Solvency II: Omnibus II Directive arrives
Mon 28 Feb 2011
On 19 January 2011, the European Commission published its proposal for an Omnibus II Directive. Omnibus II will amend the Solvency II Framework Directive, to bring it in line with the EU’s Lisbon Treaty and to take account of the EU’s new supervisory structure. It also pushes Solvency II’s implementation date back to 1 January 2013 and gives the European Commission powers to defer many parts of Solvency II for up to ten years.
Omnibus II is an EU directive, with the same legal basis as the two directives it amends – the Prospectus Directive and the Solvency II Directive. Putting it into force requires agreement from the European Parliament and Council. The European Commission wants Omnibus II to be finalised by June 2011, but for EU legislative processes this is a tight timetable and delays are possible. Postponement of Omnibus II is significant because until it is in place, the European Commission cannot formally adopt level 2 measures and level 3 guidance cannot be produced.
Omnibus II amends the Solvency II Directive by:
Changing the implementation date: from 31 October 2012 to 1 January 2013.
Replacing “implementing measures” with “delegated acts” and “implementing technical standards”: Before Omnibus II, level 2 implementing measures were expected to take the form of either a Directive or a Regulation, both of which would undergo the usual EU legislative processes. Now level 2 will consist of Commission delegated acts and implementing technical standards.
It is not at all easy to see the difference between these two forms of legislation and in fact it appears that implementing technical standards would be implemented by way of delegated acts. When the Commission adopts a delegated act, it will inform the European Parliament and the Council, who will have two months to consider the act. If either objects, the act will not enter into force; conversely, if they do not do so, the act is published and comes into force on a selected date.
Implementing technical standards will be drafted by EIOPA and submitted to the Commission by 31 December 2011. How this fits in with the work already carried out to develop level 2 measures or level 3 guidance is not clear. Nevertheless, it does appear that this amendment will not fundamentally change Solvency II’s essential legislative framework.
Introducing new powers for EIOPA: Not only does Omnibus II replace all references to CEIOPS with references to EIOPA, it makes EIOPA’s role and powers more overt. EIOPA’s role in drafting implementing technical standards is referred to above; other changes include the following:
- National supervisors must follow EIOPA’s guidelines and recommendations and provide reasons where they fail to do so, whereas the existing Solvency II wording only requires them to take such advice into account. Supervisors’ national mandates must not inhibit their performance of duties as EIOPA members (new Article 71(2)).
- EIOPA is given enhanced powers in relation to the evaluation of risk mitigation techniques (new Article 109a).
- EIOPA is given the power to determine if “an exceptional fall in financial markets” has occurred (new Article 138(4)).
- Provisions on group supervision and the operation of supervisory colleges give supervisors explicit rights to refer matters to EIOPA, in the event of disagreements. For the most part, these provisions reflect earlier wordings on referring to CEIOPS, although there is some additional recognition of circumstances in which supervisors can refer matters to EIOPA.
Transitional measures: To the surprise of many, Omnibus II contains wide-ranging provisions giving the European Commission powers to defer the implementation of significant features of Solvency II for up to ten years. These powers are discretionary and firms cannot assume that, because the Commission has the power to delay implementation of a particular Solvency II feature, it will necessarily do so. Unfortunately, the inevitable consequence is a good deal of additional uncertainty.
The transitional provisions cover important areas, including supervisory reporting and public disclosure, governance, valuation of assets and liabilities, calculation of technical provisions, tiering of own funds, the SCR and equivalence of third countries. Different maximum deferral periods apply to different areas, the longest being for up to ten years (i.e. to 1 January 2023).
Deferring application requires the Commission to pass a delegated act. As the Commission may choose not to do so firms cannot take these transitional measures into account in their implementing plans and have to continue to assume that Solvency II will come into force in its entirety on 1 January 2013.
Developments within the EU made a measure to amend the Solvency II directive inevitable. Reactions within the EU insurance sector are likely to be mixed. Omnibus II may be viewed as increasing the roles and authority of EIOPA and the Commission. Other European institutions may consider that the Commission’s discretion in areas such as transitional measures is too broad and should be reduced, so Omnibus II’s final form may be up for debate.
Few will welcome the additional uncertainty brought by Omnibus II, which means that there are substantial doubts about the eventual form of Solvency II legislation at all levels. The prospect of significant delays in the implementation of key Solvency II requirements is more likely to be welcomed by the unprepared than by those firms who are spending significant sums of money to ensure they are fully compliant by 1 January 2013.