All the best from Governance Matters!

Enjoy the festive period all - I'm off for a few days in freezing France, but will be back to the day job next week. As we say on the Isle of Man, Nollick Ghennal as Blein Vie Noa, and I hope to be of some use to you over 2012, which promises to be a busy one!

All the very best,
Allan

Financial Reporting Council - Developments in corporate governance 2011

The FRC pushed this out today on progress in implementing the UK Corporate Governance Code (and of less interest to me, the Stewardship Code. Outside of the news of what is to come (more consultation in 2012 on Audit Committees, Risk Management and Internal Control elements of the code) some interesting trends are reported;

• Code requirements on board and board committee composition all above 80% on the "comply" front - strangely the requirement for having at least half NEDS on the board was the worst area of compliance for FTSE 350 firms.
• Still having "diversity" and "gender diversity" spoken of in the same breath - more to come on that subject from me another time
• FRC are attributing some of the gripes from the industry on independence criteria and difficulty in recruiting good quality NEDs on their inability to look beyond "the usual suspects", and by doing so, they will enhance diversity.
• 80% of boards put themselves up for re-election annually in their entirety (one of the more controversial elements of the last set of Code revisions).
• Discussions regarding the expanded nature of the Board's responsibility for Risk (to essentially include consideration and setting of Risk Appetite) has led the FRC to schedule a revision to the old Turnbull guidance in 2012.
• Still griping about "boiler plate" annual report text.
• Some of the "explanations" given for non-compliance still said to be lacking
• Chairman's Statement suggestions made by the FRC appear to be bearing fruit
• Lack of consistency around the application and reporting of Board evaluations
• Disclosure on business model, strategy and risk (massive for Solvency II disclosure policy/SFCR purposes) is, because of a lack of guidance, allowing companies to determine their own levels of disclosure. However, the FRC are expecting more from companies in this regard.
• Very critical of the extent of reporting from the Audit Committee, hence the consultation due in early 2012. Also goes on to be untopically lightly critical of remuneration committee reporting in the same regard!

Additional delay to EU Parliament vote on Omnibus II - change in priorities?

Having blogged late last week on the reasons for the EU Parliament being a notable no-show at the ABI Solvency II conference last week, I was pretty shocked today to see that the delay on voting on Omnibus II (mooted by Sr. Montalvo only last week by the same publication to be a delay until the end of Jan 2012), has now apparently been moved back to April 2012.


This would clearly be a dreadful result for both the industry (on the uncertainty front) and EIOPA (on producing technical standards), and bearing in mind the disdain and petulance currently being displayed by the Parliament and head of the Commission towards the UK, might we expect to see some last minute shenanighans from the Parliament to the detriment of the UK industry regarding, say, transitional measures or the illiquidity premium?


Look forward to hearing what the other institutions themselves have to say about it - delaying the parliamentary vote to January is one thing, April is surely stretching their patience, regardless of the competing priorities at present.

Post script - proof of the pudding is in the eating

ABI Conference - FSA's Adams speaks on Internal Model Applications

The FSA have just published Julian Adams' speech on Internal Models from yesterday at the ABI Conference.

Worth noting;

On the potential to replace ICA with SCR for 2013 (which Lloyds et al have been lobbying hard on);

“What we are in a position to do, however, is to invite firms to consider how they think their work on their Solvency II model could be used to meet those current rules, thereby removing the need for parallel running of two different models”

“As the current requirements will remain in force, it will be incumbent on firms to satisfy themselves that the Solvency II model, alongside their wider system of risk management and governance, meets the existing requirements in our Handbook. By approaching the issue in this way, we intend to avoid the need for firms to apply for a complicated series of waivers or to seek specific permission from us to make the transition early. We believe this is both proportionate and appropriate, given the amount of review work we will have done with firms following submission of their Solvency II model application to us”

On the basis to be used for internal model applications (the original guidance, or EIOPA's L2 on Tests and Standards for internal model approval)

“It is clear that the Level 2 text – and, in due course, the Level 3 text which will supplement it – is more appropriate to use as a matter of principle, since this sets out much more clearly the basis on which we are expected to assess firms’ applications, and it is the standard against which you and we will ultimately be judged”

“On balance, we feel that basing our application approach on the Level 2 text is the most sensible way to proceed, and we propose to do this is by cross-referencing the Level 2 text in the guidance materials we will be making available to firms in February of next year”

“I am aware that this will mean that some firms may feel that their efforts in following the Contents of Application approach will have been wasted, and I would like to reassure you that this is not the case. We will expect you to submit documentary evidence that you meet the requirements set out in the Directive, and completion of the Contents of Application is likely to go a long way towards demonstrating compliance with the Level 2 requirements, but it is those Level 2 requirements which will be definitive”

Looks like anyone who is going to get pre-approval to use their model to meet existing FSA handbook requirements is going to have to jump through a lot of hoops, and even then may fall short

ABI Conference today - reason why the EU Parliament stayed away?

Still very early after the ABI conference today (I wasn't there, so relied on some heavy duty tweeting from Elliot Varnell and Insurance ERM).

All the great and good were there (van Hulle, Montalvo, ABI, FSA, and all the CROs in the UK who blagged a day off!), however there was no representation from the EU Parliament which, bearing in mind we are in trialogue season and there is plenty of debate still to be had, is conspicuous to say the least. A Burkhard Balz or a Peter Skinner would surely have been a good attendee to get the right balance.

However, Insurance Times flagged this from Sr. Montalvo at the conference today - looks like the EU Parliament have missed the pre-Christmas window for discussion Omnibus II, and, looking at a late January debate now, have left almost no wriggle room between debate and the Omnibus II vote.

Who this compromises the most out of the troika is unclear (EIOPA I suspect, being the unelected body), but Parliament's absence surely saved the event from a seasonably frosty atmosphere!

PRISM and Central Bank of Ireland - ORSA come early?

Towards the end of last week, Matthew Elderfield launched the Probability Risk and Impact SysteM (PRISM, summary here and detail here), which aims to usher in a new age of supervisory challenge to the Irish financial sector, well documented as having had an easy time of it before credit started to get crunchy.

One big challenge for the CBoI will be to get everything up and running before June 2012 (hopefully the recruitment drive wasas good for quality as it seemingly was for quantity!), so all the best to them for that. More pointedly, the acknowledgement that the ramping up of staff numbers will start to be felt in the industry levies asap, coupled with future income streams referenced in their planned aggresive enforcement and fining of non-compliant firms must have any of the stragglers still living in 2006 quaking in their boots.

Very interesting to see the take on Risk Appetite, Risk Tolerance, Risk Assessment Criteria etc applied by a regulator to its industry, rather than my normal vantage point of a risk consultant, either advising on or benchmarking the same facets of individual ERM frameworks within an insurance undertaking. I would have thought the way in which these things are described in Mr. Elderfield's speech should be good guidance for corporate governance code adherence over there (let's face it, it doesn't get better than from the horse's mouth!).

One thing that would make me very uncomfortable as an Insurance consultant is the extent of the crossover between ORSA, QRTs, SFCR and RSR and what is being proposed under PRISM. I would not be keen on, for example, defining 'Risk Profile' for my client in line with Solvency II definitions, only to be contradicted by the regulator's PRISM definition of 'Risk Profile', which is overall solvency needs by any other name.

If I get some spare time, I may run a cross-check between ORSA and PRISM obligations, and work out whether the CBoI is trying to tell the insurance industry how to do an ORSA via subliminal messages - for the life of me, I can't quite work out what this does for the industry that an ORSA run with "appropriate" frequency doesn't.

ABI Conference this week - who's off the Christmas card list?

I had a look through the ABI agenda for their meeting later this week (sadly won't be going). I may be missing something, but it appears that everyone got an invite except for someone from the EU Parliament.

A deliberate snub, or was rapporteur Balz or one of his lieutenants not available to ensure that at least one representative from each of the trialogue parties was present?

UK Treasury - Consultation on Solvency II

I have had a look through the UK Treasury's transposition of Solvency II consultation paper today (the purpose of this is to ultimately confirm which UK law and statute changes will need to be made to accommodate it, rather than the FSA's consultation, which was focused on replacing the existing handbooks with SOLPRU).

Strangely, at 100 pages, it is a pretty good read, and you should not be shy in purloining some of their idiot's guide material at the start for board presentations and staff briefings. However, the really meaty stuff comes in around halfway through, where they get to cost/benefit analyses (much of which leans heavily of the E&Y research referenced by the FSA numerous times already).

A few things jumped out, namely;

• £1.53bn as ongoing cost to UK industry (NPV over 10 years) - that's to go alongside the £1.9bn of transition costs!
• Sat alongside £3.52bn of "key monetised benefits", NPVd over 10 years - I'm no mathematician, but I guess that means it's a winner for the industry!
• Between 550 and 600 UK firms expected to be covered (Lloyds syndicates included) - this seems much lighter than the CEA figures from the other week, which had over 1,000 UK insurance entities. Are there relly that many below the de minimus level?
• No "gold plating" of Solvency II - bare minimum "copy-out" approach confirmed.
• Table included which shows the scale of the changes for firms with comparable data between Solvency I, ICAS and Solvency II.
• Still includes an estimate of 100 model candidates who will "ultimately" use an internal model, though it states that only a third of these will look for day-one approval. I'm struggling to reconcile this [100 in IMAP at outset, now down to 77, but only 33 will be approved on day 1!]
• Shows all the detail of how the FSA came to £110m as the cost between 09/10 and 13/14 (based on timesheets!) and the ongoing costs post-2014, broken down by FSA business area. Important note here is that half of the ongoing costs from 2014-2016 are for actuarial resource to assess internal models. Nice to know the logic behind the special project levies for those years

Plenty of flannel towards the back, which you are probably familiar with, but if not, knock yourself out!

Should the CRO carry the can?

Normally after a high profile operational risk materialises, the end cost normally determines how high up the food chain the sackings go,but they generally would stay in the first line of defence.

This one therefore stood out for me as a bit of a outlier. I'm all for individual and collective responsibility, and would personally have fallen on my sword if I was within a square mile of this abomination regardless of my job spec. However, is it correct to dismiss the CRO because of an internal control failing (albeit a whopper!)?

Solvency II Forum in Dublin - Central Bank of Ireland

All manner of fun no doubt had over on the Emerald Isle today at the CBoI's Solvency II forum. Would love to have been a fly on the wall, however consultants don't get the luxury of days off! Five presentations were seemingly put on the table, and if any of you guys reading in Ireland have anything to add, I'd love to hear it!

First presentation features a nice calendar for 2012, but more importantly the results of a "preparedness for Solvency II" survey issued in September. The following seemed pertinent;

• Around 15% didn't bother replying to and of those who did, over 10% said they were 'not preparing' at all!
• Only 40% into the "implementation and execution" phase
• Very high number of 'other' responses to questions on sponsorship and rollout responsibility, where the options provided were the obvious suspects (CEO, CFO, CRO, COO) - Appointed Actuary the missing link?
• Three quarters were "quite confident" that they will be ready from end of 2012
• Almost 90% think their boards (including NEDs) have "satisfactory" Solvency II knowledge - seems generous to say the least, however these were responses to the Central Bank, so one would be unlikely to say different!
• Top ranked aim of Solvency II programmes was regulatory compliance - that's the spirit, no flannel about business benefits and policyholder protection, just comply!
• 6% not very confident that the CBoI will be ready to conduct supervisory reviews "effectively and appropriately"
• Over 20% "not very confident" that their governance structures are Solvency II compliant (odd, as the requirements of the corporate governance code mirror or indeed surpass Solvency II requirements, and they ought to be complying with those now!)
• 50% haven't defined their ORSA Process yet!

In addition, some other CBoI preparation detail was laid down, most notably;

• Looking to build processes in order to formally accept internal model applications from 1st June 2013 which instinctively feels very late
• Liaising with the industry on the ORSA Supervisory Reporting requirement (which might lead to some element of prescribing content, bearing in mind the ORSA Consultation paper opens up the possibility of using one's ORSA Report to meet that requirement)
• Details on what the CBoI expectes in the "transition year" of 2013 yet to be finalised

Interestingly, in the Internal Models presentation, they are very explicit that Validation must cover all aspects of the models inputs, processes and outputs, not just the internal model itself - this "narrow vs wide" validation scope is something which I haven't seen the FSA be this specific about.