Mr.
Breed: Will the Minister confirm whether the rules will be
different for subsidiaries where the group holding company is located
outside the Community?
Kitty
Ussher: The provisions only refer to situations where the
subsidiaries are within the EU. There are other ways of dealing with
companies that exist across other
borders.
Mr.
Breed: I fear that, although we may know quite a lot about
the subsidiaries, those may be relying on the capital adequacy of the
group. However, if the group is outside the Community, our ability to
understand and know how strong that particular group is could be a
major impediment to supervising the subsidiaries
properly.
Kitty
Ussher: The hon. Gentleman is correct. That is a challenge
for regulators across the whole financial services sector throughout
the whole world right now. Detailed arrangements are in place, often on
an ad hoc basis and sometimes through other mechanisms, to ensure that
there is adequate communication between different regulators in respect
of firms, whether in insurance or broadly in the banking sector, or
even in the wholesale
markets. Just
to clarify what I have said before, to come under the scope of this
directive, the parent company needs to be in the
EU.
Mr.
Hoban: This is interesting, because a lot of non-EU groups
operate in the EU. Would it be possible for a non-EU group to arrange
itself so that it has an EU-based holding company for all its European
insurance businesses and for that company to be regulated on a group
basis rather than on a solo basis per
territory?
Kitty
Ussher: Yes, it would, but that is not anything to worry
about, because the regulatory requirement would ensure that they had
sufficient capital to deal with all the subsidiaries in the EU. So as
far as the policy holder is concerned, there should be no
difference.
Mr.
Hoban: I am not worried; I just want to ensure that that
was the answer. Groups such as the Prudential—I plucked it from
the air, and there are others—have significant non-EU insurance
activities, so how will its EU activities be segregated out? How will
its capital be assessed when a proportion of its activities are outside
the
EU?
Kitty
Ussher: My presumption is that the relevant regulatory
framework will be the one in the country where the company operates.
For example, if it has five or six subsidiaries in the EU, they will
have to be regulated in the way that the “Solvency
II” directive requires. If they have other operations elsewhere,
there will presumably be arrangements between the host regulator and
the parent group regulator to ensure that the necessary regulatory
requirements are adhered to, but that will depend on the regime in each
country. We are discussing what happens in the
EU.
Mr.
Hoban: So, if an insurer has an operation in, for example,
Singapore, it will meet its regulatory capital requirements there, and
presumably the subsidiary’s capital would not count towards its
capital for the SCR.
Kitty
Ussher: The hon. Gentleman is entirely right. The parent
company in the EU must meet the one-in-200 requirement for operations
that take place in the
EU.
The
Chairman: Unless I am mistaken, that brings us to the end
of questions. I call the Minister to move the motion.
Motion
made, and Question
proposed, That
this Committee takes note of EU Document No. 6996/08 relating to
Financial Services, amended draft Directive on the Taking up and
pursuit of the Business of Insurance and Reinsurance:
Solvency II (Recast).—[Kitty
Ussher.] 5.7
pm
Mr.
Hoban: I am grateful to the Minister for her forbearance
during detailed and technical questions. Our aim is not just to tease
out information, but to support the Minister by identifying some of our
concerns about “Solvency II”, and to encourage
her in her negotiations with her European counterparts. The directive
is important, and will start to bring prudential regulation into line
with the way in which international groups manage their activities.
Insurance groups are increasingly sophisticated in the way in which
they manage their risk from the capital side of their business. If the
benefits are to be realised, there must be a close fit between that
side and their prudential supervision.
It seems that
the directive has been designed to encourage and reward better risk
management, regardless of a company’s size, and, hopefully,
should enhance consumer market confidence in the soundness of insurance
companies. We welcome the fact that it is possible to manage solvency
on an EU-wide basis, taking account of capital use within the EU as a
whole. I hope that the directive will lead to a level playing field for
insurers throughout Europe, and reward those who manage risk carefully,
enable optimal capital allocation, and streamline group
supervision. I
want to discuss in a little more detail some issues that we did not
probe during questions. First, the minimum capital requirement is an
outstanding issue to be settled in the next round of negotiations. I
understand that the closer it is to the solo solvency capital
requirement for each territory, the less benefit will be gained in the
ability to manage solvency on an EU-wide basis. I gather that the
simulations of quantitative impact study 3 came up with a range of
answers where the minimum capital requirement was either less than
zero, which seems absurd, or greater than the solvency capital
requirement. Clearly, further thought is
required. Will
the Minister outline the Government’s position on what the
minimum capital requirement should be? Some member states want the MCR
to be calculated on a stand-alone basis, so that it could be audited,
and be separate from the SCR. The Association of British Insurers has
suggested that the MCR should be risk-weighted using the value-at-risk
method. It indicated that the best way to achieve that is to set the
MCR as a proportion of the solo SCR—the SCR applying to
companies acting in that jurisdiction on a stand-alone basis. It
suggested that 33 per cent. of the SCR will be an appropriate level at
which to set the MCR. Will the Minister explain the Government’s
thinking on that? Clearly it is an important issue to resolve, given
that it will have an impact on how effective the directive is in
creating a level playing field and yielding some of the benefits for
which we would hope from a strong group
regime. My
second issue concerns the supervisory regime and the colleges. I have
read the Government’s consultation paper on the role of
colleges, and I recognise that, as I indicated in my questions, if we
do not get the group supervision right, we will not fully benefit form
“Solvency II”. Clearly a strong lead regulator
will strengthen group supervision, thus realising the goals of EU-wide
solvency calculations. The Government made a very strong and important
point in their consultation document: given the open nature of
financial markets in the UK, the FSA will act as a local regulator in a
significant number of incidences, which strengthens the argument in
favour of a strong lead regulator—that demonstrates that on this
we do not speak with a vested interested. Will the Minister give us her
assessment of where she thinks that the balance of opinion lies on that
relationship? We have mentioned that industry is broadly supportive of
a strong lead regulator, but it might be helpful to have another
discussion on
that. I
have a broader point about supervisory colleges. In this case, an
EU-wide college will be set up to deal with a particular regulatory
issue—prudential supervision—but clearly, as the Minister
indicated, the concept of such colleges could be applied to
international financial institutions. Will she elaborate on the
Government’s broader policy on supervisory colleges in terms of
their membership and powers? As we touched in our discussion on
solvency relating to non-EU groups and EU groups with non-EU
activities, clearly a number of EU groups have significant non-EU
activities. Is the Government’s view that colleges should be
inclusive and open to all significant regulators of financial
institutions, or does she believe that there is pressure within the EU
for them to cover EU regulators only? Given the open nature of the UK
financial services sector, an inclusive college would be better than an
exclusively EU one. What powers does the Minister expect those colleges
to have? There has been some debate about whether they will open up the
opportunity for a supranational regulator. I understand that the
Government do not think that there should be such a regulator, but I
question whether some would use colleges as a way of re-opening that
debate.
In the
question and answer session, we did not touch on the fungibility of
capital. Clearly the proposal will work only if it is possible to
transfer capital around EU group companies. Have the discussions on
“Solvency II” dealt sufficiently with the
fungibility of capital and the ability to transfer direct capital to
subsidiaries at risk of breaching their solvency margins. As my hon.
Friend the Member for Hammersmith and Fulham alluded to when he talked
about Basel II, over recent months, we have seen the tension between
liquidity and solvency in the banking sector—we have seen banks
that are solvent, but not necessarily liquid. A parallel can be drawn
here: an EU-wide institution might be meeting its SCR, but the nature
of the underlying assets might impair its ability to move its capital
around the
group. 5.15
pm In
certain member states, such as Germany, Austria and Sweden, surplus
funds can provide capital to life insurance companies, but there are
regulatory restrictions
on their use in the relevant member states. Can the Minister indicate if
it is the Government’s view that these surplus funds will be
sufficiently fungible to be counted towards the group’s SCR and
on what basis they should be valued? In some of those member states,
they are valued at book value rather than market value; at a time of
market volatility, clearly book value may not be appropriate in
assessing the solvency of insurance companies. So I would be grateful
if the Minister commented on that
issue. Those
are the only comments that I have to make on this
directive.
Kitty
Ussher: Those are useful issues; I am grateful to the hon.
Gentleman for raising
them. On
the MCR, I am aware of the proposal of the Association of British
Insurers, which we are certainly comfortable with. As the hon.
Gentleman has said—indeed, I think that I said it earlier,
too—the key is that there is a connection between the SCR and
the MCR to allow a sort of ladder of supervisory intervention and to
ensure that the MCR really is a base beyond which we do not
go.
So we have
been supportive of setting the MCR as a percentage of the SCR.
Realpolitik suggests that other member states may be unlikely to
support that idea, but we think that a corridor approach is an
acceptable alternative to ensure that the MCR is fully driven by risk,
which is the most important factor, and has a link to the
SCR.
Mr.
Hoban: Just to be clear, in terms of the corridor
approach, is the Minister thinking about setting, say, a floor and a
ceiling as to the percentage of SCR that the MCR could
be?
Kitty
Ussher: Exactly. There would be a cap on the MCR as a
percentage of the SCR, yes.
Mr.
Hoban: Will it be clear, in looking at the MCR, that it
should be calculated, as far as possible, on a consistent basis with
the SCR in terms of treatment of different types of assets, and things
like that, so that we do not end up with businesses having to run two
parallel calculations and suddenly a percentage is applied at the end
to ensure that the business is within that
corridor?
Kitty
Ussher: The hon. Gentleman and I are violently agreeing on
this point; the answer is yes. We will try to negotiate something that
is as near as possible to a sensible basis with that idea in the back
of our minds.
On the point
of a strong lead regulator, we have already had an exchange on that
issue in an earlier part of this debate. We think that such a regulator
is in the interests of our industry and policyholders across the EU, so
I take the hon. Gentleman’s point on that issue, which, I think,
is broadly shared by the industry and is certainly held by our
industry. On
colleges, there is nothing to be lost from having regulators from all
the relevant jurisdictions working together effectively. I have not
seen the specific proposals, but I can see no reason why, if there were
a regulator outside the EU, that regulator should not be involved, if
it were seen as being important for them to be involved
or necessary for them to discharge their duties. Of course, we must bear
in mind that, at the end of the day, these are informal arrangements
for co-ordination, and it is the regulatory background in the EU or in
each member state that is
appropriate. The
hon. Gentleman asked whether a move along the road to greater use of
colleges would inexorably lead to an argument for a single regulator or
a greater degree of harmonisation in that regard. I do not think so at
all. In fact, one could argue the opposite point that if we can have
good co-ordination, obviously we do not need legislative solutions.
That is certainly the line that the Government
take. In
an earlier part of the debate, the hon. Gentleman rightly pressed me on
how the level 2 measures will be implemented and how those decisions
will be taken. It may help to point out that when drafting the level 2
implementing measures, the Commission will, of course, do so on the
basis of advice from the Committee of European Insurance and
Occupational Pensions Supervisors. The measures will have to be agreed
by EU Finance Ministries, and they will be subject to scrutiny by the
European
Parliament. The
Commission will conduct an impact assessment at that point, and we in
the UK will do one as well. We hope to proceed step by step on the
basis of evidence only, which is the most effective way to implement
the high-level agreement. That will at least increase the chances of a
solution that works in the interests of the industry, I
presume. The
hon. Gentleman asked specifically about surplus funds, which, as he
rightly said, are dealt with differently in other European countries.
We suspect that the countries that allow with-profit life insurance
policies will require some kind of compromise during the course of the
negotiations, but, obviously, we will continue to push our point. There
is no way that the surplus funds arrangements that exist in some other
countries could be used in the UK, because they simply would not comply
with the FSA’s conduct of business rules. The important thing is
to ensure that other member states get what they need, but that there
is no disadvantage to us, and that negotiations move as far as possible
in our direction so that our industry is not left
behind.
Mr.
Hoban: Does the Minister expect that if a compromise were
reached—I believe that it could create an uneven playing field
between the UK and, say, German insurers—the tier 2 measures on
disclosure would require those companies reliant on surplus funds to
meet their capital requirement and to disclose it fully and
properly?
Kitty
Ussher: I am happy to look at that, but the important
point is that German companies, for example, work in that way already.
It is always intellectually unsatisfactory that one cannot create a
single market in every way, if we think that it would be in the
interests of British business to do so, but, if we were forced to
concede a compromise in that area, the situation would be no worse. It
could end up being more advantageous to British business than was
previously the case. I always think that transparency is a good idea,
but I will have to write to the hon. Gentleman
with details on that matter.
The hon.
Gentleman was right to say that fungibility of capital is a key issue.
Groups already move capital between legal entities, so, to a degree,
that currently exists. The key is to set appropriate regulatory
requirements to determine whether capital is truly fungible, especially
between legal entities in different member states. Of course, surplus
funds cannot be used to provide group support—we would not
concede on that important point. For example, one cannot move assets
backing a with-profits policy around the group. I hope that that will
allay any remaining concerns.
Unless there
are further interventions, I believe that I have answered all the
points that have been raised. I am grateful for this opportunity to put
on record the Government’s position on the
directive. Question
put and agreed
to. Resolved, That
this Committee takes note of EU Document No. 6996/08 relating to
Financial Services, amended draft directive on the taking up and
pursuit of the business of Insurance and Reinsurance:
Solvency II
(recast). Committee
rose at twenty-three minutes past Five
o’clock.
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