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This CP is the second of the planned FSA consultations on rules to transpose the Solvency II Level 1 Directive (the Directive) in the FSA Handbook. This consultation programme is running in tandem with the Treasury’s transposition of Solvency II, through amendments to the current Financial Services Bill, to implement the Directive.
Despite the ongoing uncertainties in the European timetable for finalising the requirements of Solvency II, the FSA intends to have as many of the new rules as possible in place on the Solvency II transposition date. The regulator expects to need to conduct further consultation to capture any remaining Handbook rules that correspond to those elements of Solvency II that are still evolving and so cannot be addressed earlier.
The FSA's aim remains to clarify its proposed rules for Solvency II as early as possible
Structure of the CP
Section I sets out how the Directive aligns with the ongoing European legislative process and the programme of regulatory reform in the UK.
Section II contains feedback from stakeholders on CP11/22, in response to specific questions on transposing the prudential aspects of Solvency II. The FSA has addressed and commented on some of the main points raised in stakeholders’ feedback and has reconsidered its approach in certain policy areas.
Section III sets out some new rules and guidance to form part of SOLPRU – the new prudential sourcebook for Solvency II insurers. The proposed rules and guidance address areas that were not covered, or were only partially covered, in CP11/22. Both of the chapters in this section refer to the Directive articles, as appropriate, and to the overarching policy intentions.
Section IV proposes amendments to rules and guidance relating to other sourcebooks within the Handbook. The first two chapters relate to with-profits and unit-linked products where the regulator intends to make respective changes to other sourcebook requirements, primarily COBS, in light of the Solvency II Directive. These changes will take effect at the same time as Solvency II is implemented, unless otherwise indicated. On with-profits, the rule changes aim to distinguish between Solvency II firms and out of scope Solvency II firms. It is important to note that none of the proposed changes impact on out of scope or otherwise non-directive firms (NDFs) firms, which will be subject to existing Handbook provisions.
The third chapter in this section deals with application rules and further consequential amendments to the sourcebooks. These, in the main, switch off and disapply provisions for Solvency II insurers in light of the new SOLPRU sourcebook. While most of these changes are minor and technical in nature, the FSA draws particular attention to those with wider implications – and in a couple of instances to out of scope Solvency II firms.
In Sections III and IV, the relevant chapters also contain cost benefit analysis of the proposed changes in question, unless of minimal significance, in accordance with the regulator's responsibilities under sections 155 and 157 of the Financial Services and Markets Act 2000 (FSMA).
The evolving European regulatory landscape may result in a few outstanding areas to be addressed in further consultation in due course. Outstanding issues may include aspects of Solvency II dependent either on the outcome of the Omnibus II Directive and Level 2 Solvency II measures or on EIOPA’s formulation of guidelines as a Level 3 initiative. Known areas of these include the impact of transitionals on Solvency II, third country equivalence and the regulatory approach to third country branches.