One of the latest servings of that often-bewildering Brussels staple, European alphabet soup, represents the European Commission’s latest endeavour to integrate the EU’s financial markets and services through the establishment of occupational pensions regulatory and supervisory committees.
CEIOPS and EIOPC – or more formally the Committee of European Insurance & Occupational Pensions Supervisors and the European Insurance & Occupational Pensions Committee – represent an extension of the so-called Lamfalussy process from its original remit since 2002 on securities into the area of occupational pensions, banking and insurance.
Key players in the industry have welcomed the initiative. “One of the remaining hurdles to the integration of European financial markets is that financial regulation and supervision is still very different from one member state to another,” says Anton van Rossum, chief executive of banking and insurance company Fortis and a member of the European Round Table of Financial Services (EFR), a grouping of chairmen and chief executives of leading European financial institutions. “It means that financial operators who want to be active in other member states have to comply with the rules of all the local supervisors. While this can be justified to a certain degree for issues like consumer protection it cannot be justified for essential elements of prudential supervision like solvency and liquidity.”
The Lamfalussy process was designed to increase the transparency of European lawmaking and expand consultation by establishing a dialogue between legislators and financial market regulators and users. It is also intended to speed up the European legislative process. “In the securities field it was understood that there was a need to adapt legislation to rapidly changing financial markets,” a senior Commission official explains. “But the traditional way of adopting legislation in the EU, through a directive or a regulation, can take a long time – for example, the insurance winding up directive took 11 years to negotiate and the pensions directive also took more than a decade.”
A group of five wise men, chaired by academic and banker Alexandre Lámfalussy, proposed a four-level structure that would allow the traditional directive or a regulation (level 1) to be less detailed, setting out only the key political issues so that negotiations do not get bogged down, but with the details being filled in by a level 2 committee, which for pensions and insurance is the EIOPC. It formulates its proposals having consulted experts at level 3, and this is CEIOPS. Level 4 involves ensuring that legislation is properly implemented and applied and is the responsibility of the commission and the member states.
The EIOPC will be a reconfiguration of the Commission’s existing insurance committee, which having been established by a directive needs a new directive to affect the change. It is expected to take on its new guise by the end of the year.
However, CEIOPS was the first off the mark, being established by a commission decision last year. It has stated that its aim is to build an open dialogue and consensus on what would be appropriate legislation, regulation or supervisory practice between market participants, consumers and end-users, thus benefiting form their expertise.
“We have two types of work,” says CEIOPS chairman Henrik Bjerre-Nielsen. “The first is to advise the EIOPC and our second is to promote the convergence of supervisory practices. And here we will issue standards on best practice on how to supervise insurers and pension companies. We will define best practice through working groups, which will give us, as a committee, a draft of these standards. If we decide that they are good enough we will put them out to consultation during which we will receive the input of the industry. Finally, we will issue a standard that we expect our members to implement on a so-called voluntary basis.”
But the question of new regulations can be problematic. “My view of regulation is that it is good in small doses,” says Alan Pickering, president of the European Federation for Retirement Provision (EFRP), which represents occupational/supplementary pension plans throughout the EU. “It is important that these new bodies realise that ultimately the cost of regulation is borne by the consumer and so one has to have a minimalist approach. Rather than saying ‘you’ve got a regulatory tool that we haven’t got, let’s have it’, I’d rather that those who have extra tools say to those who haven’t ‘would the world be a worse place if I were to scrap this particular tool?’ The real doomsday scenario is that Europe ends up with the aggregate of every domestic regulatory instrument. The benign and winning scenario is that we end up scrapping tools in some countries when by experience of others we find that they don’t achieve anything.”
Bjerre-Nielsen is aware of the problem: “We have established a separate working group to examine many of these issues and one is directly focusing on the pensions directive and some of its challenges,” he notes. “Each time we give advice to the Commission or describe the standards for best practice we will have an open consultation that will include the presentation of documents on our website and the calling of meetings to allow interested parties to express their concerns – or even support. We have, for example, a market participants’ consultative panel which consists of 16 or so representatives of various European interest groups like pension funds, trade unions, insurers, employers and consumers.”
The EFRP has also highlighted a lack of trust between regulators as a bigger obstacle to pan-European pensions than the taxation issue. “That lack of trust often flows from the fact that they’ve never met each other,” says Pickering. “These new institutions will now ensure that regulators and supervisors meet. Hopefully, meeting each other they will come to trust each other and will learn from one another.”
Bjerre-Nielsen agrees and notes that the intention is to bring the pensions supervisors into the same co-operative framework that has become a tradition between insurance supervisors. “In most countries they are the same authority so it will be no problem, but in some – like the Netherlands, Italy, Ireland and the UK – they are separate and there we will need to get to know each other and build relationships. Previously, we established protocols on ways to inform each other about insurance supervision and we have not yet reached that kind of mutual recognition in pension funds. But there are no fundamental problems, it will only be a matter of time and hard work.”
But one initial issue to be tackled is who does what in the regulatory/supervisory world. “There is not yet a clear-cut difference between regulators and supervisors in every country,” notes Chris Verhaegen, secretary-general of the EFRP. “In some member states regulators make policy and supervisors monitor its implementation, whereas in others politicians make policy and regulators and supervisors regulate and supervise it. The idea is that in the future supervisors will not act as regulators.”
The EIOPC consists of national regulators and its membership consists largely of high representatives of finance, economy or treasury ministries. CEIOPS includes national supervisors and is chaired by a national supervisor, Bjerre-Nielsen being the head of Denmark’s financial supervisory authority, the Finanstilsynet.
“The first of the previously formed level 3 committees was the committee of European securities regulators and they operate more like supervisors, there being a tradition that securities supervision take the form of regulating the behaviour of markets as well as supervision,” notes Bjerre-Nielsen. “The distinction between supervision and regulation is more clear-cut in banking and insurance but the regime for pension funds is more complicated, first because pension provision may be supplied by different types of institutions, including insurers, company pension funds and banks, and second because there are differences in the type of pension product and benefit to which a beneficiary is entitled.”
And there are concepts in the pension directives that need clarification across national boundaries. ”There are different legal techniques for accomplishing the concept of freeing something and each technique is not necessarily available in all countries,” says Verhaegen. “And what will ‘full funding’ or ‘appropriate and sufficient’ mean when each country has its own approach to funding? Will they reach an agreement on a common understanding for such terms or will they just say, ‘well funding is like this for us and like something else in another country and people just have to know that, and we will have mutual recognition of different methods of funding’.”