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VI. Principal Regulatory Developments Affecting Insurance Companies
5. Group Supervision
When an insurance group headquartered in a non-EEA jurisdiction has operations in the EEA, the question arises as to whether EEA insurance supervisors can rely on the group supervision exercised in the third country jurisdiction or whether supervision has to be duplicated by a group supervisor in Europe. Guidance from the European Insurance and Occupational Pensions Authority (“EIOPA”)14 has helped set supervisor’s expectations and criteria for applying Solvency II requirements regarding sub-group supervision.
EIOPA’s guidance notes that where the ultimate parent company of a group is headquartered outside the EEA and is subject to “equivalent” third country supervision (for example, in Switzerland or Bermuda), the EEA group supervisor should rely on the group supervision exercised by the equivalent third country supervisory authorities and exempt the third-country group from group supervision by an EEA regulator on a case- by-case basis, where this would result in a more efficient supervision of the group and would not impair the supervisory activities of the EEA supervisory authorities concerned in respect of their individual responsibilities.
However, EIOPA’s guidance notes that where the ultimate parent company is headquartered outside the EEA and is not subject to equivalent third country supervision (for example, in most states of the United States), group supervision should be applied at the level of the ultimate parent undertaking in the E.U.
If there is no E.U. holding company, then the issue for international groups is whether they should consider a group reorganization in order to create an E.U. sub-group that will be supervised by the relevant E.U. regulator, or whether they should negotiate with the relevant E.U. regulator on appropriate “other methods” for exercising group supervision. The latter is an option where there is no equivalent group supervision. In the course of 2015, we saw clients adopt both approaches as it suited their particular facts and circumstances. Thus, some international insurance groups underwent a reorganization to create an E.U. sub-group headed by an E.U. holding company within which the E.U. insurers were placed while the non-E.U.
14 European Insurance and Occupational Pensions Authority. Guidelines on group solvency - EIOPA- BoS-14/181 EN. 2 February 2015. https://eiopa.europa.eu/Publications/Guidelines/GRS_Final_ document_EN.pdf
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
insurers were moved outside of the sub-group. This meant that the Solvency II group supervision and solvency capital rules would largely be limited to the E.U. sub-group. In other cases, we have seen international groups seek and obtain regulatory consent to a set of measures that will take the place of formal group supervision. Such measures vary from group to group but typically include additional reporting requirements and regulatory pre-notification of proposed dividend payments, capital extraction or intra-group transactions involving E.U. insurers in the group.
L. New U.K. Regulatory Framework on Holding Approved Persons Accountable
1. The Senior Managers and Certification Regime
Directors and senior managers of insurance companies are likely to have been relieved by news in October 2015 that a new rule, which will hold senior financial sector managers to account for failings on their watch with the threat of criminal liability, has been softened in its applicability. The rule is part of a broader package of measures known as the Senior Managers and Certification Regime (“SMCR”), which will take effect on March 7, 2016 in respect of banks, building societies, credit unions and certain investment firms, and is intended to be extended to insurers and other regulated entities in 2018.
The original plan, which is set out in the Financial Conduct Authority’s (“FCA”) and Prudential Regulation Authority’s (“PRA”) July 30, 2014 consultation paper on strengthening accountability in banking15 proposed a “reverse burden of proof,” whereby it would be incumbent on individual senior managers to prove that they took reasonable steps to avoid any issue of regulatory misconduct that has occurred. However, on October 15, 2015, HM Treasury announced16 that it was dropping the “reverse burden of proof” plan and that senior managers would instead be subject to a “duty of responsibility” clause requiring them to take appropriate steps to prevent a regulatory breach. The burden will be on the regulators to prove that a senior manager has failed to do this.
15 United Kingdom. The Bank of England and Prudential Regulation Authority. Strengthening accountability in banking: a new regulatory framework for individuals. (PRA CP14/14, FCA CP 14/13). July 2014. Web 16 December 2015. http://www.bankofengland.co.uk/pra/documents/ publications/cp/2014/cp1414.pdf
16 United Kingdom. HM Treasury. Senior Managers and Certification Regime: extension to all FSMA authorised persons. October 2015. Web 16 December 2015. https://www.gov.uk/ government/uploads/system/uploads/attachment_data/file/468328/SMCR_policy_paper_ final_15102015.pdf
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