MiFID structured retail product review
On 22 April 2022, the Central Bank issued a letter setting out the findings from its recent series of targeted reviews of Structured Retail Products (SRPs) and its expectations for all firms in relation to SRPs. This follows the Themed Inspection by the Central Bank in 2016. All firms are required to complete a full review of current SRP arrangements and controls against the findings and expectations in the Central Bank letter and make changes where necessary. Our Risk Consulting team, led by Gillian Kelly (Co-Head of Consulting), explore the complications of these requirements.
Isle of Man Updates
The IOMFSA has issued an update on the current status of the ICP project
The IOMFSA issued a one-page update late in June in respect of the current status of the ICP project. The update sets out that the project itself has now completed, and that key outcomes include:
- for long-term (life) assurers: new requirements in respect of risk-based capital, corporate governance and enterprise risk management, conduct of business, and group supervision;
- for non-life insurers: new requirements in respect of risk-based capital, corporate governance and enterprise risk management, and conduct of business, in addition to changes to the definition of Class 12 insurers; and
- for general insurance intermediaries: all new regulatory requirements have now been brought into effect.
The update also sets out that there are two upcoming further public consultations – 23/24 will see one on public disclosure requirements, and 24/25 on non-life group supervision. The update can be accessed here.
Additional guidance documents
In addition, there were two guidance documents issued which relate to the coming into effect of the updated legislation.
The first relates to both the Insurance Regulations 2021 and the Corporate Governance Code of Practice for Insurers 2021, and provides clarification in respect of the following matters:
- Regulations 13 and 14 (notification requirements): the regulations apply only to notifiable matters of which a regulated entity is aware after 30 June 2022;
- Regulation 17 (regulatory returns): for those accounting years ending prior to 30 June 2022, insurers must report in accordance with the Insurance Regulations 2018, and for those accounting years ending on or subsequent to 30 June 2022, the Insurance Regulations 2021 apply. The guidance also sets out the IOMFSA’s reporting expectations in respect of non-annual returns;
- Class 12 authorisation: further guidance in respect of summary and ‘decision tree’ diagrams has been set out, along with clarifying that Class 12 contracts must only allow class 12 business. Further explanation is also included on the definitions and expectations regarding ‘related party’, ‘common industry or association’, ‘informed consent’, and ‘de minimis’;
- ORSA submission times: those already subject to ORSA requirements under the Corporate Governance Code of Practice for Commercial Insurers 01 January 2019 see the continuation of the requirements. For those subject to the Corporate Governance Code of Practice for Regulated Insurance Entities 01 October 2010, the insurer is expected to carry out an ORSA (if class 12, ORSA Summary) prior to 30 June 2023, and annually thereafter; and
- There is also further guidance in respect of Compliance Certification (prior to 30 June 2022 reporting must be in accordance with the applicable legislation at that time), and examples of material matters required to be reported under the Corporate Governance Code for Insurers 2021 are also set out therein.
The guidance itself can be accessed here.
The second is further guidance in respect of the Insurance Regulations 2021, specifically in respect of Approved Supervisor and Other Acceptances, and sets out:
- the definition of Supervisor;
- those foreign Supervisors who are currently deemed Approved Supervisors;
- the process for future approvals of foreign supervisors;
- clarification around the process for acceptances of Permit Holders under Regulations 15 and 16; and
- the definition of qualifying ceding/retroceding insurers in relation to Class 12.
The guidance itself may be accessed here.
Stakeholder e-Bulletin published
There was a Stakeholder e-Bulletin published in June which set out that:
- the new risk-based solvency & capital framework for non-life insurers came into effect 30.06.2022 and these regulations have changed the definition of Class 12 insurance business; and
- the IOMFSA will no longer be issuing certificates of authorisation/registration and refers people to the online registers instead.
The Guernsey Financial Services Commission consults on 2023 fees
The GFSC has launched a consultation paper on proposals for increasing the licence fees paid by firms. The consultation period will close on Wednesday 14 September. The consultation paper is available on the Commission’s Consultation Hub.
The GFSC is consulting on an overall increase in fees of 9%. Other specific proposals to change fees are outlined in the consultation paper and include application and annual fees in respect of firms to be licensed under the Lending, Credit and Finance legislative framework and future considerations for fees including the restructuring of Insurance Sector Fees.
Since late 2021 the Commission has been considering whether the fees charged within the Bailiwick’s insurance sector should be restructured, as part of discussions with the Guernsey International Insurance Association (“GIIA”). In restructuring the fee base for the insurance sector the aims would be to ensure that the fee model is:
- aligned with the “user pays” principle by which the Commission sets fees, being proportionate to the level of supervisory effort necessary by the Commission, and
- continues to encourage growth within the sector.
This would be consistent with the process undertaken for the investment sector, as part of the 2022 fee consultation.
While no firm proposals have been considered yet, the emphasis of any changes would be to, where appropriate, rebalance fees so they are proportionate to the nature, scale and complexity of the types of entity within the sector and the level of supervisory engagement required by the Commission.
In our 2020 and 2021 annual reports, the Commission emphasised the increased supervisory effort required for international commercial insurers, including those underwriting policies for retail customers. It is likely that it will be necessary to increase the fees paid by this sub-sector, over-and-above any rebalancing of annual fees paid by the insurance sector as a whole, in ensuring a “user pays” model is applied in a proportionate manner.
Engagement with GIIA and other industry actors on the above is ongoing. The Commission intends to put forward proposals for this restructuring in a future fee consultation paper, once an assessment has been made of potential changes.
Central Bank of Ireland (CBI) Updates
Insurance Regulations / Differential Pricing
Following publication in March 2022 of the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Insurance Requirements) Regulations 2022 (the “Insurance Regulations”), which apply from 1 July 2022, the Central Bank published the ‘Insurance Regulations 2022 Q&A’ on 6 May 2022 to assist insurance undertakings and insurance intermediaries’ understanding of the Insurance Regulations.
June 2022 Newsletter
The Central Bank has published its June 2022 newsletter which includes observations from the recent self-assessment questionnaire relating to insurers’ asset exposure to Ukraine, Russia and Belarus, and non-life insurance covers offered that could see a material increase in the level of claims because of the crisis in Ukraine.
EIOPA assesses European insurers’ exposure to physical climate change risks
Building on its ambitious agenda for sustainable finance, and in particular on the sensitivity analysis of asset-side transition risks published in 2020, EIOPA launched a follow-up exercise on physical risks in the second half of 2021. This discussion paper presents the first results of this exercise which included a large data collection from industry focused on property, content and business interruption insurance against windstorm, wildfire, river flood and coastal flood risks. The report focuses on assessing the materiality of the insurance sector exposure to physical climate change risk under a financial stability perspective.
ESAs provide clarifications on key areas of the RTS under SFDR
The three European Supervisory Authorities (ESAs) (EIOPA, European Banking Authority and European Securities and Markets Authority) published a statement providing clarifications on the draft regulatory technical standards (RTS) issued under the Sustainable Finance Disclosure Regulation (SFDR), which include the financial product disclosures under the Taxonomy Regulation.
The ESAs publish the joint Report on the withdrawal of authorisation for serious breaches of AML/CFT rules
The ESAs published a joint Report, which provides a comprehensive analysis on the completeness, adequacy and uniformity of the applicable laws and practices on the withdrawal of license for serious breaches of the rules on anti-money laundering (AML) and countering the financing of terrorism (CFT).
ESAs call for improvements in product descriptions intended for retail investors
The ESAs issued a joint supervisory statement regarding the ‘What is this product?’ section of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs).
International Supervisory Authority Updates
The International Associations of Insurance Supervisors (IAIS) has published a Newsletter, dated May 2022. The Newsletter includes updates in relation to the ‘Year in Review 2021’ report, which presents an overview of the IAIS’ progress and key achievements of 2021 amid the continued challenges of the COVID-19 pandemic.
PRA: Insurance Stress Test 2022 cover letter to firms
The Prudential Regulatory Authority (PRA) is launching its biennial insurance stress test (IST) and is asking a number of the largest regulated life and general insurers to provide information about the impact of a range of stress scenarios on their business. The PRA expects participating firms to fully engage and to provide comprehensive responses to its request. The PRA has provided the scenario specification, guidelines, and instructions for the stress test. It has also published a template version of a Dear CEO letter on the IST 2022, which sets out the PRA's expectations for firms participating in the test. The deadline for submission is 28 September 2022.
FCA: Learning from the last 30 years to face the next - speech by Nikhil Rathi
The Financial Conduct Authority (FCA) published a speech by Nikhil Rathi delivered at the Chartered Institute for Securities & Investment (CISI) 30th anniversary dinner. In his speech, Nikhil Rathi talks about the following topics:
- Resilience and standards
- Transformation and digital challenges
- Environmental, social and governance (ESG)
- Diversity and Inclusion
HMT: The new Financial Services and Markets Bill, announced in Queen’s Speech
HM Treasury (HMT) published a speech delivered by Her Majesty the Queen in which she announced the new Financial Services and Markets Bill. One of the main elements of the bill is revoking retained EU law on financial services and replacing it with an approach to regulation that is designed for the UK. This includes the Solvency II legislation governing the regulation of insurers, which the government has committed to reform.
PRA: How have firms' views on financial stability risks in the UK evolved in recent months?
The PRA published the results of its regular survey asking market participants how confident they are in the UK financial system and what risks they believe the system is facing. Cyber-attack risk and geopolitical risk remain among the top three most cited risks and have been since the 2017 H1 survey. Pandemic risk is no longer a top three risk among survey participants, with most firms now citing inflation risk instead. The largest change since the 2021 H2 survey was around inflation risk, becoming one of the top five most cited risks for the first time since the survey began in 2008. It was cited as a key risk by 33% of respondents in 2021 H2, but this has now risen to 63%.
Please see below for EIOPA’s response to recent questions, as summarised by our colleagues in KPMG UK. EIOPA has responded to queries where uncertainties exist in the Solvency II requirements. The Solvency II requirements may change or become more prescriptive over time
06 May: Equity investments in Special Purpose Acquisition Companies (SPACs) should be treated as equity investments in the Standard Formula
EIOPA clarified in Q&A (#2351) that Equity investments in Special Purpose Acquisition Companies (SPACs) should be treated as equity investments in the Standard Formula. This is like the treatment of equity investments in real estate administration companies, as per Guideline 3 of the Guidelines on the Look-Through Approach. Article 84(1) and 84(2) of the Delegated Regulation states the criteria for investments to be treated on a look-through basis. They would need to either meet the criteria of being an investment packaged as a fund or meet the criteria of only being exposed to indirect risks. As well as the indirect exposure to the assets held by the SPAC, there is additional exposure to the market perception as to the value of the SPAC. Therefore, it would be inappropriate to solely apply a look-through basis to the investment, and the Standard Formula does not allow for splitting of the risks in the way envisaged by the question.
06 May: Outsourcing to cloud service providers
EIOPA clarified in Q&A (#2287) that in cases where the undertaking outsources operational functions or activities to service providers which are not cloud service providers but rely significantly on cloud infrastructures to deliver their services (for example, where the cloud service provider is part of a sub-outsourcing chain), paragraph 16 of Guideline 1 of EIOPA’s Guidelines on outsourcing to cloud service providers does not imply an obligation for the undertaking to conclude a written agreement with the cloud service provider in the outsourcing chain, but to ensure that the content of the guidelines is complied with also in case of this type of arrangements. This expectation is to be read in conjunction with “Article 274(4) (k) and (l) of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014”.
The written agreement entered into with the service provider that relies significantly on cloud infrastructures to deliver its service shall comply with the EIOPA’s Guidelines on outsourcing to cloud service providers.
20 May: 2022 EIOPA IORP Stress tests shocks
EIOPA responded to a series of questions regarding the 2022 EIOPA IORP Stress tests shocks. EIOPA clarified in Q&A (#2429) that the scenario has been provided by the ESRB and is based on the disorderly transition scenario, as elaborated by the NGFS. The information reflected in EIOPA’s input helper tool (baseline) has been defined according to the following:
- For risk-free rates: The Solvency II term-structures as of 31/12/2021 as published by EIOPA (i.e., without VA and including UFR).
- For sovereign yields: the observed yields for 3M and 10Y as of 31/12/2021 as provided by Refinitiv using the relevant tickers according to EIOPA’s RFR technical documentation.
The information reflected in EIOPA’s input helper tool (adverse scenario) has been defined according to the following:
- For risk-free rates: the adverse scenario as provided by the ESRB. As only two tenor points have been provided, the corresponding levels have been translated into shocks for each tenor point, followed by linear interpolation and extrapolation to arrive at the shocks for the other tenors. The unchanged UFR has been applied to the adverse scenario as well.
- For sovereign yields: a similar approach has been taken as for the risk-free rates using now the observed sovereign yields from Refinitiv and the levels from the ESRB adverse scenario to define the shocks