The changing nature of insurance regulation

Anthony Kirby, EY EMEIA Wealth & Asset Management Advisory Regulatory Intelligence and IBOR Lead, looks at how insurance regulation is becoming more open-ended and what that means for investors

Sara Benwellposted on Tuesday, July 14, 2020

Anthony Kirby, EY EMEIA Wealth & Asset Management Advisory Regulatory Intelligence and IBOR Lead

What I find fascinating is not just the number of regulations but also what they represent and what the direction of travel looks like.

There are already some 40-+ regulations that impact financial services firms such as insurance asset managers in Europe at the current time.

These regulations take the form of single legal effect regulations that are applied equally in every member state, but also directives which are transposed into the law of each country.

"There are already some 40-+ regulations that impact financial services firms such as insurance asset managers in Europe "

And it isn’t just about the numbers of regulations; it is the type of more open-ended new regulations to come and the downstream consequences of how they impact the types of data – structured and unstructured - to be collected, exchanged and disclosed.

Gone are the days when we were just looking case by case at traditional European regulations like the Markets in Financial Instruments Directive (MiFID) II.

If you are a regulatory reform specialist on the bridge, you have to keep tabs on the other new measures to come but also plot the course of where the regulators themselves are going.

"The new world is what the regulators are calling outcome focused regulations"

The old world within asset management meant showing the rules to be complied with to a portfolio manager or trader.

The new world is what the regulators are calling outcome focused regulations – it is a smorgasbord of guidelines, principles, recommendations and ‘Dear CEO’ or ‘Dear Chair’ letters.

If you happen to be sitting in operations needing to flex your operating models to comply with this mix, then I do really sympathise with you because there could be so many moving parts.

It’s like trying to measure a building out for fitted carpets when you know the floor area and the shape of the profile of the building but not the exact number of floors.

"It is a smorgasbord of guidelines, principles, recommendations and ‘Dear CEO’ or ‘Dear Chair’ letters."

That’s what new regulations during the 2020s could look like. Think more open-, rather than closed-ended.

The European regulators are also moving towards single legal effect regulations. When it comes to transaction reporting, for example, there’s no room for national divergence because the rules are now consistent.

Examples include the European Market Infrastructure Regulation (EMIR), the Markets in Financial Instruments Regulation (MiFIR), the Uncleared margin rules (UMR), Securities Financing Transactions Regulation (SFTR) and the new form of the alternatives directive which will be called the Alternative Investment Fund Managers Regulations (AIFMR).

"The European regulators are also moving towards single legal effect regulations."

This means getting the data right, preferably at source, and building ‘golden copies of that data’. Because when firms get the data wrong, it means that they are fined publicly as was the case with a couple of major sell-side firms.

The fines can be seven or even eight figures large. So, the devil is in the data and if you are not careful you are going to find yourself beholden to the source of that data as data providers don’t tend to readily take liability.

In the 2020s, regulators will want to see parties along the value chain assuming liabilities and pricing them into the mix. Think more in terms of legal indemnifications and less in terms of service level agreements.

 

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