I-2.5: Neutralization using impact surveys before the adoption of Acts and Regulation

In France, Article 39 of the French Constitution, which was created by the Constitutional Act of the July 23, 2008, requires that the Government back each bill with an impact survey that explains why the new legislation is needed and what consequences it is expected to produce.

Neutralization using impact surveys will allow proposed legislation to be impartial thanks to the prior consultations legislators or regulators are required to carry out.

Impact surveys for new legislation or legislation that transposes European Union directives will include an overview and description of the proposed measures, their legal framework, the cost of these measures, and the potential and predictable financial impact for each industry, including a description of impact per company.

When transposing European directives into national law, it is necessary to take care not to increase the existing regulation resulting from European rules in terms of cost for companies.

Firstly, we will proceed with an analysis of the French example of the regulation and supervisory reform for the insurance industry, and secondly, we will analyze the European example of reform of prudential supervision for the insurance industry (Solvency II directive).

I.The French example: regulation and supervision of the insurance industry

1.The background

The idea of merging the various regulatory authorities overseeing the financial industry is not a new one.

A first step in this direction was taken by the Financial Security Act of August 1, 2003. In addition to the merger of the two financial market authorities (COB-CMF) into a single authority (AMF), this Act also merged the regulatory authorities in charge of the insurance industry, “mutuelles” and “institutions de prévoyance” into a single commission (the CCAMIP became the ACAM), which is an independent public authority with its own legal personality.

The international financial crisis of 2008 has been the occasion to reopen the debate on the organization and the mechanisms of regulation of financial services in France.

The Act of August 4, 2008 on the modernization of the economy allowed the Government to legislate by ordinance on the measures necessary for:

• Cooperation between the regulatory authorities of the banking and insurance industries;
• The adjustment of the jurisdiction of the regulatory authorities and the other entities responsible for oversight of financial products’ marketing and commercialization process;
• The adaptation of the procedures implemented by those authorities and of the sanctions they can take.

Mr. Bruno Deletré submitted a report to the Minister of Economy and Finance on the January 19, 2009, which is based on two main proposals:

• The merger of the authorities responsible for oversight of the banking and insurance industries within a single authority controlled by the Bank of France (Banque de France), whose mission is to ensure the strength and the solvency of the financial institutions in those industries;
• Merging the tasks of overseeing marketing, contracts, and intermediaries for all financial industries under the AMF’s aegis, which would expand its purview beyond its current responsibilities in financial market supervision and investor protection..

During the High Committee of the Marketplace which took place on June 30, 2009, and on the basis of the first proposal, the Minister of Economy and Finance opened a public consultation which ended on July 27, 2010.

This consultation allowed for agreement between all parties involved on a new regulatory structure based on the following principles:

• The reinforcement of banking and insurance regulation, and the means allocated to it;
• The independence of the new authority;
• The recognition of the specificities of each of the two industries;
• Better coordination between the new authority and the Market Authorities in the field of business and marketing practices.

2.Creation of a new Regulation Authority (Autorité de contrôle prudentiel (ACP))

The Prudential Control Authority (ACP) is described as an independent administrative authority (article L.612-1 I of the Code monétaire et financier (CMF)) unlike the former Insurance Companies Monitoring Authority (ACAM) which was an independent public authority. The independence of the new authority is guaranteed by its financial autonomy recognized by the article L.612-18 of the CMF.

However, unlike the ACAM, the new Authority has no legal personality. The French government is therefore legally liable for the possible harmful consequences of the new authority’s activities.

Nevertheless, the ACP’s lack of legal personality does not deprive it of the ability to bring suit before a court of law. Indeed, article L.612-16 I of the CMF gives the President of the ACP the power to sue anyone in any court. Furthermore, the ACP can bring a public criminal suit to ensure the application of the criminal provisions of the various Codes that apply to the insurance industry (article L.612-16 II CMF).

3.The innovations introduced by the banking and financial regulation Act of October 22, 2010 and the ACP’s new powers

The Ordinance of January 21, 2010 was ratified by the French Parliament as part of the banking and financial regulation Act of the October 22, 2010. Beyond this ratification, the Parliament passed the creation of a Board on Financial Regulation and Systemic Risks (article L.631-2 of the CMF).

This Act makes several deep modifications to the measures regarding the ACP, especially in order to enhance this body’s role in consumer protection. Furthermore, article L.621-29-1 of CMF states that the ACP can:

• Ensure that voluntary codes of conduct developed by professional associations are compatible with existing law;
• Approve all or part of those voluntary codes of conduct at the request of a professional association;
• Declare the existence of best professional practices;
• Draw up recommendations defining the rules of those best professional practices;
• Ask professional associations to make recommendations on those matters;
• Publish a compendium of the approved codes, professional rules and other best practices identified or recommended.

However, there has been no impact survey performed on the ACP’s new powers. These powers were not discussed by the High Committee of the Marketplace in July 2009 or in the draft ordinance submitted to the Advisory Committee for Legislation and Financial Regulation (CCLRF). Indeed, the ACP’s new powers were not described in the amendment notice the Government submitted concerning its proposed Banking and Financial Regulation legislation. There were neither committee work nor debate in Parliament. Only the Insurance industry was consulted on short notice in August 2010.

4.The ACP’s Transparency Policy

In its transparency policy, the ACP attempts to specify the various instruments at its disposal in order to provide the public and any person subject to its oversight with specific and structured information on the priorities and analyses it uses when carrying out its duties. The ACP specifies the nature, content and scope of each of these instruments, subject to the sovereign appreciation of the Courts. Then, the ACP warns the financial sector of any conduct it considers inappropriate.

Nevertheless, the industry has observed the lack of specification on the legal treatment of the aformentioned legal instruments and the mandatory nature of the contents of the best practices identified and recommended by the ACP. The industry also needs to be informed of the best practices before any investigation is carried out.

It emerges from this preliminary analysis that the ACP’s creation, as well as its architecture, was the subject of a large public consultation before the Ordinance of January 21, 2010 was adopted. There was an important consultation with the intention of ensuring the preservation of strong oversight for the insurance industry, and technical understanding of its economic model. Nevertheless, an examination of the ACP’s new powers has never been carried out using a public consultation, despite the fact that these powers raise many legal questions.

 II.The European example: Solvency II

Before introducing the European example of the reform of prudential standards, it is necessary to provide an overview of the new European Regulation scheme that is taking place this year.

The European Regulations reforming the European regulatory structure for financial services were published in the Official Journal of the European Union on December 15, 2010. These regulations establish a European Committee of Systemic Risk that monitors the macro-prudential financial system, as well as three new European regulation authorities at the micro-financial level, namely:

• European Banking Authority (EBA);
• European Insurance and Occupational Pensions Authority (EIOPA);
• European Securities and Markets Authority (ESMA).

These four new bodies are part of the European Financial Supervision system, which includes the regulatory authorities at the member-state level. Oversight of financial institutions was not transferred to these European bodies, and national authorities are still responsible for overseeing the financial institutions within their jurisdictions.

1.The definition of Solvency as applied to the insurance industry

Solvency is the ability for insurers to uphold the long-term commitments they have entered into with their customers. This depends on the size of those commitments (cover and protections offered to the policyholder) and of the resources available within the insurance company, especially funds and assets such as stocks or bonds. Life insurance policies are an important part of those commitments, along with other covers and protections offered to the policyholder. Insolvency is the main financial risk faced that insurance companies face.

2.The reasons for the Reform

Solvency II is a reform of the European rules governing the solvency of insurance companies. The reform aims at adjusting the level of equities to correspond to the real risks the insurance companies face, and especially financial risks. It is based on the framework Directive adopted in 2009 and on the implementation measures that have yet to be defined. It aims at giving insurers the means to better ensure their solvency, while building a single European Insurance Market.

3.The importance of Solvency II’s implementation measures

The implementation measures that are currently being defined will determine this reform’s concrete effects. It is important to focus on the measures proposed by the European Commission.

4.Solvency II’s timetable

This Reform should be operational in 2013, but the implementation measures are already being discussed. Only a few months remain before these measures become definitive, which is short as compared to the decision process.

5.The links between Solvency II and the financing of the Economy

A modification of solvency rules means changing insurance companies’ investment strategies, which inject 1,600 billion Euros into the Economy every year (half of it is devoted to companies). This balance may be affected by a reform of the solvency standards.

6.The final impact study (QIS5)

The last impact study before finalizing the implementation measures has been completed and the results were announced by the EIOPA on March 14, 2011. French insurance companies had resisted the crisis and recovered high financial strength by the end of 2009. However, there are still uncertainties as to the method according to which future prudential ratios will be calculated, and on the extreme sensitivity of these ratios to market conditions.

 The French and European Insurance Federations, remind of the need to coherently define the scope of the capital concerned, and to reduce calibration especially where long-term risks are concerned. Equal treatment between the different members of the Insurance and Financial Services industries must be guaranteed, and the implementation standards simplified. Finally, it is necessary to provide appropriate transitional measures. The French and European insurers are mobilized in order to find the solutions to the issues revealed by the current draft standards.

It is apparent that the reform of prudential standards in the insurance industry has been the subject of a large consultation. This important consultation allows insurance companies to take appropriate measures to meet new r