ESAs (European Supervisory Authorities)

The European System of Financial Supervision (ESFS) was introduced in 2010. It consists of the European Systemic Risk Board (ESRB) and the 3 European supervisory authorities (ESAs), namely: the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Authority (EIOPA).

ESAs’ stakeholder groups

All three authorities have stakeholder groups that represent the industry and consumers in order to facilitate consultation with stakeholders in areas relevant to their tasks. BIPAR is represented in EIOPA’s Insurance and Reinsurance Stakeholder Group (IRSG).

Revision of the European system of financial supervision

In March 2021, the European Commission launched a public consultation on the supervisory convergence and the single rulebook of the three ESAs seeking to take stock of what has been achieved since the review of 2019 ESAs Review. This consultation will feed into the preparation of the report required by the Capital Markets Union (CMU) action plan in Q4 2021 which will also cover the ESAs Founding Regulations. The Commission will consider proposing measures for stronger supervisory coordination or direct supervision by the ESAs.

In its response to the consultation, BIPAR explains amongst others that it is too early to assess any need for changes and recalls that it is crucial to have the right timing for the development and application of level 1 and 2 rules. Level 1 cannot start applying if level 2 is not yet finalised and implemented. BIPAR also explains that in general it is not in favour of having regulations instead of directives. Proportionality and subsidiarity reasons justify the use of Directives. Regulations are sometimes not adapted to national legal frameworks and cause therefore uncertainty or disproportionate high compliance and transition costs in particular for smaller operators.

BIPAR's responses and preparation for response to ESAs' consultations in 2020 and in 2021

During 2020 and 2021, BIPAR answered -and is in the process of preparing feedback- to various ESAs' consultations. See also article on digitalisation for EIOPA consultations on open insurance, on insurance value chain and new business models and on blockchain and smart contracts.

  • EIOPA’s thematic review on mortgage life and other credit protection insurance

EIOPA launched an EU-wide thematic review in February 2020, looking into consumer protection issues with mortgage life and other credit protection insurance sold through banks. EIOPA states that even if mortgage life and other credit protection insurance can be beneficial for consumers, national competent authorities have reported issues and risks related to these types of insurance products that may lead to consumer detriment.

BIPAR participated in an EIOPA roundtable discussion on “Mortgage life and other credit protection insurance sold through banks” on 5 March 2020, pointing out issues with cross-selling and the need for the consumer to be able to choose/switch his/her insurance product(s) without losing beneficial interest rates.

BIPAR has been contacted by EIOPA to provide further input into the process. EIOPA aims to publish a report by early 2022.

  • EIOPA’s 9th Consumer Trends Report

EIOPA is mandated by its empowering Regulation to collect, analyse and report on consumer trends. For this purpose, EIOPA publishes, on an annual basis, a Consumer Trends Report. BIPAR was consulted by EIOPA on the drafting of its 2020 Report, which was published in January 2021.

The 2020 Report focuses on Covid-19, providing an initial and preliminary overview on its impact on the insurance sector, the responses and challenges which emerged. This includes taking stock as to how EIOPA’s Covid-related measures have been implemented and their impact. The Report contains BIPAR and BIPAR members’ input, as well as an interview with BIPAR Chairman, Juan Ramón Plá.

EIOPA states that despite initial concerns, insurers, intermediaries, and pension funds have maintained business continuity. The sudden shift towards digital channels has crystallised some benefits of financial innovation/digitalisation, both for insurers and intermediaries as well as for consumers. However, in particular, for more vulnerable and less digitally-savvy consumers, intermediaries have also played a key role, being a first point of contact for consumers to seek guidance on their insurance coverage.

While the full extent of the effects of COVID-19 on consumer trends still had to be revealed, EIOPA identified a number of key issues:

  • Existing concerns in relation to unit-linked products have intensified.
  • Approaches to exclusions varied across markets, products and undertakings.
  • Problems for travel insurance products surfaced, both in relation to exclusions but also in relation to changes in the risk profile for which the products were sold, as well as a lack of remedial measures to address resulting consumer detriment. However, many travel insurers have also taken goodwill measures and extended coverage particularly to consumers stranded abroad.
  • For some products the risk profile being covered decreased materially, raising questions as to their capacity to meet the needs of the target market, yet initiatives for addressing such changes in risk profile were not widely spread.

EIOPA also added a risk heat map to its 2020 report, providing a visual summary representation of the key, Covid-related, findings from the report.

In November 2020, BIPAR had the opportunity to share its views with EIOPA during an exceptional 2-hour webinar.

  • EIOPA and ESMA reports on cost and performance of retail investment products

In April 2021, both EIOPA and ESMA published their annual statistical reports on the cost and performance of EU retail investment products (IBIPs, personal pension products, UCITS, …).The reports follow the request from the European Commission to the ESAs back in 2017 to periodically report on the costs and past performance of retail investment products.Both reports look into distribution costs, referring to specific markets at some points. High costs have been reported by both, raising questions on value for money/diminishing the investment outcome for final investors.

EIOPA report on costs and past performance of insurance-based investment products (IBIPs) and personal pension products finds that overall, in line with general market trends, 2019 was an extremely positive year for the IBIPs market at European level and positive net return across all Members States. EIOPA finds that administrative costs represent on average the dominant cost driver, followed by investment management costs and distribution costs. Biometric costs are minor. Overall, EIOPA finds that instances of high costs have been reported, raising questions on value for money. For personal pension products, similar trends to IBIPs were noted.Here, an absence of harmonised reporting has continued to raise data challenges.

ESMA report on performance and costs of retail investment products in the EU looks at UCITS funds (the largest investment fund sector in the EU), retail alternative funds and structured investment products (the smallest market) and finds that the costs of investing in key financial products remain high and diminish the investment outcome for final investors. ESMA finds that retail clients pay on average around 40% more than institutional investors across asset classes. Specifically with regard to ESG funds, ESMA finds that ESG outperformed non-ESG equity UCITS mostly due to sectoral factors. According to the evidence, actively managed ESG funds showed lower costs than non-ESG, not supporting the view that there is systematic greenwashing by ESG funds.

  • EIOPA Consultation on unit-linked insurance value for money

In April 2021, EIOPA launched a public consultation on: “a framework to address value for money risk in the European unit-linked market”. EIOPA wants to create a framework for product manufacturers setting out how to assess whether their unit-linked products (and hybrid products that combine a unit-linked component with a profit participation component and/or a capital guarantee) offer value for money, taking into account the needs, objectives and characteristics of a target market.

EIOPA defines “value for money” as: “where the costs and charges are proportionate to the benefits (i.e., investment performance, guarantees, coverage and services) to the identified target market and reasonable taking into account the expenses born by providers and in comparison to other comparable retail solutions on the market.”

The EIOPA draft framework builds on the IDD’s Product Oversight and Governance (POG) basis and is centred around the principles that:

  • Value offered by unit-linked (and hybrid) products should be assessed both taking into account the product as a whole as well as each product component (investment, insurance and guarantees, if any).
  • When products are tested, manufacturers should assess the product features and characteristics, including costs and the reward profile of the products, vis-à-vis the target market characteristics, objectives and needs and they should ensure that no ‘undue’ costs are charged to consumers. In this respect, EIOPA looks at distribution costs as well, in particular at those charged as a percentage over capital, which may be the “result of agreement between manufacturers and distributors rather than the reflection of a specific service provided to respond to the target market’s needs, objectives, and characteristics. This could increase the risk that consumers receive poor value for money”. EIOPA amongst others also calls on manufacturers to take into account the quality, breadth and depth of advice and retrocession fees from asset managers when establishing the reasonableness of costs and assumed return.
  • Products which are difficult for consumers to understand should have more granular target markets and adequate measures in place to mitigate complexity related risks.EIOPA also emphasizes that mass-marketed products need to be understood by distributors and calls on manufacturers to ensure that careful consideration is given to select appropriate distribution channels with professional skills and training to provide the necessary professional advice to customers.

EIOPA’s proposed framework is a first step towards a broader set of tools to assess value for money. BIPAR will provide input in the discussion paper.

  • EIOPA consultation on LEI guidelines

In April 2021, EIOPA launched a consultation on revised draft guidelines addressed to national competent authorities (NCAs) on the use of the Legal Entity Identifier (LEI).The LEI is a unique identification code, a 20-character, alpha-numeric code. It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure.

The LEI was proposed by the Financial Stability Board (FSB) and endorsed by the G20 in 2012. It aimed at achieving a unique, worldwide identification of legal entities participating in financial transactions.

The LEI is nowadays widely used by the financial industry especially in the EU, not only for pure identification of legal entities at both single and group levels, but also for data quality purposes, linking different types of data. This in turn supports activities in the area of financial stability, oversight and supervision as well as consumer protection.

As part of its involvement in data standardisation initiatives, EIOPA issued 4 Guidelines on the use of the LEI in 2014. Other European Supervisory Authorities (ESAs) as well as authorities from other jurisdictions also developed and introduced tools, laws and regulations which include references to LEI for regulatory purposes.

EIOPA proposes to replace the current 4 Guidelines by 2 new Guidelines:

  • on the scope of legal entities - the main focus of the public consultation covers the scope of entities that should have a LEI code. The suggested scope is broader than before. Apart from Institutions for Occupational Retirement Provision (IORPs) and insurance and reinsurance undertakings (and their branches), EIOPA proposes that insurance and reinsurance intermediaries which carry out cross-border business under the IDD, insofar as they fall under the supervisory remit of the competent authority, have a LEI code. EIOPA also suggests that third-country legal entities which are part of a group as defined in Solvency II Directive have an LEI code and that branches established in a third country and belonging to insurance or reinsurance undertaking with the head office situated within the EEA, use the LEI code of the head office legal entity or have their own LEI code. The Guideline provides for the application of a proportionality principle regarding (re) insurance intermediaries as only those who are operating cross-border should have an LEI code.
  • on reporting to EIOPA - the revised Guidelines also cover the necessity to use an LEI code for identification purposes when competent authorities report to EIOPA.

EIOPA will consider the feedback received, publish a Final Report on the consultation and submit the revised Guidelines for adoption by its Board of Supervisors. EIOPA currently foresees that the Guidelines shall apply from 1 January 2022.

- Published on June 2021 -

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