Solvency II Update - Timing issues (Tim Scott)

21/09/2012

Background

The Solvency II Directive (2009/138/EC) was formally passed by the European Parliament at the end of 2009. As made, it required Member States to transpose Solvency II into national law by 31 October 2012.
From the outset, that choice of date was regarded as odd. Given that Solvency II operates on a balance sheet basis, any firm with a balance sheet date of 31 December would effectively have been required to apply Solvency II during 2012 in order to comply with the Solvency Capital Requirement as at 31 December 2012. This was apparently not the intention, and it was therefore proposed that the date be moved back two months to 1 January 2013, so that the new rules applied from 2013. That proposal was made in mid-2010, but the Solvency II Directive was not amended. The change of date was intended to be introduced as part of Omnibus II (which is a further directive, designed to amend the Solvency II Directive by introducing transitional provisions and providing for the “Lisbonisation” of the delegated rule-making process).

The original intention was that the final rules (including the Level 2 measures) should be settled at least one year prior to implementation, thus giving firms reasonable notice of the new rules. As the Level 2 and Omnibus II negotiations continued during 2011, it became apparent that there would not be enough time to finalise those measures by the end of 2011, thus leaving less than a year between rule finalisation and commencement. As the months rolled on, a delay – or extensive transitional relief – became inevitable.
The problems with implementation went beyond a debate over timing. Regulators across Europe were not convinced that they had the power to entertain internal model applications until Solvency II entered into force, whenever that was. This meant that firms seeking internal model approval would not know until some months after the commencement of the regime what their required level of capital was. Clearly this was unacceptable, both to firms and to regulators.

Bifurcation

This dilemma gave rise to the idea of splitting (or, as it became known, “bifurcating”) the start date into separate transposition and commencement dates. In other words, the regime would need to be transposed into national law some time prior to the rules actually being applied to firms, thus giving regulators an interim period in which to consider and pre-approve internal model applications. When the FSA first confirmed the bifurcation approach in October 2011, that interim period was to be one year (i.e., national transposition by 1 January 2013 and “go live” for firms on 1 January 2014). However, ongoing delays in the timetable for finalising Omnibus II and, in turn, the Level 2 measures meant that 1 January 2013 became unachievable.

Rather than moving the start date out of sync with the usual accounting balance sheet date, the interim period was condensed to six months. In the meantime, further delays on Omnibus II meant that it might not be passed until after 31 October 2012, by which time the original Solvency II Directive would technically enter into force. Accordingly, in May 2012, the European Commission rushed out a proposal to finally amend the Solvency II Directive commencement date such that transposition is now required by 1 July 2013 and firms must comply from 1 January 2014. That amending directive was passed in July 2012 and represents the current position.

What’s On the Horizon?

Rumours persist that there will be a further delay. Given the course of the above changes, any implementation delays would likely be in one-year increments, potentially suggesting a 1 January 2015 start date, with transposition sometime during 2014. There have been suggestions of a longer delay (e.g., of up to seven years), however this appears to be based on a misunderstanding of a proposal for transitional relief under the matching adjustment provisions, rather than a wholesale delay to the entire regime.