Protecting and enhancing the Single Market for financial services: a regulatory perspective - Gerry Cross, Director of Policy and Risk

Speech at the European Insurance Forum

Good morning ladies and gentlemen.

Firstly, I would like to thank Insurance Ireland and its CEO Kevin Thompson for the invitation to speak at this year’s European Insurance Forum, bringing together the European and international insurance industry to debate and discuss some of the key challenges and opportunities in today’s environment.

Last year attention was focussed on the implementation of Solvency II which had been so many years in the making. We could continue to discuss Solvency II and how it has embedded in the regulatory regime. However, today I would like to turn my attention to a number of other important matters.

In particular, I would like to talk a little about the European single market in financial services, including of course insurance. And about some of the current challenges and how they are being addressed.

The Single Market in Financial Services

The ‘Single Market’ refers to the EEA as one territory without direct or indirect obstacles, including regulatory obstacles, to the free movement of goods and services. Although the concept existed in the founding Treaty of Rome in 1957, which committed to the abolition, as between Member States, of obstacles to freedom of movement for goods, persons, services and capital, the single market in financial services only became truly operational with the adoption of the Single European Act in 1986 and then the Maastricht Treaty in 1992. The period since then has seen the realisation and ongoing deepening of the single market in financial services based in particular on mutual recognition and passporting rights for cross-border business.

The benefits of the single market for financial services are considerable. Whether it be in the form of the funding of business, the management of risks, the making available of investment opportunities, or simply planning for and supporting people’s lifetime activities, financial services are essential to well-functioning and successful societies. The Single Market has and continues to allow these activities to be fulfilled more effectively and more efficiently than ever before. It allows for the creation of deeper and more liquid financial markets, better risk diversification and capital allocation across Member States, and therefore more effective financing of the economy. It is essential to the smooth transmission of monetary policy in the euro area. And, while further benefits remain to be realised, it has promoted competition and innovation across EU borders, pushing down costs and increasing the provision of products and services for businesses and consumers.

Challenges remain

The enhanced realisation of the benefits of the single market in financial services remains an important continuing focus, including for financial regulators, and amongst them the Central Bank of Ireland. For us a particular focus of this effort is our work as part of the European Supervisory Authorities and, in the case of banking, as part of the SSM. As part of that work we seek to drive forward the completion of a single rule book for regulatory purposes and supervisory convergence in terms of how that rulebook is interpreted and applied. For the Central Bank of Ireland this work is a significant priority and one to which we commit material resource, time and effort.

The single market in financial services is however, just that, a single market. It is not, at least at this stage, a financial services union. For example, outside the area of banking, we do not have a unified regulator for the different sectors (with certain specific exceptions, for example in the oversight of credit rating agencies and trade repositories). And indeed even in the area of banking, the Banking Union remains far from complete. This state of the world reflects the current state of political will as determined by our democratic institutions. This may of course change over any given timescale. And it is not my role here to speculate on this. Rather it is to note that this is the current dispensation. And until that changes, it is clearly not the role of regulators to pre-empt or to prejudge the political determinations in this regard.

What I do want to do however is to note some of the challenges that arise in the context of the single market in financial services in its current configuration and to consider what is or might be done to address them.

Let me consider those challenges under two broad headings: (1) ongoing challenges; and (2) Brexit-related challenges.

Clearly one of the most significant ongoing challenges in respect of the single market in financial services is ensuring a level playing field. Now of course this is a core aspect of the mandates of the ESAs and I will not reprise here all of the very good and important work that has been done in this area. Both in terms of the development of the single rulebook and then in terms of its converged application, in particular by the large amount of high quality supervisory guidance that is now available. Again for the Central Bank the achievement of a deep level playing field is a high priority. We are strongly engaged with the work of the ESAs in this regard.

But perhaps an area where there is room for further development is that of supervisory convergence around practices and implementation. This has been the focus of increased attention by all of the ESAs over the recent period which is very welcome. It is an area that should in our view continue to be focused on. As we said in our submission to the Commission’s ESAs’ review consultation, we think the peer review process is one where improvements could be sought (though we acknowledge the material resource constraints under which the ESAs are currently operating).

At the Central Bank of Ireland we particularly like the fact that EIOPA has established an Oversight and Supervisory Convergence Department with a dedicated Supervisory Oversight Team. The team’s mandate is to drive the quality, consistency and convergence of supervision by bilateral engagement with NCAs on their supervisory practices. This approach could be further developed in EIOPA and also applied in the other ESAs. Brexit is also giving rise to an enhanced focus on convergence and the development of new ideas and approaches for that work.

A further challenge revolves around potential mismatches arising from the home authority–host authority division of responsibilities. One example of this is the case of prudential authorisation and supervision. Such authorisation and supervision is carried out by the home state authority; while the activities may be carried out – either by freedom of services or freedom of establishment - in another Member State. Now in general as discussed this is a very good model; it allows business to be carried out on a cross-border basis and customers and clients enjoy the benefits of enhanced competition and a wider range of service providers.

But there are also aspects that need to be taken into account and appropriately addressed.

Firstly there is the risk that in certain cases the home state authority may not be well-placed to understand the risks that are being undertaken by the regulated entity in a host country. This is likely to be so only in a limited number of circumstances but nonetheless needs to be guarded against. To this end at the Central Bank we consider it desirable that the home authority consults effectively with the host authority. Any consultation process in relation to authorisations must of course ensure that operational efficiency is maintained, and the integrity of the decision making process within NCAs continues in order to ensure accountability. Host authorities’ role should be a consultative one. There cannot be any doubt about the decision maker in the context of authorisations.

There has already been developed a somewhat similar procedure within EIOPA where the revision of the General Protocol ("the Siena Protocol") includes a process which requires the home competent authority to interact and discuss issues with host competent authorities where an entity writes or intends to write material levels of cross-border business. And it is timely that I am speaking to you today because this revised protocol (The Decision on the Collaboration of the Insurance Supervisory Authorities) entered into force just recently on 1 May.

That Decision further strengthens and enhances co-operation between NCAs especially in relation to cross-border activities through information and data exchange. In order to embed these principles in on-going supervision, the Decision includes specific requirements on co-operation between home and host Member States prior to authorisation, ensuring potential issues are identified and addressed at the earliest possible stage, which is fundamental for the conduct of supervision and consumer protection. From the consumer's perspective they are operating in the single market too and are entitled to expect that the same standards will be applied across countries and that firms will have to meet those same standards irrespective of the country of establishment.

Secondly, it is very important, in order to maintain confidence, that there is no misunderstanding of where the business is being run from and who it is being supervised by. This should not become obscured by for example a complicated set of agent arrangements. We welcome the requirements in Solvency 2 as to disclosure in this regard, where there is a specific requirement for insurers operating on a Freedom of Services or a Freedom of Establishment basis to disclose to the policyholder, prior to entering into a contract, of the location of its Head Office. Any documentation issued to the policyholder is required to convey this information also.

Following the recent well-known failures of insurance undertakings operating on a cross border basis in the Irish market, the Central Bank carried out an initial review on how consumer's are informed of the name of their insurer and the Member State where its head office is located in their policy documentation. There are specific requirements in this regard, in both the Central Bank’s Consumer Protection Code and EU (Insurance and Reinsurance) Regulations 2015. The Central Bank has issued a letter, outlining the provisions in the Regulations and requiring relevant firms to review all policy documentation and take any necessary actions in order to ensure that this information is disclosed in a way which can leave no doubt, nor disguise, diminish or obscure in any way this important information. This information should be provided in a way that best informs the consumer so they know who the underwriter is, particularly when dealing with a broker.

Thirdly, it is sub-optimal that in the Single Market there is no harmonised approach to dealing with the failure of an insurance company. As we have seen from the financial crisis, the arrangements that govern what happens when a firm fails are enormously important. This means that a key part of achieving a truly single market is having a harmonised approach in this area. We welcome the current work of EIOPA in this regard and look forward to the finalisation of its views following its recent public discussion paper.

Brexit related challenges

Turning now to Brexit, and the challenges that it poses for the Single Market in financial services:

Like other sectors, the UK insurance industry currently enjoys the full benefits of the single market passport as I have described. Post-Brexit, given the UK’s intention to leave the single market and to no longer be subject to the jurisdiction of the European Court of Justice, it seems likely that such passporting will come to an end.

This will undoubtedly change the configuration of the EU insurance market: the UK insurance industry is the largest in Europe with considerable levels of cross border activity.

Brexit is likely to result in a relocation of some financial services activity away from London and into EU27 Member States. As you will be well aware, the process is already underway.

The Central Bank has seen a high level of interest and engagement from financial firms who are exploring the possibility of relocating their operations into Ireland. We have had enquiries from very many firms of many different types. Engagement is currently ongoing with a large number of such firms. The picture is similar across the different sectors.

As UK based firms make decisions on which Member States to relocate to, one of the risks is that regulatory differences could emerge across the EU 27 and that this could result in firms making decisions not on appropriate grounds such as business model fit, workforce considerations, accessibility, etc, but rather on the basis of seeking regulatory advantage, something that should not happen within the single market.

Take for example, the question of substance which relates to how much presence a firms needs to have in a EU jurisdiction in order to be authorised there. The question matters because unless a firm is actually running the authorised business from the EU jurisdiction where it is authorized, then the business is being run, and effectively, as a result, being supervised, elsewhere. And we want to avoid firms doing business in the EU when they are not in fact subject to EU standards and requirements.

The risk of divergence on this question has been a real one. This is why we have been very pleased to see a significant amount of work being undertaken by the European authorities in this regard.

We have seen real and important progress over the recent period. Progress that we believe will make it significantly less likely that firms will be making their relocation decisions based on regulatory or supervisory comparisons.

For example the SSM has recently come out with a set of guidelines on the matter. The Central Bank of Ireland been working very closely and very actively on this as part of the SSM. The guidelines that they have issued reflect in many respects similar thinking to our own in terms of an appropriate balance of robustness and pragmatism. We will continue to work closely with our colleagues in the ECB and SSM as the situation and thinking evolves.

So far as other types of financial firms are concerned – insurance companies, investment firms, asset managers, payment institutions – of course the SSM’s guidance does not apply directly to the approach to these firms. But here also significant progress is being made. Here too we have been working very closely with our colleagues across Europe as part of the European Supervisory Authorities.

The individual ESAs are developing guidance which will set out the approach that they will expect to see adopted by national authorities when dealing with Brexit-related applications.

They are also implementing mechanisms and approaches which will seek to make it likely that Member State authorities will comply with the spirit as well as the letter of this guidance when they are deciding Brexit-related authorisation applications.

These are important and welcome developments.

Conclusion

Let me finish here.

What I have tried to outline is the fact that while the Single Market in financial services has brought many benefits, not only does it continue to be a work in progress, but also it faces specific challenges, both from Brexit and otherwise which need to be addressed. The European Supervisory Authorities and the SSM have a key role in this. At the Central Bank we welcome the good work that they have been doing.

I look forward to our panel discussion.