EIOPA consultation paper on the proposal for guidelines on the System of Governance

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Introduction

The EIOPA consultation paper on the preparatory guidelines on the System of Governance is by no means an easy read; at 40 pages long it sets out a total of 57 guidelines and is accompanied by 60 pages of explanatory text! The following blog provides an overview of the guidance and comments on any significant differences compared to EIOPAs final Level 2 advice on implementing measures (CEIOPS-DOC-29/09) and the draft Level 2 text. A detailed summary of the guidelines and the explanatory text will follow shortly.

Overview

The guidelines are addressed to national competent authorities (NCAs) and are intended to ensure a consistent and convergent approach in implementing the requirements relating to the System of Governance under the Solvency II Directive. The guidance basically reads as a checklist with the explanatory text providing some further actions that would be necessary to ensure the requirements are met.

The consultation on the guidelines will run until the 19 th June 2013 after which it is expected that EIOPA will publish the final guidelines sometime in autumn this year.

The guidelines shall apply from the 1 January 2014 and NCAs are expected to take the appropriate steps to have the present guidelines in place by this date. Progress reports are then required be sent to EIOPA on the application of the guidelines at the end of February each year with the first being by 28 February 2015 (covering the period 1 January 2014 to 31 December 2014).

At high-level, firms are required to build:

  • An effective system of governance,
  • An effective risk-management system,
  • Qualitative information which supports the system of governance.

Comparison with Level 2 advice and draft Level 2 text

EIOPA have previously consulted on the Level 2 implementing measures for the System of Governance in CP33 after which they published the final advice in CEIOPS-DOC-29/09. Since then, the draft Level 2 text has also been made available to significant stakeholders. In the final Level 2 advice, EIOPA stated that the document “also includes material that could be considered for the future when developing Level 3 guidance”. It is therefore not unsurprising that the proposed guidelines cover similar areas to that covered in the explanatory text of the final Level 2 advice and also the draft Level 2 text. Hence, we have shown below the key points which we believe are notable compared to the previous publications.

  • There are no guidelines relating to the remuneration policy which is mentioned in the explanatory text of the final Level 2 advice and extensively covered in the draft Level 2 text,
  • Guideline  14 refers to the fit and proper principles for outsourced key functions which have not previously been covered,
  • Guideline  32 introduces the concept of a medium term capital plan,
  • Guideline 41 focuses on identifying areas of non-compliance when calculating the technical provisions as opposed to ensuring compliance,
  • Guideline  46 states that the opinion the actuarial function provides on the pre-application stage of the internal model should be “based on technical analyses and should reflect the experience and expertise of the function”. This has not been mentioned previously and seems contrary to the fit and proper requirements.

Comments

Given the similarities between the proposed guidelines and both EIOPAs final Level 2 advice and the Commissions draft Level 2 measures, we would expect most firms not be too far off what is expected. Although the guidelines are expected to be in place by 1 January 2014 it is clear that higher standards will be expected as time progresses which should help to phase in the implementation.

However, we believe that EIOPA could have gone further with certain points. In particular, further information on the degree to which it is acceptable to combine certain roles, particularly in small companies, would have been well received. As would definitions of the risk appetite and risk tolerance.