Question marks...

22 November 2012 —
How to make a choice between two wrongs? This was the main question mark that hovered over the debates at EIOPA Conference in Frankfurt. The two wrongs in question refer to the repeatedly postponed application of new prudential regulations under the Solvency II Directive.

After years of heated debates that have concerned various technical aspects of the new regulations, after repeated impact studies and simulations performed on certain segments of the industry, the controversy relates this time mainly to the time of application and how it will be enforced. Basically, we are talking about two versions, both with pluses and minuses that can not be overlooked:

The first option - let's call it the "perfect solution" - requires a new postponement of the Solvency II implementation deadline, most probably until 2016, if not even more, with the idea of giving European authorities the needed time to clarify the last important issue on which a full agreement has not yet been reached: long-term guarantees. If the idea of launching a fully verified and tested regulatory regime is more than reasonable, it is not less true that financial markets are continuously evolving, bringing new issues on the table that should be covered by these regulations, in an unpredictable-end race. Moreover, repeatedly postponing the Solvency II implementation puts the all concerned entities' patience to the test, the more that large companies have already invested lots of money to adapt their internal systems to the new requirements. Finally, a new series of delays casts a rather bad light on the ability of European regulators.

The second option, becoming increasingly popular among European authorities, is that of a gradual implementation - let's name it the "partial solution" - which involves more rapid new regulations compliance, starting with already clarified issues, followed by extending the regulations coverage as the latest technical issues are clarified. The main advantage is that this solution would allow improvements "as we go" of the Solvency II provisions, going right up to the review of issues which now seem clear, but once put into practice might need some changes. "Against" arguments are referring to the inevitable "babble", misunderstandings, ambiguities that could arise from application of incompletely analyzed rules up to its most remote consequences.

EIOPA conference has not made a clear choice out of these two solutions. However, it seems both the industry and the authorities are inclining the balance towards the phased application, with all its possible drawbacks. Yet, until a decision will be made, the signal was very clear: we need a faster resolution, or striving to perfect regulation will remain only an aspiration, whose fulfillment will be constantly delayed by the ever changing realities of the financial markets.

Daniela GHETU

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