Thursday, 27 November 2014

PRA Pillar 3 Working Group - testing commences

Bit of activity on the Pillar 3 front, with the PRA's industry working group publishing minutes from their 'recent' meeting (i.e. 2 months ago).

Rather than another bleat about late delivery in contravention of their Terms of Reference (bottom of last page!), let's enjoy the content for what it is, which is incredibly useful.

Data Collection and xBRL
A few basics were formally tabled, such as the PRA completing their vendor selection for a data collection system, and a note that the xBRL process chosen across the EU has "some commonality". Of particular interest is the commencement of a testing sub-group which has been charged with assisting the PRA in getting their technology up and running with sample data, and that work is apparently ongoing as we speak.

They have planned to allow selected submittors to dry-run their facilities in Q1 2015, before opening it up to all other firms obliged to submit material in the preparatory phase in Q2. Not sure how much lag this set-up allows, so let's hope they get happy before Christmas!

External Audit and Pillar 3
Another sore point has been the potential inclusion, on a short or long-term basis, of external auditors in the preparation and delivery of Pillar 3 reporting (raised on the Solvency II Wire last month). The PRA opine that external audit requirement guidelines "...are not scheduled to be included" in the forthcoming ITS, and that EIOPA has not decided when to issue public consultation on the matter, though they will at some point.

Clearly the PRA have ambitions to continue their existing requirements for the external audit of regulatory submissions, as evidenced by their preparatory phase approach to gaining comfort on Solvency II Balance Sheet components of all IM applicants and larger SF firms, which will pad out a few partner's wallets at the Big 4 (though perhaps for the right reasons).

Lobbying and questions
Effectively told the attendees to direct more questions to EIOPA rather than them, and in particular to wait for EIOPA's second set of ITS, due any day now. On the basis that ITS will (probably) be accepted by the Commission as delivered, the PRA are reminding firms that this is effectively the only window for the industry to bleat.

Board sign-off of QRTs
A huge bugbear across the industry was the implication, reinforced through the PRA's Pillar 3 Q&A document (Q20, last page), that June 2015 would see piles of QRT material tabled at Board meetings across the UK for them to formally approve. They confirmed at this meeting that the Board "...may choose to delegate aspects of the process for operational reasons" - CFO sign-offs all round!

Asset Data, and interaction between Asset Managers and Insurers
A slightly odd, but very relevant point was raised regarding Insurers interacting with their asset managers to ensure they get the right quantity and level of granularity in their asset data to populate the QRTs. The PRA are naturally concerned about this, given the shortening timeframe, and given that the asset management industry themselves appear to be making some voluntary efforts, it feels like the insurers have some work to do.

Approved Persons in UK under Solvency II - "SIMF-ly The Best"?

The UK prudential and conduct supervisors doubled-up this week with a barrage of paperwork regarding "Fit and Proper" assessment of senior staff members in Insurers under Solvency II.

This was already acknowledged as an area where intelligent copy-out wouldn't quite cut the mustard for UK plc, so no doubt the Compliance functions of insurance entities have been looking forward to these publications appearing. Given the light touch on the topic in the Directive (Art.42) and Delegated Acts (Art.273), this is very much welcome gristle.

Evidently "Proper" - but "Fit" enough?

While the maintream media has cranked out some comment already on both the FCA (here) and PRA approach (here, here and here), they are naturally broad with their brushes. I thought I would cut it up into my much more insular world of "what does it mean for Key Functions under Solvency II".

PRA Consultation Paper
  • The regulatory framework for individuals will be called the Senior Insurance Managers Regime (SIMR), and will come into force from 1st Jan 2016. 
  • The CP is targeted at ensuring fitness and propriety of individuals running an insurer, or performing a Key Function.
  • NED's have been left out of this paper, as there is a wealth of comment already provided on a separate joint FCA/PRA consultation from the Banking industry.
  • That said "...the regime for insurers should not be identical to the regime for banks". 
  • While Controlled Functions continues to exist as a PRA term, it will be interchangeable with the term Senior Insurance Management Functions ("SIMFs"), which I have used below.
Going into detail, we find the following;
  • CEO, CFO, CRO and Head of Internal Audit are all SIMFs, with Chief Actuary, WP Actuary and a couple of Lloyds-specific roles also lined up.
  • Some Group-specific SIMFs also created.
  • Any Solvency II "Key Function" holders who are not SIMFs will simply be assessed within the business, with the PRA having right to overturn. I thought this would include the Head of Compliance, but they are picked up by the FCA (below). Not sure who else could be Key Function but not a SIMF, unless some SIMF role-holders don't plan to also do a day job.
  • List of new Core Responsibilities provided which need to be allocated to one or more SIMFs (2.21). These include the old chestnuts of remuneration policy and "culture" in its broadest sense, as well as performance of ORSA.
  • A form will follow which needs to be completed by firms for all prospective SIMFs and Key Function holders containing "relevant information" on them - I suspect this will be a LinkedIn cut-and-paste job.
  • Obligation to make and maintain a "Governance Map" listing the positions and key functions which run the firm, the allocation of management responsibilities (including the new ones in 2.21 presumably) and relevant reporting lines. Oddly, the PRA think "...there will be some costs in compiling and maintaining the Governance Map", when it feels like a lazy Thursday morning for Company Secretarial to me...
  • Some reinforcement of Conduct standards for SIMFs and Key Function holders, with Key Function holders having an additional policyholder protection-related standard added to their armoury.
  • Emphasise that Fit and Proper needs to be assessed on an ongoing basis, as opposed to periodically, which effectively gives the regulator a get-out-of-jail when a bad apple SIMF mismanages a firm (i.e. "why didn't you pick it up internally first?").
  • Solvency II brings in a legal requirement for firms to satisfy themselves of a candidate's fitness and propriety before sending applications to the PRA. They therefore plan to assess whether firms recruitment processes are "appropriately rigorous", which feels like a step into the un-assessable (if that is even a word).
Proposed Supervisory Statements are appended to their document covering the assessment of fitness and propriety, and the application of new conduct standards. From those I would highlight;
  • "The norm" is for single individuals to perform SIMFs
  • That firms may add to the list of conventional Key Functions using a bullet-point checklist
  • Firms can "...freely decise how to organise each function in practice"
FCA Consultation Paper
  • The existing Approved Persons Regime will be adapted to fit Solvency II and PRA/EIOPA requirements, as well as existing application forms.
  • "Pre-approval" will therefore still exist in 2016.
  • While the PRA pick up approval of most Key Functions under Solvency II, the FCA keep hold of the approval of Compliance Function heads, which don't feature in the SIMF list.
  • Give themselves some leeway to impose approval and conduct obligations on "certain other functions" in insurers
  • Appear to be combing over conduct-related rules from their work with the banking industry
Frankly, the amount of crossover between prudential and conduct regulators, existing and new rulebooks, and banking and insurance industries, makes this particular topic an awkward read, which is why I don't work in Compliance!

Levity aside, the outcome of these consultation papers will have a significant effect on insurers existing onboarding and approval processes, content of executive job specifications, and indeed the fundamental operacy of governance systems, given the level of prescription involved. Now would be a good time to start briefing!

Tuesday, 4 November 2014

EIOPA's Implementing Technical Standards on Internal Model Approval - ready to "submit"?

EIOPA have kicked into life at the end of October like Freddy Krueger on laughing gas, releasing a swarm of consultation papers and summaries. While the releases on Colleges of Supervisors or the calculation of the risk-free interest rate will be of interest to some, my own interest was in a subset of their draft Implementing Technical Standards on Solvency II Approval Processes

I have tried to cover the distinction between ITS and the other weaponry in the hands of EIOPA and legislators here. The aggregated feedback received by EIOPA on the suite of Solvency II approvals covered by ITS is neatly summarised in this doc, with EIOPA adding dollops of proportionality into the summary, to effectively remind supervisors not to treat the applications of giants and pygmys with the same vigour. Given the audience reaction to the UK regulator's industry event a couple of weeks ago, I think 'proportionality' may need to become the PRA's middle name (though it probably works better as its first name...)

Clearly, two big moans have been common threads in the responses received, and both have been rebuffed. The concept of supervisory requests for supplementary information "stopping the clock" on one's approval window has been retained, while the idea of "no answer in 6 months equals approval" has been firmly rejected.
Internal Model approval
- "Easy, Easy"
Of more interest to me than the other approvals covered by the consultation is the Big Daddy himself, Internal Model Approvals. From a UK perspective I have covered this in multiple posts previously (here, here, here and here for a start) , and was interested to see if any more whistles and bells had been added to what is already an area causing serious fatigue within the UK's potential applicants, not to mention a few dozen corpses from the c.100 interested parties back in 2011 (slide 4 here).

I thought the following was worth highlighting;
  • Given that the Delegated Acts are already loaded with granular Documentation requirements for IM applications (articles 243 & 244), the ITS insists on a few more pieces! Having cross-referenced between the DAs and the ITS, I reckon the items listed in Article 3 d, h, j, p, q and r are all new requirements, though none would be a stretch to produce.
  • Expectations that your model has been in use prior to application (Art 2 (3 a ii)), and is integrated into your current system of governance (Act 2 (c)) - perhaps this is the effort which firms with capital add-ons will be compelled to do in 2016 & 2017 in advance of model applications?
  • Results of your "last" Validation Process must be submitted in a Model application (Art 2 (m)) - again, suggests there will need to be a year's worth of "live" modelling in advance of making an application
  • The supervisors have 30 days to assess the "completeness" of an application - this feels weirdly generous, given those 30 days count towards the overall 6-month assessment window (provided the application is complete).
  • Despite the PRA's firm assertion on Oct 17th (slide 8) that conditional approval for Model applications is not available, Articles 3 (8) and 5 (4 b) both suggest otherwise, namely that proposed "adjustments" or "terms and conditions" can be accounted for in their decision. 
  • As much prominence being given to Model Change process and Model Change policy as the initial Model Application process - applications can actually be rejected on the strength of the change policy (Art 5 (2)). Despite that, the articles designated for these areas (Arts 7 & 8) are relatively straightforward.
There is no real reason why these ITS for IM approval won't sail through at the Commission, so best to prepare accordingly. However, UK applicants with 2016 modelling ambitions will of course need to wait further for EIOPA's Common Application Package before they can finalise this montagne de papier.