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Regulatory Radar - April 2016

Newsletter on regulation for the financial services industry

Monthly newsletter providing an overview of the key regulatory changes impacting the financial services industry

Amendments to Solvency II Delegated Act

On 1 April 2016 the European Commission (EC) published in the Official Journal the amendments to the Delegated Act on the EU prudential rules under Solvency II and these amendments entered into force on 2 April 2016.

Investment in infrastructure projects is essential to support economic activity and growth in Europe. By removing the challenge to invest experienced by insurance companies, the measures coming into force will mobilize private sector investment, which is a key objective of the Investment Plan for Europe. The insurance industry is well-equipped to provide long-term finance by investing in equity shares as well as loans of infrastructure projects, but currently less than 1% of their total assets are allocated for this purpose. As a result of this change to Solvency II, insurers will have to allocate less capital and find it more attractive to increase investment and play a bigger role in European infrastructure projects.

Based on expert advice from the European Insurance and Occupational Pensions Authority (EIOPA), the Delegated Act lowers certain requirements for investing in so–called qualifying infrastructure projects. In particular, it lowers the risk charges for insurers' equity and debt investments in these projects, under the standard formula for calculating capital requirements in Solvency II. The risk calibration for investment in unlisted equity shares of such projects has been reduced from 49% to 30%. Risk charges for investments in infrastructure debt were also reduced by up to 40%.

In this context EIOPA published a consultation paper on 15 April 2016, following the request by the EC for further technical advice on the identification and calibration of other infrastructure investment risk categories i.e. infrastructure corporates. Comments on this consultation paper can be submitted until 16 May 2016.

Final draft regulatory standards on PRIIPs

On 7 April 2016 the ESAs published their proposal for regulatory technical standards (RTS) on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs). The proposed KIDs address mainly the content and presentation and provide retail investors for the first time across the EU with simple and comparable information on investment products in the banking, insurance and securities sectors. A 3-page document increases the transparency and comparability of information about the risks, performance and costs of these products. The new rules will contribute to enhancing the confidence and strengthening the protection of EU consumers of banking, insurance and securities products.

The draft RTS relate to three Articles under the PRIIPs Regulation:

  • The presentation and content of the KID, including methodologies for the calculation and presentation of risks, rewards and costs within the document;
  • The review, revision, and republication of KIDs; and
  • The conditions for fulfilling the requirement to provide the KID in good time.

The new rules have been submitted to the EC for endorsement. They will come into force on the 31 December 2016.

Preparatory guidelines on POG

On 13 April 2016 EIOPA published a final report on public consultation on preparatory guidelines on product oversight and governance (POG) arrangements by insurance undertakings and insurance distributors.

POG arrangements relate to the processes which aim to ensure that the interests of the customers are taken into consideration throughout the life cycle of an insurance product, namely the process of designing and manufacturing the product, bringing it to the market and monitoring the product once it has been distributed. They play a key role in customer protection in ensuring that insurance products meet the needs of the target market and thereby mitigating mis-selling. They are an essential element of the new regulatory requirements under the Directive 2016/97/EU of the European Parliament and of the Council of 20 January 2016 on insurance distribution (IDD).

The objective of these preparatory guidelines is to support and to provide guidance to competent authorities in their preparatory steps leading to a consistent implementation of the organisational requirements on POG arrangements of the IDD at an early stage. This allows national authorities to take into account EIOPA’s expectations already at the implementation phase, mitigating the risk of different approaches at national level and the need for further alignment for the sake of consistency and a level playing field among member states at a later point of time.

This final report is the follow-up of the two consultation papers launched in 2014-2015. Whereas the first public consultation sought feedback from market participants and stakeholders on guidelines on POG arrangements by insurance undertakings, the second public consultation focused on equivalent arrangements for distributors of insurance products.

The feedback from both public consultations has been thoroughly analysed and considered. The draft guidelines have been modified and amended where it seemed necessary and appropriate. Subsequently, the draft guidelines were submitted to EIOPA’s Board of Supervisors. The latter adopted the guidelines at the beginning of April 2016.

MiFID II delay and publication of draft Delegated Acts

On 28 April 2016 the permanent representatives Committee (Coreper) agreed, on behalf of the Council of Europe, its negotiating stance aimed at extending by one year the dates of transposition and application of new securities market rules. Both the Directive (MiFID II) and the Regulation (MiFIR) were to become applicable 30 months after entry into force, i.e. as of 3 January 2017, with Member States having to transpose the new Directive by 3 July 2016.

However, essential data infrastructures will not be in place by 3 January 2017. This would lead to legal uncertainty and potential market disruption. Under the Council’s approach, the deadline for the Member States to transpose MiFID II into national legislation would be set for 3 July 2017 and the date of application of both MiFID II and MiFIR would be set for 3 January 2018. The European Council published several drafts enacting this extension, namely a draft Directive amending MiFID II as regards certain dates and a draft Regulation amending MiFIR and two other Regulations regarding certain dates.

Furthermore, the Commission published a first MiFID Delegated Directive on 7 April 2016. The Directive contains provisions on investor protection, notably on safeguarding of clients financial instruments and funds, product governance requirements and inducements.

This first Delegated Act was followed by the publication of the second Delegated Regulation supplementing MiFID II on 25 April 2016. The Regulation aims at specifying, in particular, the rules relating to exemptions, the organisational requirements for investment firms, data reporting services providers, conduct of business obligations in the provision of investment services, the execution of orders on terms most favourable to the client, the handling of client orders, the smaller and medium-sized enterprises growth markets, the thresholds above which the position reporting obligations apply and the criteria under which the operations of a trading venue in a host member state could be considered as of substantial importance for the functioning of the securities markets and the protection of the investors.

The European Parliament and Council will now have a three month scrutiny period of both texts, extendable by a further three months by either institution. If no objections are raised, they will be finalised and published in the Official Journal.

Learn more

Download the full version to read more about:

  • Financial services industry
  • Credit institutions and investment firms
  • Investment products and asset management
  • Insurance, reinsurance and pensions
  • Data protection

All newsletters issued in 2016 remain available via our 2016 Regulatory Radars archive.

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