Lawyers question Eiopa’s powers to soft-launch Solvency II

Authority promises guidelines on early implementation of risk governance and Orsa rules, but some doubt remains

Legal experts are divided over whether the European Insurance and Occupational Pensions Authority (Eiopa) is overstepping its powers in trying to compel national supervisors to adopt early elements of Solvency II prior to the entire package coming into force.

Last month, Eiopa published an opinion laying out a roadmap for the soft launch of the directive's Pillar II requirements on risk governance and the Own Risk and Solvency Assessment (Orsa) in order to ensure a convergent approach between national supervisors in the run-up to the implementation of Solvency II.

The authority will publish guidelines for their implementation in the first half of 2013 and expects national supervisors to comply from January 1, 2014 - despite the expected two-year delay to the full implementation of the directive.

Lawyers have questioned whether Eiopa has legal powers to make national regulators comply with these guidelines. While Eiopa has the ability to issue guidelines, it does not have to power to change the law of individual jurisdictions to enforce compliance, some legal experts say.

Bob Haken, London-based partner in the insurance group at law firm Norton Rose, says only those supervisors that have delegated powers from their national government to enforce regulations would be compelled to comply with Eiopa.

"To my mind, what the guidelines don't require is for [national] supervisors to go back to their authorising ministries or governments and put through law changes. If it was, then that would [require] a piece of European Union legislation," he says.

"That's where I think the difficulty is going to come. The Financial Services Authority, for example, has pretty wide rule-making powers under the Financial Markets and Services Act 2000, so it has probably quite a lot of power to make new rules, or to adopt new practices, in order to comply with the guidelines. That's not true across Europe, and a lot of other European member states are a lot more prescriptive on what their regulators are allowed to do."

Eiopa has recognised this by stating in the opinion that the guidelines will be introduced on a comply-or-explain basis. Supervisors lacking the delegated authority to enforce the guidelines will have to write a letter of explanation that will be published by Eiopa.

Other lawyers argue that because Eiopa's powers are not tied to the Solvency II legislation, it has the legal power to demand national supervisors implement Pillar II, even without the full implementation of the directive.

Geoffrey Maddock, a partner in the insurance practice at Herbert Smith Freehills in London, says Eiopa has wide powers to issue guidelines under regulation 1094/2010, which constituted the authority in 2010.

"I don't think we're forced to read it [the Eiopa regulation] as meaning Eiopa can only issue guidelines when it's actually looking at implementing one of the listed directives such as Solvency II, because its objective is to do all the good things listed in that regulation," he says.

Article 1 of the regulation describes Eiopa's legally-defined objectives, which include "improving the functioning of the internal market, including in particular a sound, effective and consistent level of regulation and supervision", and "strengthening international supervisory coordination". In pursuit of these objectives, Eiopa has the legal authority under Article 16 to issue guidelines that "competent authorities and financial institutions shall make every effort to comply with".

Yet some suggest Eiopa may be violating the spirit of the rules by promising to issue legally binding guidelines. "It's probably fair to say it was expected that the guidelines would be issued in the context of an implemented Solvency II world [rather than prior to its implementation]," says Norton's Rose's Haken.

There is also some confusion over whether Eiopa is going against the European Commission's (EC) wishes by taking steps to soft-launch Pillar II.

In November, European Commissioner for internal market and services Michel Barnier said Eiopa should foster convergence towards "a Solvency II approach" among regulators "within the limits of the existing framework", in response to a request from Eiopa chairman Gabriel Bernardino for early implementation of elements of Solvency II.

Some suggest the letter could preclude the authority from using its powers to introduce Pillar II, which is not part of the existing regulatory framework of Solvency I, and that the EC intended Eiopa to encourage best practice among national supervisors, rather than impose strict expectations on member states.

However, others argue that Barnier's letter does not bar Eiopa from using all its powers to act on Pillar II. "What commissioner Barnier was rejecting in that letter was the idea that the European institutions - the commission and parliament - should have to spend time working out which parts and how they would be partially implemented, because that would distract from progressing the full implementation," says Herbert Smith Freehills' Maddock. "I don't think he was discouraging Eiopa from taking its own action to ensure there is convergence."

Insurers doubt whether any new guidelines from Eiopa will ensure a harmonised soft-launch of Pillar II, regardless of the legal particulars. "I'm not sure it's going to be enough to get the consistency they're striving for, partly because, if you just look at all of the difficulties in getting agreement on key aspects of Solvency II, that sort of dynamic is still alive when it comes to early adoption as well," says Tom Grondin, chief risk officer at Aegon in The Hague.

"The fact it would be primarily spearheaded by local supervisors whether to adopt some early elements of Solvency II, it does have a pretty good chance, but I wouldn't expect all member states to do it," he adds.

In addition, Grondin suspects that any early implementation of capital or reporting requirement would not be supported. "I think there is a better chance of success if the proposals focus on Pillar II areas, such as Orsa."

There are indications Eiopa may include elements of the Pillar III reporting regime in the forthcoming guidelines. Eiopa states that "national competent authorities are encouraged to request all the information necessary for applying a prospective and risk-based supervisory approach".

This, suggests Norton Rose's Haken, is a veiled message from Eiopa that Pillar III reporting standards should be front-loaded alongside II. "What that [paragraph 21] is getting at is bringing in Pillar III... what it is doing is encouraging the supervisors to use existing powers to request information, which really is Solvency II reporting through the backdoor," he argues.