Wednesday, 26 February 2014

Board Diversity - should gender and ethnicity have a quota?

Having seen a few snippets in quick succession on the matter, I figured it was as good a time as any to revisit Board Diversity, the gift that keeps on giving...headaches to Legal, Compliance and Company Secretarial departments all over Europe!

My initial interest in the matter was piqued by the potential dichotomy between having a Board that was "Fit and Proper" in the context of Solvency II or indeed the myriad Corporate Governance Codes within Europe, and the simultaneous push within the EU for setting quotas for a minimum percentage of female representatives on Boards.

Certainly a couple of years back, it looked like companies may be faced with a choice of meeting any gender quota (but with a Board that was not "Fit and Proper", if only due to lack of Board-level exposure and experience), or simply thumbing their noses at the quotas. The UK's current informal approach recommended by Lord Davies suggests that, while progress is being made on the gender front specifically, there is no danger of radical positive discrimination in order to meet a quota, regardless of who sets it.

I have therefore rather caustically covered the topic on previous posts (here, here and here) due to the hijacking of the word "diversity" as actually meaning "gender diversity" - seulement! There is evidently nowhere near enough working class (or working class origin) representation on plc Boards, not to mention ethnicity, disabilities and people who have served coal-face time in not-for-profit or charitable sectors - do they get a quota too?

All levity aside, there are rumblings from the UK Labour party that perhaps gender isn't the only quota worth talking about, floating the idea of ethnic quotas should they be elected next year. Bearing in mind the shamefully unrepresentative gender and ethnic make-up of the British members of parliament, and the triteness of his leader's behaviour when white-bloke hunting at PMQs the other week, he may wish to turn his attentions closer to home. That said, if the diversity debate has broken out of its gender-soaked malaise, it is cause to celebrate.

Dude? You're barred...
InsuranceERM have (unwittingly?) helped to perpetuate the idea of "diversity" being a debate that is overwhelmingly about gender in a recent round-table centred on how the Insurance industry "...can become more reflective of society" - which had no dudes in attendance!

While I certainly wouldn't argue that Insurance was, is, and will continue to be the "domain of the white male" for the foreseeable future, can that be remedied by excluding said males from a conversation on inclusivity of all things?

While the conventional pros and cons were discussed about Golden Skirt-style quotas, mandatory shortlisting of women for senior positions and mentoring, the child-rearing-sized elephant in the room was also tabled. The prevailing opinion seemed to be that it is encumbent on both employers and women to do a bit more during that phase of life to maintain career progression.

Had my two cents been sought (heaven forbid!), I would have added the "H" bomb into the mix. As a husband who works in another country from my family home, I personally offer an additional constraint to my wife's career every single working day, and one thing which won't change between generations is that one partner generally has to "take one for the team". Do the significant others of UK plc realistically provide more of a constraint on career development than any of the factors discussed by the InsuranceERM panel?

I would also have referenced Britain's blue-rinsed demographic timebomb, caring for infirm relatives, in this context, a job that most men manage to avoid, even when it's their parents! I have no first hand experience on the matter, so am reluctant to do more than float the idea, particularly when high-achieving female talent may have the means to outsource such activity.

Progress on the diversity issue therefore remains clunky, piecemeal and gender-obsessed. With every Lloyds (voluntarily?) taking the initiative, there is a Glencore or LSE who manages to clear the decks!

I certainly hope to see some progress on the gender percentage front soon, if only to hit a target so that we may switch the debate back to genuine diversity. With the topic gaining traction across the pond, maybe we won't have to wait too long.

"Implementing Measures" to "Delegated Acts", "RTS" and "ITS" - Unsporting Lisbon...

How to make sense of post-
Lisbon legislative processes
OK, I have finally broken. I think it was a paragraph that had the words "acts" "delegated" "implementing" "regulatory" "measures" and "standards" strewn around like the gin-soaked occupants of a broken carousel that got to me.

The transition of Solvency II-relevant terminology from pre-Lisbon to post-Lisbon, and the lack of clear supporting material to aid the understanding of an idiot prole like me, has led me to have a stab at clarifying it myself, in the lead up to the Omnibus II vote in a couple of weeks.

The fundamentals are easy enough - the 2009 Treaty of Lisbon aimed to put Parliament and Council on an even keel in the decision making process, and get things done quicker. Lisbon was enacted around the same time that the original Solvency II Directive was coming in to land, so naturally any Lisbon-inspired changes in how EU legislation is made and maintained would need to be factored in to the wording of the Solvency II Directive when convenient.

Coupled with this was the European Union's decision (post-credit crunch) to develop a new architecture of financial supervision, which allowed EIOPA to rise in 2010 freshly armed from the embers of CEIOPS with new legislative drafting powers, changing the comfort blanket of the existing 4-level Lamfalussy process into something much trickier to fathom.

There was therefore plenty to factor in when Omnibus II, the tidying-up vehicle, was first envisaged  (covered nicely in this blast from the past from Freshfields), most prominently;
  • EIOPA's ability to draft and recommend "technical" standards which could become law without Parliament and Council having a blocking vote - as CEIOPS, they would have only had an "advisory" capacity.
  • The EU Parliament now being in a position to suggest that certain "technical" matters were actually "political", thus bringing some of the granular mathematics (specifically, Long Term Guarantee-related) back into their sphere of influence during the trilogues - without co-decision making, this would have been much trickier.
To supplement any confusion that might arise in the Lisbonising of the Solvency II Directive, there has been an opportunistic replacement, recycling or bastardisation of terms from pre-Lisbon over to the current day, without an effective mapping (this is by far the best offering I've seen, from Herbert Smith Freehills). Therefore for my own benefit, I have broken it down, and any benefit you can derive you are most welcome to!

Old Term - Implementing Measures (or "Level 2 Text")

New Term (part 1) - Delegated Acts

Why New - Comitology was the process of the Council and Parliament leaving Commission-led "committees" to deal with the development of secondary legislation to sit alongside core legislation (Solvency II Directive in our case). For years, Parliament was largely out of the loop of its drafting, receiving a Yes/No vote on such legislation only as late as 2006.

The post-Lisbon move from implementing measures to Delegated Acts gave Parliament the right to veto and amend drafts of secondary legislation. The European Council have the same powers. The delegated powers can also be revoked if either co-legislator doesn't like the Commission's tone.

The Commission, who remain responsible for developing Delegated Acts, have the drafting powers delegated, via article 290 of the TFEU. They continue to receive assistance from expert committees to create this material, with EGBIP assembled last summer to advise on the Delegated Acts side of things.

What does it really mean - not much on its own, however the new process is proving to be just as opaque and convoluted as it was previously (covered nicely here). It evidently means that influencing the content of Solvency II's Delegated Acts remains in the hands of a chosen few, for example, when Dr Wiedner noted (in AOB) that 'Member States' will get to see draft Delegated Acts before they are finalised in trimester 2 of this year, I think he meant the representatives in the room, not us!

This shadowy future was nicely predicted here back in 2011 - a less efficient process, less formality, less visibility of legislative influencers, and more horsetrading than bank holiday barbeque weekend at Tesco.

Old Term - Implementing Measures ("Level 2 Text")

New Term (part 2) - Implementing Acts

Why new - The concept of "Implementing Measures" has effectively been cut in half, with Implementing Acts very much a sideshow in the context of Solvency II - the Herbert Smith Freehills paper referenced above states that implementing acts are only referenced in one article of the Directive.

These are drafted by the Commission through powers delegated via article 291 of the TFEU, and the distinction between Delegated and Implementing Acts is shown here.

What does it really mean - nothing of consequence it would appear!

Old Term - N/A

New Term (part 3a) - Regulatory Technical Standards/RTS/
"Level 2.5"

Why New - EIOPA were empowered through the 2010 "EIOPA Legislation to draft technical standards on behalf of the Commission which would ensure consistent harmonisation of Solvency II across the Union. These kick in formally as soon as Omnibus II gets through.

A huge step up from their previous guise as CEIOPS, where they were little more than a sparsely staffed lobbying aggregator, Regulatory Technical Standards (RTS) are directly enforcable in Member State law once approved.

RTS may only be for technical matters and "shall not imply strategic decision or policy choices". These are published for public consultation, then submitted to the Commission, who can adopt, reject or amend them.

Both the Council and Parliament receive the draft RTS at the same time as the Commission, and have limited windows in which to object to their content. A specific "sunrise clause" has also been added to Omnibus II which allows the Commission (for a limited period) to circumvent the RTS process entirely and deal directly with certain matters without EIOPA involvement.

What does it really mean - For both RTS and ITS (below), EIOPA, as pen-holders, have had a significant amount of influence placed in their hands with respect to what "uniform conditions" are, and how they should be enforced.

As we have seen in recent consultations, EIOPA do not tend to change their minds, which may perversely make life easier (or at least more certain)!

Ultimately, the reality of "Level 2.5" is that the co-legislators have lost much of their ability to influence or veto acutely technical material, further distancing Solvency II's amendment and approval from Parliament and Council, into the hands of unelected, quasi-autonomous technocrats. Which can only be a good thing...

Old Term - N/A

New Term (part 3b) - Implementing Technical Standards/ITS/"Level 2.5" text

Why New - As with RTS, Implementing Technical Standards (ITS) are directly enforcable in Member State law once approved, and follow the same drafting process. EIOPA's scheduled work in the "Level 2.5" space is of course ITS, not RTS, in the run up to 2016. have tried to cover the distinction between RTS and ITS Standards here (subscription required), but it is not even massively clear from the Regulations which empower EIOPA!

The crucial difference is that ITS, once adopted by the Commission, receive no further scrutiny, unlike RTS, where the co-decision makers can still object after the Commission adopts.

What does it really mean - The reality of the legislative process means that even in the sticky-beaker's paradise of Solvency II, Parliament and Council do not have the time or inclination to argue the toss over this material, so will hopefully leave EIOPA and the Commission to it.

Hard to conclude this post really. For sure we have been unlucky to have bridged the Lisbon divide, as well as the genesis of EIOPA and the realisation midway through proceedings that some of the "technical" matters had immense political significance.

That said, the legislative path we have set Solvency II down for the last few years has made a mockery of the best laid preparation plans within the Union's insurers. Andrew Tyrie MP really hit the nail on the head...

Tuesday, 25 February 2014

Omnibus II and Delegated Acts - state of play summary (before it gets interesting!)

Unless you've been hiding in a cave since last summer, you shouldn't find anything new in this post, but I wanted to accumulate all relevant materials into one place for the run up to Omnibus II D-Day for my own convenience, and you're welcome to share.

At the moment we have;

European Parliament
European Commission
  • I'll cover the fineries of this on a separate post, but worth noting that the Commission's "draft implementing measures" document, which have been circulating for over 2 years, is now referred to as "Delegated Acts", after being Lisbonised.
  • A revised draft of these rebadged Delegated Acts, on the assumption that Omnibus II gets through Plenary, will be delivered like an impatient baby in the deuxieme trimestre of this year (p21). 
  • It apparently not be made available to the proles for public consumption beforehand (reported here and here). Still plenty of time for the faceless exponents of dark arts and back-room shenanighans to influence its content, so the lack of formal consultation is not necessarily a calendar breaker, though it is exceptionally poor form. 
  • The Commission's advisers now come in the form of EGIBF (for Delegated Acts) and EIOPC (for Implementing Acts). EIOPC are evidently a garage without a car at the moment, having not published a scrap of material in 15 months while Omnibus II dragged its heels. 
Obviously as a practitioner in the Risk field who doesn't want to wallow in the details of European Union lexicon, the forthcoming spurt of activity is considerably murkier than it would have been pre-Lisbon. Virtually every relevant term or participating body in the Solvency II hemisphere has had a name or remit change in the interim, and I'm not seeing anyone offer a mapping between "Pre" and "Post"-Lisbon terms.

I'll have a stab on a separate post, for my own sanity if nothing else.

Tuesday, 11 February 2014

PRA's Pillar 3 Industry Working Group - the horsetrading begins...

The PRA have at last released the materials from their pre-Christmas Pillar 3 industry working group, which should provide a little cheer to anyone working in that space, and indeed the vendors who are manfully trying to supply software solutions to address it.

The materials include;
As I mentioned in a previous post, these materials were due for publication 12 working days after the meeting, and the lag had me a little bit concerned that the debate had taken a terrible turn! It wouldn't appear so on review, but I thought the following issues were worth flagging;

From Q&A
  • National-specific template consultations will start "at earliest" in July 2014
  • Suggest that dialogue between firms and the PRA will aid the appropriate application of proportionality up to 2016
  • Suggest that firms "regularly check" EIOPA's website for relevant material, as well as stating that they will update the Q&A doc. Both of these things lead to a "pull" of information by individual firms rather than a co-ordinated "push" by supervisors and rulemakers, which I find displeasing.
  • EIOPA will be expected to provide definitions of any ambiguous terms
  • PRA will not publish a reporting timetable in the preparatory period
  • Smaller firms will not be allowed to submit material in a format other than XBRL
From "record of the discussion"
  • Myriad issues tabled regarding interactions with external parties (ratings agencies, data vendors, asset managers)
  • Range of assumptions, simplifications and materiality calls already being made in the absence of definitive guidance or supervisory college "party line"
  • Publicly disclosed QRTs listed as an area where "more information is needed" - the PRA expect the Implementing Technical Standards to cover these in more detail. 
  • XBRL - Final templates for preparatory phase are due in May 2014. The final ones for Solvency II itself are due in December 2014.
  • The industry flagged their issues regarding XBRL solution vendors and the poorly taxonomised templates as they stand. The PRA therefore asked for specific examples of what might be compromising lead times and budgets.
  • There are some open ended questions at the back of this document which are for the PRA to answer at a later date.
From Data Collection exercise
  • PRA confirm that in most cases, the information submitted is being used "to inform ongoing supervisory work" as a minimum.
  • Some general insurers submissions were incomplete, while some life insurer submissions either did not segregate their with-profit and non-profit funds. This is seemingly less than helpful while the PRA struggle to calibrate their Early Warning Indicators (more on that here and here).
  • A clear supervisory focus on the standardised risk information submitted around the tails of the distributions and diversification benefits - you've been warned about taking liberties already UK and Ireland!