviouslyundertaken by theFSAs Data MonitoringTeam (theFSAs central data collectionteam).For firms who report regulatory data via GABRIEL there will be nochange to this reporting and you will continue to use the GABRIELsystem toreport asyou do now.GABRIEL will be operatedby FCA. Firms are tocontinuetousetheircurrent URL and login details toaccessthesystem.Theexistingdata itemswill remain withonlyminor changestothewording.Any technical queriesabout thesystem should be raised withtheFCAContact Centre on 0845606 9966or email addressfcc@fsa.gov.uk.Whereshould I submit myfirmsemail/ paperreturns?For firmswhoreport regulatorydata via email or in hard copy (paper)more detail of whereto submit your returnswill be provided on thePRAsinternet site www.bankofengland.co.uk/prasoon.Wherefirms providedata directlyto FSAsupervisorsor policy teams,you will continueto dosoafter LCO.Solvency ii Associationwww.solvency-ii-association.com 33. P a g e | 33If, after LCO, you are unsure where to report data, please firstly checkthe PRAs internet site under the section on regulatory data or contactPRAsFirm Enquiries.Contact details will be:Telephonenumber 02034617000Email PRA.Firmenquiries@bankofengland.co.ukWhen will thePRAreleasefurther contact details/ newaddress?Movesto20 Moorgateare takingplacein stages, having started in earlyJanuary2013.Belowis a tablelistingthe move datesfor each division:Supervisorswill confirm outstanding contact details such astelephonenumbers,email addressesand email addressesaround their move dates.For firmswithPGP encrypted keys, communicationon new accesscodeswill alsobe included.Will theFCAand PRAhaveseparate registers?There will be one registermaintainedby theFCA. It will be availabletoall firms, reflectingtheposition of both thePRA and theFCA.Solvency ii Associationwww.solvency-ii-association.com 34. P a g e | 34Will I retain thesameregistration number?Yes.Your FSAnumbers will be carriedacrosstothe new Register.Will therebeaPractitioner Panel?Yes.The PRA will establisha PractitionerPanel.2. Authorisationsand transitional arrangementsWhat will happen to ourexisting permissionsand waivers?Transitional arrangementsfor grandfatheringexistingprovisionsaredependent on secondarylegislation.We are in discussionwithHM Treasury, with a view to the legislationprovidingthat existingPart IV permissions,controlled functions,passports,limitationsand requirementsare grandfatheredwithout theneed for a firm to take action.Exact detailsof grandfatheringarrangementswill be finalisedoncesecondarylegislationhasbeen published.We also published more detail on transitional arrangements for approvedpersons, and on Handbook transitionals more generally, on 25 January inCP13/3http:/ / www.fsa.gov.uk/library/policy/cp/ 2013/13-03.shtmlWhat happensif weare applying foraneworvaried permission orwaiversover theperiod includingLCO?ThePRAwill ensurethat applicationsto the FSAthat aremade beforelegal cutover but not determined until after legal cutover are transitionedtothe appropriate regulator and made against the appropriatestatutorytests.Solvency ii Associationwww.solvency-ii-association.com 35. P a g e | 35Exact detailsof in-flightauthorisation arrangementswill be finalisedoncesecondary legislationhasbeen published.When will weknowthefinal changesbeingmadeto theApprovedPersonsregime?There is more detail on our approved personregime in ourApproachDocumentsand in the consultationpaper (CP12/26) coveringchangestotheapproved personsHandbook sections.This paper can be accessedhere:http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-26.shtmlConsultationfor CP 12/26 closed on 7 December 2012,weare currentlyreviewingtheproposalsin light of responsesto theconsultation andexpect the final PRA ruleson approved personsto be madebythe PRABoard at or around LCO, whenother substantivechangesto theHandbook will alsobe made, and accompanying PolicyStatementsissued.Pleasesee section4Policy Materialbelow for more detail on finalisingthePRAHandbook.We alsopublishedmore detail on transitional arrangementsfor approvedpersonson 25th January in CP13/3http:/ / www.fsa.gov.uk/library/policy/cp/ 2013/13-03.shtmlWill thenewthreshold conditionsbemorespecific?HM Treasuryhaspublished indicativethreshold conditions.Dualregulated firms will need to meet twosetsof conditions,oneset from thePRAand oneset from the FCA.For thePRA there will be threshold conditionsspecific toinsurersandthreshold conditionsfor all other firmsregulated by thePRA.Solvency ii Associationwww.solvency-ii-association.com 36. P a g e | 36http:/ / www.hm-treasury.gov.uk/ d/ condoc_fin_regulation_draft_secondary_leg.pdfWill authorisation andthedifferent approval processestake moreorlesstimewiththePRA?Thestatutorytime limit on authorisationsin FSMAwill remainunchanged after legal cutover.ThePRAwill report against statutory timelimits.ShouldI continue to useONAafter legal cutover?Immediately after LCO, the ONA system will continuetobe used for thesubmission of applicationsand notifications,withsome minor changestoreflectthat it will be owned by theFCA, but accessibletoboth regulators.Will firms still berequiredtodisclosewhotheyare authorised andregulated by?Yes.We have consultedon revised wordingof thisstatusdisclosureanda proposed transitional, aspart of consultationon Handbook changes.Thepaper can be accessedhere:http:/ / www.fsa.gov.uk/library/policy/cp/ 2012/12-24.shtmlWill I berequiredtoresubmit anyinformationornotificationsthat aresubmittedjustbeforeLCO?No. Any submissionsor information received prior toLCO will not needtobe resubmitted.CP 13/3 outlinesHandbook transitionalprovisionsrelatedtoinformation submissions.How will I knowwhereto send information ornotificationsafter LCO?Solvency ii Associationwww.solvency-ii-association.com 37. P a g e | 37Whereinformationor notificationsare required under a rule, theappropriatesubmission details will be updatedin thePRAs rulesor onthePRAwebsite.CP 13/3 setsout more information in relation to thetransition of timelimitsand notification requirementsin therulebook.3. SupervisionWhat is thePRAs approachtosupervision?ThePRAs approach to supervision wasoutlinedin thetwoPRAapproachdocuments one for deposit-takersand investment firms, onefor insurers initiallypublishedin October 2012tofacilitatescrutinyofthePRAs proposed approachasthe Financial ServicesBill passedthrough Parliament.Thedocumentsalsoset out some key policy material for firms.We will publish updated versionsat legal cutover, and thereafter thedocumentswill act asstandingreferencesfor firmson the PRAssupervisoryapproach, keyPRApolicies,and the PRAs statutoryobjectives.When will mylast FSArisk assessment visit be?We are currentlyplanning the transitionfrom theFSAs risk assessmentframeworktothe PRAframework.Firms will be notified of how their supervisionwill be transitioned tocontinuousassessmentfrom the Regulatory Period previouslyindicatedin anARROW or SupervisoryAssessment letter.Thenew SupervisoryAssessment Framework will be a continuousassessment model, focusing on judgementsabout keyriskstothePRAsobjectives.Solvency ii Associationwww.solvency-ii-association.com 38. P a g e | 38For more detail refer totheApproach Documents.When will I knowwhichcategory myfirm fallsinto?Acorepart of the PRAs work will be toassessthesignificanceof a firmtoitsobjectives.With this in mind wehave divided all firms intofive categoriesofimpact.Before LCO wewill write tofirms notifying them of their categorisation.Will myfirm still berequiredtocomplywith FSARiskMitigationProgramme(RMP) items?What will happentoRMP?We have streamlined thenumber of actionsin the RMP and split themintoconduct and prudential actions.Your supervisor will have communicated with your firm to confirm theoutstanding RMP actions, and your firm is accountable to the relevantregulator for their resolution.Whowill bemyPRAsupervisor?One of themajor changeswemade in 2012wastoestablishprudentialand conduct supervisionteamsfor dual regulated firms.You should now be awareof your PRA supervisor.If you have not been allocateda supervisoryou should continuetocontact usthrough the FSAContact Centre.At LCO the PRAwill have itsown Firm Enquires, contact details will be:Telephonenumber 02034617000Email PRA.Firmenquiries@bankofengland.co.ukSolvency ii Associationwww.solvency-ii-association.com 39. P a g e | 39Will individual capital guidanceand individual liquidityguidancestillapply?Both the individual capital guidanceand individual liquidityguidanceissuedby the FSAtoPRA-regulated firmswill continuetoapply.How will European and other policyinitiativessuch asSolvencyII andCRD IV affect thePRAs supervision model?Information about how the interactionof such initiativeswill affect thePRAsapproach will be made availableaspart of the implementationofthesepolicies.4. Policy materialHow will thePRAissuepolicymaterial after LCO?ThePRAApproach Documentsset out that the PRAwill establishandmaintainpublishedpolicy material whichis consistent withitsobjectives,clearin intent, straightforwardin presentationand asconciseaspossible.As set out in our December letter, only a limitedamount of FSAnonHandbook guidancewill be transferredtothePRA.In addition, theletter accompanying theseFAQs setsout in detail ourapproachto FSAIndividual Guidanceand the action required by firms.5. Feesand costsWill thecurrent feestructure beadopted bythePRA?Firms current feeswill seethem through this fee period. For the first feeyear under the PRA(expectedtobe 2013/ 14)the PRAfeesstructure willbebased on adaptingthecurrent structure, makingonlythe necessarychangestoaccommodatedual-regulation.Solvency ii Associationwww.solvency-ii-association.com 40. P a g e | 40Theseproposed changesare in the feespolicy Consultation Paper(CP12/28)http:/ / www.fsa.gov.uk /static/ pubs/cp/ cp12-28.pdfHow will feesbeset next year?For thefirst year under the PRA (expectedto be 2013/14) thePRA feeswill be set to recover the annual funding requirement it needsto meet itsstatutoryobjectives.This funding requirement and thefee ratestorecover will be included inthePRAfeesratesConsultation Paper (CP) expectedto be published inApril 2013.How is creatingthePRAgoingto bepaid for?Thefeesthat wecharge firms fund the FSAand thetransitionwork thatweare doingfor thenew regulator.We have set out the regulatory reform costsin this years businessplan.TheAct makesprovision for the PRAtorecover, from the industry, theregulatoryreform transition costsof theFSAand the Bank of England.6. Co-ordination with the Financial Conduct AuthorityOn what basiswill theFinancial ConductAuthority (FCA) and thePrudential RegulationAuthority(PRA) worktogether?Thedraft Memorandum of Understanding (MoU) betweenthe FCA andthePRAsetsout a high level frameworkfor how thetworegulatorswillworktogether withinthe new regulatorysystemprovided for by theAct.It will be vital that the twoauthoritiespursue their own mandates,respectingthe UKsTwin Peakssupervisorysystem.Solvency ii Associationwww.solvency-ii-association.com 41. P a g e | 41But it will alsobe essentialthat theycoordinateactivitiesin some areas,and cooperatein others.TheMoU setsout thesearrangementstohelp ensure theyare effectiveand efficient.There will alsobe a separateMoU coveringthe specific issuesraised bythejoint regulationof with-profitsinsurance contracts.BoththeFCA and PRAarevisitingusnext year, howdoyou intend toseparatethetwoareas?TheFCA and PRA are twodifferent regulatorslookingat differentaspectsof thebusiness, although there isa requirement to shareinformation. Detail of the FCAand thePRAsassessmentsandexpectationsof firmsare set out in therespectiveApproach Documents7. Current & forthcoming publicationsThere area varietyof publicationsthat firms should be awareof,including:- Banking- TheBank of England, Prudential RegulationAuthorityapproachdocument tobanking supervisionhttp:/ / www.fsa.gov.uk /static/ pubs/other/pra-approach-banking.pdf- Insurance- The Bank of England, Prudential RegulationAuthorityapproachdocument toinsurancesupervisionhttp:/ / www.fsa.gov.uk /static/ pubs/other/pra-approach-banking.pdf- Designationof investment firms by the PRA - this document setsouthow thePRA will exercisethepowersthat will be conferred underFSMA 2000, Order 201(the draft Order).Solvency ii Associationwww.solvency-ii-association.com 42. P a g e | 42http:/ / www.fsa.gov.uk /static/ pubs/other/designation.pdfDraft Memoranda of Understanding (MoU)- Draft MoU betweentheFCA and the PRAhttp:/ / www.fsa.gov.uk /static/ pubs/mou/ fca_pra.pdf- Draft With-ProfitsMoU betweenthe FCAand the PRAhttp:/ / www.fsa.gov.uk /static/ pubs/mou/ draft-with-profits.pdf- Draft MoU betweenthePRAand the FSCShttp:/ / www.fsa.gov.uk /static/ pubs/mou/ fca_pra.pdf- Draft MoU betweenthe HMT, Bank, PRAand FCA on internationalorganisationshttp:/ / www.hm-treasury.gov.uk/ d/ fin_fs_bill_mou_international_organisations_jan2012.pdf- MoU betweenHMT, Bank (includingthePRA) on financialcrisismanagementhttp:/ / www.hm-treasury.gov.uk/ d/ fin_fs_bill_mou_financial_crisis_management_jan2012.pdfSolvency ii Associationwww.solvency-ii-association.com 43. P a g e | 43Opinionof the European InsuranceandOccupational PensionsAuthority onSupervisoryResponsetoaProlonged Low Interest RateEnvironmentIntroduction and Legal Basis1.This Opinion is issued under the provisionsofArticle 29(1) (a) ofRegulation(EU) No1094/2010of theEuropean Parliament and of theCouncilof 24November 2010(hereafterthe Regulation).As established in thisArticle, EIOPA shall play an activerole in buildinga common Union supervisoryculture and consistent supervisorypractices,aswell asin ensuringuniform proceduresand consistentapproachesthroughout the Union.2.This Opinion isbeingissued in fulfilment of EIOPAs responsibilitiestofacilitateand coordinatesupervisory actionsunderArticle 18(1)andArticle 31(e) of theRegulation.3.Theinformation gatheringrequirementsin the Opinion areincludedunder theprovisionsofArticle35of the Regulation.4.This Opinion isaddressed tothe national competent authoritiesrepresented in EIOPAs Board of Supervisors.5.TheOpinionincludesan appendix setting out keytasksfor EIOPAandNational SupervisoryAuthorities.Context6.TheJapaneseexperiencein the 1990sand early2000sdemonstratesboth theplausibilityof a prolonged period of low interest rates,aswell astheimpact of such a scenario.Solvency ii Associationwww.solvency-ii-association.com 44. P a g e | 44Many Japanese life insurers had built up substantial books of guaranteedbusiness from the 1980s and were vulnerable to a prolonged period of lowinterest rates.Theresult wasthat between1997and 2001,seven Japanesefirms failedand legislationwaspassedtoallowinsurersto alter guaranteedratesonpolicieswheretheyface a high probabilityof bankruptcy.7.EIOPA hasbeen highlightingfor some timethe potential solvencyrisksarising from a prolonged period of low interest rates.In 2011EIOPAcarriedout a stresstest includinga lowyield scenariotoassessthe effectson the EU insurancesectorof a prolonged periodoflowinterest rates/yields.Twoscenariosinvolvingdifferent profilesfor yieldsweretested.Theexerciseconcludedthat 5% to 10% of the included companieswouldfacesevere problems, in thesensethat their MCR ratiowouldfallbelow 100%.In addition, an increasednumber of companieswouldobservethat theircapital positionwoulddeterioratewithMCR ratesonlyslightlyabove the100%mark, wherebythey could become vulnerable toother potentialexternal shocks.It is alsohighlightedin therecentlypublished EIOPARiskDashboardasa significant risk identified by national supervisoryauthorities.8.TheEIOPAFinancial Stability Report for thesecond half of 2012highlightsthecomplex and uncertain financial and economicsituationfacingEuropeaninsurers.EIOPA hasfocusedtodateon insurersbut the lowinterest rateenvironment isalsohaving an impact on occupational pension funds.EIOPA plansto explorethismore fullyduring the course of 2013.Solvency ii Associationwww.solvency-ii-association.com 45. P a g e | 459.On one hand, weak economic conditionsacrossthe Europeaneconomyimplythat monetary conditionsin theEU are likelytoremainadaptabletotheprevailing economicenvironment.This is reflectedin theofficial interestratesin Europe that remain at lowlevelsand on a downwardtrend.On theother hand, European government bond yieldscontinuetobedivergent withsome countriesexperiencingnegativereal yieldsat somematuritiesdue to a flight toquality, while othersare experiencinghighlypositivereal yieldsacrossmost maturitiesreflectingcreditworthinessconcernsand other uncertainties.10.Longterm interestratesare of critical importancetolife insurers,sincethese institutionstypically have long-run obligationstopolicyholders that becomemore expensive in todays termswhenmarketratesarelow.Consequently, thefinancial positionof thesefirms typically deterioratesunder such conditions, in particular wherethe duration of liabilitiesexceedsthat of assets.This problem is even more pronounced where guaranteed ratesof returnhavebeen offered topolicyholders.11.Aprolongedperiod of lowinterestratesmay alsohave an adverseimpact on non-life insurerspursuing a businessmodel whereinvestmentreturnsareused tocompensatefor weakunderwritingresults.In some cases,buoyant investment returnshave facilitatedintensepricecompetitionfor market share withsomefirms operatingwithtechnicalunderwritinglosses.If underlying insurancebusinessisbeing supportedby investmentreturnsthisbusinessmodel will be challengedby a prolonged lowyieldenvironment if nomanagement action is taken to changethebusinessmodel.Solvency ii Associationwww.solvency-ii-association.com 46. P a g e | 4612.Non-life insurers may also be affected in a situation where low yieldsdo not provide sufficient returns to counteract the effects of inflation onlonger tailed business.This is a more difficult situation, since it requiresinflation hedging overa long maturity.13.Theprecisetimingof whenthe effectsof a prolonged low interestrate environment wouldmanifest themselveson insurersbalancesheetsdependson the accountingmethodology in use, aswell asthe businesslinesbeing written.14.If market value isin use, the impact is very rapid sinceany declineinbenchmark interestrates isreflectedin the discount rateapplied toliabilities.This effect being amplified wherethe duration of liabilitiesisgreaterthan that of assets.Theoutcome isthat availableassetstocover solvencyare eroded.Arelatively small number of EU jurisdictionsutilisemarket value ininsuranceat present and they have alreadyfelt theimpact of low interestrates.15.If historic cost accountingis used then theimpact on an insurersbalancesheet appearsmore slowlysinceit emergesthrough lowerprofitsor lossesthat are ultimatelytaken to thebalance sheet.Thefact that the effectsof lowinterest ratesare slowtoemergeinbalancesheet termsdoesnot mean theproblem isnot there and there isa real risk that firms could build up hidden problems.This arguesfor the examinationof a wider set of metricswhenassessingthe performanceand conditionof firmsexposed to thisrisk.Solvency ii Associationwww.solvency-ii-association.com 47. P a g e | 47Examinationof market value and historiccost accountingbalancesheetscan provideuseful comparative information, while analysisoffirmscashflowsprovidesan insight intoemergingimbalances.16.In life insurance, guaranteed businessis the most exposed to aprolonged period of low interest ratessincethere may be a yield spreadcompression.In thiscase, asassetsare (re)investedtheachievablespreadbetweenreturnson assetsand guaranteed ratesshrinks.This reinvestment risk is the primary meansbywhichthe impact of lowinterest ratesaffectsthe financial positionof firms in a historic costaccountingenvironment.17.In terms of official solvencyrequirements,SolvencyI is mainlybasedon historic cost accountingand isnot a risk basedframework.As a result, the potential solvencyimpact under SolvencyI is limited andmay takesome timetoemergein termsof solvencycover.Nevertheless, somenational supervisoryauthoritiesrate a prolongedlowinterest rate environment asan important risk for the insurancesector.18.Theimplementation of SolvencyII wouldseea move tomarket valueand a riskbasedsolvency requirement that would explicitlycalculatetheinterest rate risk capital chargeand woulddiscount insuranceliabilitiesusingrisk free ratesasa basis.In thiscontext, it is important that insurersdo not store up risksthatmay crystalizesuddenlywiththe implementationof SolvencyII.Any delay in the full implementationof SolvencyII should beused asawindow for national supervisoryauthoritiesand insurersto deal withtheissue.Solvency ii Associationwww.solvency-ii-association.com 48. P a g e | 4819.Theimpact of thecurrent period of lowinterestrateshasbeen felt inseveral European jurisdictions,wherethenational supervisoryauthoritieshave alreadytaken a rangeof different measurestodeal withtheissue.20.Internal research by EIOPA has highlighted the challenges faced bynational supervisory authorities and individual insurers in responding totherisksposed by lowinterest rates.In termsof guaranteedbusiness, there are noimmediate optionsavailablein relationtoexistingbusinesswhichmust be addressedthrough more medium term measures,such asincreasedreserving.New business,on theother hand presentsmore optionsin termsofchangesin product design to de-risk them or changesin the mix ofbusiness.Firms have alreadystarted torespond by utilisingtheseoptions.Taking the above into consideration, EIOPA recommends thefollowing supervisory responses:Scoping the Challenges21.National competent authorities,if theyhave not alreadydone so,should actively assessfor theinsuranceindustry in their jurisdictionthepotential scope and scaleof the risksarisingfrom lowinterest rates.National competent authoritiesshould then report toEIOPAtheirfindingsregarding potential scope and scaleof risks.22.EIOPAwouldcoordinate a further exercisetoassessthe conditionsthat would be requiredfor significant adversesolvencyand/ or systemicstability problemstoarise, aswell asto estimatewhensuch problemswouldarise.Solvency ii Associationwww.solvency-ii-association.com 49. P a g e | 4923.National competent authoritiesshould intensifythemonitoring andsupervision of insuranceundertakingsidentifiedashavinggreaterexposure tothe risksposed by a lowinterest rate environment.This should followa clear escalation of supervisory activitydependenton thesituationof the individual firm being considered.Promoting Private Sector Solutions24.Unsustainablebusinessmodels in particular should facechallengefrom supervisorsat an earlystage and it is expected that insuranceundertakingsshould be encouragedtoresolvetheir ownproblems.Even in thosecountries where thecapital impact of low interest rateshasalready been recognizedthrough market-consistent accounting, a threattobusinessmodelsstill exists.Persistent low interestratesmay damage theunderlying valueproposition of insurers,resultingin a downwardpressure on salesandconsequentlypressureson expenseratios.Additionallylowinterestratesmay encourageother businessmodelchangessuch asalterationsin asset allocationsin a searchfor yield,whichmay create new riskson the asset sideof thebalancesheet.25.National competent authoritiesshould actively engagewithinsuranceundertakingsin exploring private sector measurestoaddresstherisksraisedby a prolonged period of lowinterest rates.Theyshould takeintoconsiderationthemaintenanceof thestability offirmsand policyholder interestsin this engagement.In particular, theyshould consider the balanceof risk exposure betweeninsuranceundertakingand policyholders.Solvency ii Associationwww.solvency-ii-association.com 50. P a g e | 50This effort should cover both in-force business(policiesalreadywritten) and new business.26.National supervisoryauthoritiesshould explorewith insuranceundertakingsmeasuresto improveundertakingsownfinancialresilience.This is especiallyimportant in relation toin-force business, wheremeasuressuchasincreasedreserving are likely tobe the onlyoptions.In termsof new business,if product redesign is not beingconsidered,then national supervisory authoritiesshould explorewhat measuresfirmswould taketo ensure their financial resilience.27.National supervisoryauthoritiesshould explorewith insuranceundertakingsthe other measuresthat could be taken regarding newcontracts.Such measuresmight includeadaptation product designsin such a wayasto addressthe risksarisingfrom lowinterest rates.Thelatter could includea de-riskingof productsor measurestoincreasetheir flexibility.SupervisoryAction28.If national competent authoritieshave taken or are consideringtakingmeasuresthat wouldbe appliedtoall firms in their jurisdictionfacingthese risks, EIOPA recommendsthat such measuresshouldincorporate, asappropriate, conditionalityand exit featuresif needed.It is expectedthat conditionalitywouldset out clear criteriafor availingof the measuresbeingoffered.Equally, there should be clear exit criteriafor the cessationof suchmarket wide measures,if feasible.Solvency ii Associationwww.solvency-ii-association.com 51. P a g e | 5129.If national competent authoritiesare consideringtakingmarket-widemeasuresthentheyshould notify EIOPAand its Membersof thisintention.This will allowbetter coordination of measuresacrossjurisdictionsintermsof timing and broad design.Discussionof proposedmeasureswithEIOPA Member authoritiesthathavealreadytaken such action wouldalsohelp toimprove policy design.30.EIOPAwouldengagein a follow-upexercisewith Membersin 2014toexplorewhat actionshave been taken in light of this Opinion.Aformal report wouldbe prepared for considerationat theEIOPABoardof Supervisors.This opinion and itsAppendix (Summary of recommended Key Tasksand Deliverables) will be published on EIOPAs website.Done at Frankfurt am Main, 28February2013[signed]Gabriel BernardinoChairpersonFor theBoard of SupervisorsSolvency ii Associationwww.solvency-ii-association.com 52. P a g e | 52Appendix Summary of recommended Key TasksandDeliverablesNational SupervisoryAuthorities(NSAs)1.NSAstocarry out a coordinatedexercisetoquantify the scaleandscopeof therisksarising from aprolonged lowinterest rate environment(coordinationby EIOPA see below point 2).2.Tointensifythe monitoring and supervisionof insurersidentifiedasfacinggreater exposure tothe risksposed by a prolonged low interestrate environment.3.Toengagewithinsurerstoexploreprivate sector measuresto addressthe impact of lowinterestratesthat balanceboth financial stability andpolicyholder interests.This would includeexplorationof actionsthat firmscould take toimprovetheir financial resilience.In particular, NSAs wouldactively challengebusinessmodelsthat areidentifiedasbeing unsustainableand toencourage insurerstotakeappropriateactions.4.Toexploremeasuresto de-risk new businessand alsomeasuresrelated toin-forcebusinesstoimprove financial resilience.5.Toreport progressin theseareasto EIOPA, preferably, on a halfyearly basisand toparticipatein an EIOPAcoordinatedstocktake in2014.6.Where NSAs areplanningto, or are about to, take supervisoryaction,tonotify EIOPAand its Members.Solvency ii Associationwww.solvency-ii-association.com 53. P a g e | 53EIOPA1.Todevelop withNSAsan agreed frameworkfor thequantitativeassessment of the scopeand scaleof therisksposed by a prolonged lowinterest rate environment.2.Tocoordinatethe exercisedescribedabove under point 1and collateresultsfor reflectionback toNSAs.3.Todevelop a reportingtemplate for NSAstoreport on a preferablyhalf yearly basis progressin supervisoryinteraction with firmson thissubject.EIOPA will workwith NSAsto agreedetails of the information to bereported, sothat thiscan be effectivelycollated, analysed, and reflectedback toNSAs.4.Toundertake a stocktaking exercisein 2014toassessprogressindealingwiththeimpact of a prolongedperiod of lowinterest rates.Solvency ii Associationwww.solvency-ii-association.com 54. P a g e | 54The European crisisand the development ofthe European UnionSpeechby Mr LarsRohde, Governor of theNationalBank of Denmark, at the EuropeanAffairsCommitteesconsultation:TheEuropean crisisandthedevelopment of the European Union, formerUpper Chamber of the DanishParliament,CopenhagenThank you for invitingme to speak here today.TheEU member stateshavebeen severelyaffected bythe financialcrisisand thenthesovereigndebt crisis.Therecessionisnow initsfifth year.Many measureshave been takentocontain thecrisis, and more are inthepipeline.Beinga small, open economy, Denmark is highlyvulnerable todevelopmentsin theEU.We participatein manycommunityefforts, but not in the monetaryunion.We have opted out, but at the same time the krone is tied closelyto theeuro.Solvency ii Associationwww.solvency-ii-association.com 55. P a g e | 55Thepurposeof keepingthekrone stableagainst theeuro is toavoidexchange-rateuncertainty which is very important toan economy suchasthe Danishone, with exportsaccountingfor almost half of the grossdomestic product.At the same time, inflationand inflation expectationsare anchored to anarea pursuing stability-oriented economicpolicieswithlow and stableinflation.Thefixed exchange-rate policymeansthat fiscal policyis theinstrumentat our disposal tostabilise the economy.This arrangement hasserved uswell for 30years.Denmarkseconomicpolicy enjoysconsiderable credibility alsoin thefinancial markets.This is whywehavefor sometime been and indeed, wearestill seenasa safe haven for international investors.This hasresulted in historicallylowinterest rates.Despitethemost recent increase, DanmarksNationalbanksdeposit rateis still negative.Thelow level of interest rateshasmitigatedthe real economicconsequencesof thefinancial crisis.But at some point interest rateswill normalise.Thestabilityof the anchor currency i.e. of the euro area is importanttothe Danish economy.Thepolitical system in a non-euro area EU member state suchasDenmark must perform a balancingact how far should wegoin termsof participation?Solvency ii Associationwww.solvency-ii-association.com 56. P a g e | 56This questionwastopical in relationto theissueof closer fiscalcooperation, asit is in the current processtowardsa bankingunion.In the early1990s,the European foreign-exchangemarket came understrongspeculativepressure and one currencyafter the other came underattack.Thecrisisculminated in 1993with speculation againsttheExchange-Rate Mechanism, ERM, existingat thetime.Some20years downthe line, the financial crisisand sovereigndebtcrisisin certain European countrieshave onceagain put theEuropeaneconomiccooperationunder pressure.Themost recent crisishasdiffered from the situation in theearly 1990swheneach EU member statehad itsowncurrency.If national currencieshad not been replacedby the euro in 1999, wecould very well have seen an extensivecurrencycrisison top of thefinancial crisisand the sovereign debt crisis.For theeuro area, theeurohaspreventedthis.TheDanishkrone, on the other hand, washit by short-term currencyunrest in the autumn of 2008, aswereother small currencies.Subsequently, the sovereigndebt crisishas, from timeto time, ledtopressure on the krone, but this hasbeen upward pressure due to largecapital inflows.Afixed-exchange-ratesystem isnot in itselfan effectivebulwark againstirresponsiblepolicies.Theeuro area sovereign debt crisiscould verywell have taken a far moredramatic path, leadingto disorderlysovereigndefaults, without thevarietyof pan-European initiativestosolve the sovereign debt crisisthatSolvency ii Associationwww.solvency-ii-association.com 57. P a g e | 57weretheresult of theeconomic-politicalcooperation betweentheeuroarea member states.Theintroduction of theeuroback at theturn of the millennium causedinterest ratesto drop markedlyin many euro area member states,andyield spreadswithin theeuro area wereall but eliminated.But the interest-rategainswerenot used for consolidation.Instead, theyboosted domestic demand.As a result, competitivenesswaseroded, and thesemember statessawincreasingcurrent-account imbalances.At the same time, housing bubblesemergedin several member states,andthislater causeddistressfor thebanksthat had helped tofundproperty projectsat inflatedprices.Theeuro area systems for monitoring and addressinggovernmentdeficitsand other macroeconomic imbalancesproved to be completelyinadequate.This wasone of the reasonswhythe imbalanceswereallowedto develop and to becomemuch more seriousthan theyhad been ahead of thecrisis in theearly1990s.Furthermore, risk premiumson the government bondsof thesememberstateswereunsustainablylow for a longperiod after the introductionoftheeuro.Hencemarket pressuresfor political action werecorrespondinglylow.This changed abruptlywhenthe financial crisisand sovereigndebt crisisset in.Solvency ii Associationwww.solvency-ii-association.com 58. P a g e | 58Sincemany countrieshad failed to take advantage of the favourableeconomicclimatein the earlyyears of thiscentury toconsolidate publicfinances,their positionwasweakwhen the crisis struck.Still, most countries eased fiscal policy in 2009aspart of concertedEuropean effortstooffset thenegativeimpact of the crisison growthandemployment.This caused further deterioration of public finances,and for several euroarea member statesit led to an outright sovereign debt crisis.One reason wasthat thebanksnon- performingloanseventuallybecame a problem for the public sector, therebyweighingdown ongovernmentfinances.In many countries, fiscalexpansion during the boom immediatelybeforethecrisishasnow madewayfor extensiveconsolidation.In other words,fiscal policy hasamplified cyclical fluctuationsinsteadofdampeningthem.Therefore, thelesson to usall from theERM crisis in the early1990sand recent yearsfinancial crisisand sovereign debt crisis isthat it isimportant toaddressmacroeconomic imbalancesin time topreventsystemic risk.Thefinancial crisisand thesovereign debt crisisrevealed a clearneed tostrengthen politicalcooperationbetweeneuro area member states.Themost recent crisishasexposed at leasttwofundamental weaknessesin the EUseconomiccooperation.Firstly, thepressure for budgetarydisciplinewasnot strong enough.Secondly, the one-sidedfocuson fiscal policy wastoonarrow.Solvency ii Associationwww.solvency-ii-association.com 59. P a g e | 59Acomprehensive view of themember stateseconomic situationisrequired.It is alsoevident that pricestabilityalone is not sufficient toensurefinancial stability.In recent years, theEU member stateshaveadopted a seriesof new rulesaimed at addressingtheseweaknesses, includingtheFiscalCompact,whichtightenstherequirementsfor fiscal discipline.In addition, theEU member stateshave adopted rulesfor surveillanceofmacroeconomicimbalances, under whichthe European Commissionisto monitor whethera member stateis building up excessiveimbalances.There is nowmore focuson systemic risk, and a European SystemicRiskBoard, ESRB, hasbeen set up.In Denmark, wehave introduced the Systemic Risk Council, whosememberswereappointedlast Thursday.Although Denmark has, in many ways, navigated the financial crisisbetter than many other countries, we have generally had to learn thesameeconomic policylessonsasothers.In Denmark, too, fiscalpolicy in the pre-crisisyears reinforced the boomrather than dampening it.Among other things,thisledto higher wageinflationand weakercompetitiveness.As a result of the procyclical fiscal policy, thedownturn wasmore severethan it wouldotherwisehavebeen.But theunderlying fiscal policywassounder than in the member statesnow experiencingproblems.Solvency ii Associationwww.solvency-ii-association.com 60. P a g e | 60This is true both in termsof cyclical stabilisationand long-term fiscalsustainability, although welost focusin thepre-crisisyears.Theconclusion tobe drawnfrom developmentsin the 2000s, not onlyinDenmark but throughout the EU, is that if fiscalpolicy isprocyclical in aboom, it will have to be procyclical alsoin thesubsequent downturn.Obviously, this isnot expedient.Denmark haschosen to adopt the Fiscal Compact asa frameworkforfuturefiscal policy.This hasbeen reflectedin a Budget Act witha more stringent sanctionsregimevis--vis local and regional government thelevelsat whichithas, historically, been most difficult to observe budgetsand agreements.Majorstepshave alreadybeen takentostrengthen economic cooperationin theEU with stronger budgetary disciplineand increasedmacroeconomicsurveillance, but all thesame it is essential that there isstill political will to ensure that the policiespursuedhave a strongmedium-term orientation while alsodampening, not amplifying cyclicalfluctuations.It is important to observethespirit aswell asthe letter of thecommonrules.This alsoappliesin theevent of a future banking union.***Thefinancial crisiswassucceededby a sovereign debt crisisin the EU.This hasrevealed closenegative interaction betweentheeconomyandbank financesin a number of member states.Toprevent the credit lendingfrom collapsing, governmentshavehad tousepublic fundsto support the bankingsector.Solvency ii Associationwww.solvency-ii-association.com 61. P a g e | 61At the same time, the sovereigndebt crisishasmade thesegovernmentsmore dependent on the banks, whichbuy up a largeshare of thedomestic government bonds.Fiscaldevelopmentshave raised concernsabout thesemember statesabilityto continuetosupport the bankingsector.This hashad a negativeimpact on thebanksaccessto funding andreinforcedthetendencyfor bankstoreducetheir lending.Sincelowerlendingvolumesmay further curb economic activity, theeconomicchallengesbecomeeven greater.In the short term, thebanking union representsan attempt tobreak thenegativeinteractionbetweengovernmentsand banks.Thevision behind the banking union istoprevent criseslike theoneseen in recent yearsand tomitigatetheimpact if a crisis should,nevertheless, arise.Theaim isto shielddevelopmentsin thefinancial sector fromdevelopmentsin public financesin individual member states and viceversa and increasefinancial stability.In the longer term, a banking union is tohelp support financialintegration in the EU, and hencethe singlefinancial market.Vulnerableeuro area member statesare facingmajor challengesinrelationtoboth public financesand the financial sector.Abanking union doesnot necessarilyaddressthesechallenges.Thereformsrequired in thesemember stateswill undoubtedlybe costlyandhave real economicimplications.Solvency ii Associationwww.solvency-ii-association.com 62. P a g e | 62It is imperative to find a solution to existing challengesin vulnerablestates and banks so as to bring them back on the right track withoutunduedelay.DanmarksNationalbank supportstheoverall vision for a bankingunion.Abanking union makes goodsensein an integratedfinancialmarket,wherefinancial institutionsare freetooperate acrossnational borders.Thesinglemarket for financial serviceshascontributedtostrengtheningcompetitionand the supplyof credit, tothe benefit of both the Danishfinancial sector and itscustomers.Integration withinthe European financial sectorincreased until 2007,but hassincethe onset of the financial crisis been decreasing.Like theother EU member states, Denmark has an interest in a well-functioningsinglefinancial market.I seemerit in the current discussionson theestablishment of a bankingunion asamechanism for supporting financial integrationin the EU.Developing the individual elementsof a bankingunion will be a hugetask.If the vision is toberealised, thebankingunion must comprise at leastthreeelements:(1) a singlesupervisorymechanism,(2) a singleresolutionmechanism for failingbanks, and(3) a singledeposit guaranteescheme.Initially, focus has been on establishing a single supervisory mechanismunder the auspices of the European Central Bank in order to solve someof the problemscurrentlyfacedby some European banks.Solvency ii Associationwww.solvency-ii-association.com 63. P a g e | 63Thesinglesupervisory mechanism is primarily aimed at euroareabanks,but non-euroarea member statesmay opt in.Theframeworkconditionswill differ, dependingon whetherthememberstatein question hasadopted the euro.At present it looksasif non- euro area member stateswill be abletoparticipatein thesinglesupervisory mechanismon an equal footing witheuroarea member states.This is positive.Theset-up witha singlesupervisorymechanism can enhancethecredibilityof financial supervision in theEU, especiallyin theeuro area,and will contributetofinancial stability, whichwill alsobe an advantagefor the Danish economy whether or not wedecidetojoin.TheCommission is expected to tableproposalsfor the remainingelementsof thebanking union later this year.Thecontent is asyet unknown, and it isdifficult topredict the finalset-up.Thedistribution of costsis a politicallysensitiveissue, not least in termsof whether legacyassetsare tobe includedin the equation.Theestablishment of a strong singledeposit guaranteescheme, and notleast a crediblesingleresolutionmechanism withbail-infor failingbanks,is essential if theEU is to succeed in containingthe negativecontagion from banksto governmentsin a future banking union.In Denmark wealreadyhave a credibleresolution mechanism, and wehaveretained ourAAA ratingthroughout the crisis.Both have serveduswell.All the same, it cannot be ruled out thatDenmarksindependent resolution approach hasincreased thebanksSolvency ii Associationwww.solvency-ii-association.com 64. P a g e | 64fundingcostsin theshort term, soit isimportant toestablisha singleEuropean frameworkfor resolution of banks.TheDanishbankingsectoris characterisedby substantial cross-borderactivitiesamong thelargest banks.Theconsolidatedassetsof Danish banksamount to almost four timesDenmarksGDP.In addition, theratio of thelargest Danish banks consolidatedassetstoGDP is among thehighest in the EU.Due to the sizeof the banking sectorand the high degreeofconcentration, a singleEuropean insurancescheme, asprovided for by abankingunion, will, other thingsbeingequal, be attractivefrom a Danishpoint of view.After all, insuranceschemesworkbest whenmany equal policyholderssharetheburden.***Overall, I believe that it wouldbe an advantage for Denmark toparticipatein thebankingunion oncethe remainingtwo legs thedeposit guaranteescheme and the resolution mechanism are in place.Therefore it is important to remain firmly seated at the negotiation tableand contribute to ensuring a robust and effective set-up which Denmarkmay join if wechooseto doso.If a credibleframework is establishedfor a bankingunion, and tax payerswill not havetofoot the bill whenbanksfail in the future, thiswill have astabilisingeffect, not onlywithin the euro area but alsoin other memberstates.As I seeit, that isin itselfa strong argument in favour of Danishparticipationin a bankingunion.Solvency ii Associationwww.solvency-ii-association.com 65. P a g e | 65Thank you for your attention.Solvency ii Associationwww.solvency-ii-association.com 66. P a g e | 66Summaryof the repliesPossible Recovery andResolution Framework forFinancial Institutions other than BanksTheEuropean Commission held a stakeholder consultationon aPossibleRecovery and Resolution Framework for Financial Institutionsother than Banks (hereafter Consultation) between5October and 28December 2012.The initiative follows the adoption, on 6 June 2012, of a Commissionproposal for an EU framework in this area for banks and investmentfirms.Consistent withinternational-level workin this area, it examineswhetherandhow the failureof different kindsof nonbank financial institutions,notablycentral counterparties,central securitiesdepositories,andsystemic insurancecompanies,should bemanaged by specificstepstoensure orderlyrecovery and resolution wherenecessary.TheCommission servicesreceived 67responsestothe Consultation.Theconsultation attracted a widerangeof view from stakeholders(seefigure 1).Thebusinesscommunity wasthe most activestakeholder group, whichmadeup two thirds of all responses(see figure 1).Besides thepublic institutions,whichwererelativelyactiveparticipantsin theConsultation, the Commission servicesalsohad an opportunitytohear the viewsof other important stakeholders,such astradeunion oracademics.Solvency ii Associationwww.solvency-ii-association.com 67. P a g e | 67Avast majorityof businessesthat repliedtothe Consultation weretheprovidersof different financial services.Figure 2depictstheparticipation of businesscommunity in theConsultation.As regardsthegeographicaldimension, only four responseswerenotfrom theUnion all of them arrived from the United StatesofAmerica(seeFigure4 below).Responses3 came from half MemberStates(14out of 27).Solvency ii Associationwww.solvency-ii-association.com 68. P a g e | 68Twothirdsof Unionsresponses(41out of 63) came from theUK, DEand organisationsrepresentingUnion-wideinterests.For thetransparencypurposes,it should alsobe mentioned that amongrespondentsfrom businessand employee/ customer organisations,twothirds(33out of 49) of respondentswereorganisationsrecognised in theTransparencyRegister, whichwasset up and is operated bytheEuropean Parliament and the European Commission.This summary aimstoprovidedifferent interest groupsviewson thethreecategoriesof financial Institutionsother than banks, asreflectedintheConsultation:1) financial market infrastructures;2) insurancecompanies;3) other non-bank entitiesand institutions.Solvency ii Associationwww.solvency-ii-association.com 69. P a g e | 691. FINANCIAL MARKET INFRASTRUCTURESAll identifiedstakeholdersgroups, except insurance,provided commentson thepossiblerecovery and resolution framework for financial marketinfrastructures(FMIs), i.e. central counterparties(CCPs) and centralsecuritiesdepositories(CSDs).There is a broad agreement that specific measuresshould bedefinedforthe recovery and resolution of FMIs astheyare central to thefinancialsystem and often non substitutablegiven their unique role.Thevast majority of respondentsagree that CCPs, carrying much morerisk than CSDs, should be the first onesto be subject to a specific EU-frameworkfor recovery and resolution.Stakeholders saw national insolvency rules as inadequate and werebroadly supportive of Commission proposals to improve resolutionprocess.CCPsinsist on the need togivecareful considerationsto thepracticalimplicationsof such a regimeon their operations.Theyalsosuggest that the Commission should not rush intothedefinitionof a specific regime.TheEMIR legislationhasdefined extremelystringent operatingstandardswhichshould mitigatethe increasedrisks linked to thebroader range of derivativescontractscentrallycleared asa result of theclearingobligation.In their views, theCommission should instead playan active rolein thedevelopment of appropriatepolicyresponsesat international level,beforeproposinglegislationin that area.There is a broad understanding that anyrecovery and resolutionframeworkshould beadapted to thespecific characteristicsof each typeof FMI.Solvency ii Associationwww.solvency-ii-association.com 70. P a g e | 70In thisrespect the recoveryand resolution framework for CSDs shouldbedifferent from therecovery and resolution frameworkfor CCPs, giventhesubstantial differencesbetweenthese twotypesof institutions,notablyin termsof risk profile.CCPsunderlinethat duetothe strong interdependenciesbetweenFMIs,recovery and resolution regimesshouldbe coordinatedand effectiveforall of them tomitigatepotential spill over effects.Consequently, everyone isbroadlyin agreement that CCPsand CSDswith banking licensesshouldbe subject toa framework specific to themrather than the one for banks,by wayof a functional approach.Thevast majority consider that resolutionmeasuresshould primarilyaim toensure thecontinuityof theessential servicesprovided by FMIswhichis keyin order tosafeguard financial stability, and that robustrecovery planningunder the oversight of supervisorsisvital in order topreservestability in the markets.Few businessrepresentativeshoweverquestion if the objectiveof theresolution should not be the protection of creditorsasit is thecaseundertheinsolvencyprocedure.Specifically, some asset managersbelievethat bail-in for CCPs wouldnot be an appropriateasa resolution tool, whichinstead should aim toprotect clientsassets.Tradeunionsunderlinethat, regardlessof thedesign of the frameworkandthepowersinvested in theadministrator, there must be noworseningof employeesrightsin any aspect due toa company beingput under resolution.As regardsthemanagement of a crisis situation, financial serviceprovidersrecommend a clear distinctionbetweenthedifferent phases(ordinaryproceduresin difficult situation, recovery, and resolution).Solvency ii Associationwww.solvency-ii-association.com 71. P a g e | 71Such a distinctionin their view is of the utmost importancein order toavoid any uncertaintyover whohasthe full responsibility.Specifically, CSDs believethat all CSDs should be covered by the futurerecovery and resolution frameworkand that such frameworkshouldemphasiserecoveryover resolution in view of the their systemicimportanceand lack of substitutability in their respectivemarkets.There hasbeen a general support for reachinga common understandingin thepoint of resolution (trigger), but differencesappeared on theconditionsfor the trigger.For instance, asset managers saw the trigger to be as close as possible toinsolvency and as long as resolution authorities have sufficient discretiontodetermine whether the resolution trigger hasbeen met.Contrary to this,oneof theexchangesargued that the intervention out tobewhen a FMI showsearlysignsthat it may be a viablebusinessin theshort to medium term, taking intoaccount thenature of thebusinessandthestagein itsdevelopment (e.g. start-upsmay need more leeway).Stakeholdersalsobroadlyagree that supervisorsshould be abletorequirechangestoFMI operationsaspart of recovery and earlyintervention efforts, but there should be clarity and transparencyon thecriteria / circumstancejustifying suchintervention.Specifically, trade unionswouldnot like to seerecovery coststo beincurredby employees.There is wideagreement on the necessarytoolsand powerstotransferoperationstoa competing FMI or a bridgeentity, some notableoperational constraints(portabilityof positions,common technicalstandards) notwithstanding.Banks underlinedthat non-systemic partsof FMIsshouldbe liquidatedand stepsshould betaken to avoid concentration in the FMI market.Solvency ii Associationwww.solvency-ii-association.com 72. P a g e | 72CCPschallengethepracticalityof solutionsbased on the transferofbusinessto another, whileCSDsagree that resolution authoritiesneed tohavea broad rangeof resolutiontoolsavailableto them, but they insistedthat such toolsshould be adapted to their businessmodelsand servicesprovided.On thetemporary stayon the exerciseof earlytermination rights,publicauthoritiesare broadlyin favour, but banksand asset managersexpressedconcernstohave thetemporary stayasa general rule.In their view,the temporary staymight exacerbatea crisis.If it wereto be used, strict guidelineswouldhave toapply.Specifically, CCPshighlight that, though useful under certaincircumstances, theresolution authorityspowertohalt paymentsshouldnot lead to an automaticsuspension of all transfers.Respondents listed predictability, clarity, preciseness, transparency andparity among principles governing loss allocation, but also clarity on theimpact on the employeesof an entityconcerned.Many support effectiveand proportionatelossallocation toolsamongnon-defaultingmembers or avoidance of moral hazard on the sideofmanagement and shareholders.Contrary to this,asset managersstronglydefend tocap liabilityofclearingmemberstoa pre-determinableamount, and to excludeallocationof lossestonon-defaultingparties.Finally, trade unions would like to see employees prioritized right tosalaries and other means of remuneration in cases of failing financialinstitutions.Everyone generallyagreeson theneed for effectivecross-bordercooperationbetweenrelevant authorities,but viewsdiverge somewhaton therole and powersof possibleresolutioncolleges.Solvency ii Associationwww.solvency-ii-association.com 73. P a g e | 73Therole of collegesand cross-borderrecognition of resolution measuresare consideredasimportant.CCPshowever emphasizethat the coordinationbetween authoritiesshould not jeopardizethe prompt implementationof recoveryandresolution frameworksin emergencysituations,whereasCSDsconsiderthat there should beno more resolutionspecificcross-borderarrangementsbetweennational authoritiesthanthoseprovidedfornormal supervisorytasks.Banks highlightedthat beforeany recovery and resolution frameworkisimplemented, the rulesand regulationsfor establishingFMIsaswell astherulesensuring the protectionof participantsassets,portability ofassets,and segregation needtobe established.In the same vein, banks invitethe co-legislatorstotakeintoaccount thenew legislation:EMIR1 and alsoforthcoming CSD Regulation(CSDR)andSecurities Law Legisla