14 June 2005

Forum Notes

Report of the meeting held at the offices of CEA, Brussels

The meeting fell into two distinct segments: (i) Insurance and re-insurance, (ii) discussion of the Commission’s recent Green paper on financial services.
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Insurance

Alastair Evans of Lloyd’s Corporation welcomed the progress of the re-insurance Directive which has just gone through the Parliament after a single reading. This legislation is, he said, something the re-insurance industry has long been wanted. Adoption of the directive is expected to occur in the coming months.

Currently, he said, re-insurance is regulated at national level and the industry was now looking forward to common regulation and prudential rules for pure re-insurance, but not of course for insurance companies that also underwrite re-insurance. The model, he said, would be the same as for insurance, with home member states exclusively responsible for financial and prudential supervision. The Directive signalled the end of the collateral system (whereby re-insurers post financial collateral in the host state to cover gross liabilities). These exist in some member states and the change would be welcome. Currently, collateral can also take form of stocks and shares in France.

The industry is also lobbying the United States as it also operates an expensive collateral system aimed against alien insurers. The progress on the Directive will also allow the EU to speak to the US, and at the World Trade Organisation, with a single voice.

Peter Vipond, Head of Financial Regulation and Taxation at the Association of British Insurers, addressed the issues of principle asking whether in the context of the Solvency II Directive for insurance companies all member states had a similar view about the issue of insurance company failure. He suggested that some day in the future the industry could expect an Insurance Guarantee Directive designed to have a similar consumer protection function as bank deposit protection schemes.

But this raised a philosophical problem, the spectre of a zero failure regime which brings the risk of moral hazard and removes from consumers the incentive to consider carefully where to place their business. He argued that a non-zero failure regime is desirable because it promotes efficient markets. “If there are no failures, the market is not working,” he said.

He pointed out however that failure can mean different things.

It might be liquidation or administration or a court-sponsored scheme of arrangement. Without such systems in place, however, it was hard to counter the arguments of those who say you cannot allow failures. He also suggested that in the EU insurance supervision is “ an absolute mess,” that the insurance industry lacks the concept of the banking industry’s consolidated lead supervisor, that some national supervisors are very conservative, and want to load liabilities and be “ super prudent,” all of which militates again consolidation in an industry which has 4000 firms.

Chris Verhaegen of the EFRP said that a public debate was needed to educate people that you cannot have a risk free product or service. She said that there is growing demand for pension funds to be risk free, but this option is very expensive to provide. She was critical of the way that national supervisors, in their demand for more and more information in applying the IORPS Directive, do not seem to rely on information provided by foreign colleagues, and so hinder market integration.

Asked by Dominique Graber of BNP Paribas to explain the difference between Basle II and Solvency II more fully, Mr Vipond said that Basle II was less sophisticated, more arithmetical, while Solvency II would be mathematical.

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Green Paper on Financial Services Policy

A senior Commission official said that Secretary Snow’s visit to Brussels had passed off well – with a good meeting of minds on the main issues in the EU-US financial markets discussions. Snow had come to Europe in part to focus on and learn about EU financial market integration, “a sign of real interest and engagement by the US.”

Turning to the Green Paper on Financial Services Policy (2005-2010) the official pointed out that a lot of work had gone into the effort to get the balance and calibration of future policy right. He believed that market participants support the thrust of the paper which he characterised as “consolidate, implement, enforce and evaluate.”

DG Markt’s web site was monitoring implementation – and it is hoped this transparency tool will put pressure on states to transpose and implement. But Brussels will need the help of the markets and of regulators as well.

Commissioner McCreevy is strongly committed to better regulation, including proper, economic-analysis based, impact assessments of possible legislative proposals, and, in general, more regulatory discipline. There is a lot of unfinished business, however, ranging from capital adequacy issues related to Basle II, to clearing and settlement, payments systems and Solvency II for insurance companies (See ABI views above). On clearing and settlement, the progress on removing some private sector barriers to pan-European structures is beginning to accelerate.

On Solvency II, there is a very substantial volume of work to be undertaken. There is an acknowledged need to improve the structure of European insurance company regulation. On supervisory convergence among EU financial services regulators, many practical issues were being discussed such as common reporting formats, common training and exchanges of personnel between regulators in different jurisdictions aimed at improving the regulatory network. The aim is to make the existing “hub and spokes” Lamfalussy process work. The US also has a complex patchwork of regulators covering banking, securities markets and derivatives, not a simple system. .”

China, India and Japan are showing an interest in engaging with the EU in developing financial market regulatory structures and this presents the EU with “an opportunity for global leadership.”

On pan European retail financial markets, the Commission is looking at the so called “26th regime”, but at this stage the “jury was out” on the issue of whether or not it could be useful in promoting integration. Under the new Commission, it seems there is closer co-ordination developing between the various Directorates-General that have partially over-lapping responsibilities in the field of financial market integration.


One participant raised a number of points and stressed that he shared the markets’ support for the Green Paper but drew attention to “unfinished business,” in particular the issues of clearing and settlement and the single payments area. On both issues, the Commission should not interfere with a system that works and is efficient.

Turning to retail financial services, he argued that harmonization of contract law and taxation is essential for the integration of retail financial markets, but the Green Paper is silent on these questions. He drew attention too, to the Commission’s plans to look at a consolidated financial services rule book to try and ensure that EU (and national) rule books are mutually consistent and internally coherent. While supporting the idea, he added that this represents “a mountain of work.”

He suggested that two pre-conditions are needed for viable retail markets: minimum harmonization and mutual recognition. We have, in practice, he argued – referring to a speech given by Tommaso Padoa-Schioppa at the Commision’s high level conference last year in Brussels, only one of the two legs which are needed to walk smoothly - minimum harmonization - but not the second leg, mutual recognition. If mutual recognition is lagging because, say, of consumer protection rules, the idea that member states would allow the effective implementation of a ”26th regime” of pan-European retail market regulation to sit alongside the regulations of the 25 states is “ a brilliant idea but a non-starter.”

Finally, he emphasized that it was not sufficient to have just a regulatory dialogue with countries like Japan, the US and China, more was needed. We must also have a view of how EU regulations impact on the world-wide capital market. As an example of how failure to take this wider view can have serious adverse consequences, he pointed to US legislation 40 years ago when Regulation Q introduced higher taxation on interests on foreign dollar bonds, drove the business offshore, and triggered the development of the eurodollar market, a business which never returned to the US.

Responding to these points, the Commission official said that the Commission does not try to dictate the shape of private market structures, but rather is trying to create the framework conditions for really efficient clearing and settlement structures.

He argued the future for pan-European retail financial markets is the least developed part of the Green Paper. On rule books, clearly this would be a mountainous task for the future but “we need at EU level a set of rules that are legally consistent.” On the 26th regime, it was worth recalling that UCITS is a 26th regime, and it works to some extent.


Graham Bishop presented a European Parliament perspective on the basis of a reading of the final van den Burg Report. Encouragingly, there appears to be a shared political will to achieve an integrated financial market, thought there were some differences of emphasis. He highlighted the Parliament’s clear-cut insistence on achieving appropriate call-back rights on level 2 legislation. Also, great importance is attached to accountability – evidenced by devoting nearly a third of the substance of the report to issues of supervision and regulation. The EP seems to be signalling a greater wish to move towards a single supervisor – in contrast to the Commission’s view that this would only be a last resort and a long way off. ECON also seems to call for more action on hedge funds and credit rating agencies than the Green Paper.

The Commission official agreed essentially with the broad position Graham Bishop had presented, noting interest in hedge funds is increasing.


The reality is that the Lamfalussy process is “under review every day in the markets, by financial services firms, the European Parliament, and governments, all of whom understandably are watching the regulatory organizations in the Lamfalussy structure like hawks.” Openness and transparency are key for long term continuity and success.



Graham Bishop closed the meeting by thanking the Comite Européen des Assurances for their hospitality.

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Date of next meeting: This is provisionally set for 12 October and will be kindly hosted by the European Banking Federation at their offices at 10 Rue Montoyer, Brussels. Henrik Bjerre-Nielson (Chairman of CEIOPS) has already accepted our invitation to address the meeting.

© Graham Bishop