1. Council of Europe adopts Directive on consumer credits
On 9 October 2023, the Council of Europe published a press release announcing that it had adopted the proposed Directive on consumer credits ("CCD II").
CCD II will protect consumers from irresponsible lending practices and ensure that clear information is provided for credit on all scales. It will:
- ensure that credit information is given in a clear and understandable manner, and is adapted to digital services;
- introduce stricter advertising rules to reduce abusive credit to over indebted consumers and establish effective measures against overcharge;
- require lenders to protect consumers from over-indebtedness by ensuring that they can repay their credit;
- broadens the scope of CCD II to loans below €200 and buy-now-pay-now products;
- introduces a right to terminate within 14 days for consumers; and
- gives cancer survivors a right to be forgotten.
As previously discussed in the FIG Top 5 at 5 21 September 2023, the European Parliament voted to adopt CCD II on 12 September 2023. Following the adoption by the Council of Europe, the legislative act has now been adopted. Once CCD II is signed by the President of the European Parliament and the President of the Council, CCD II will be published in the Official Journal of the European Union and will enter into force on the twentieth day following its publication.
2. European Parliament adopts proposed Directive on financial services contracts concluded at a distance
On 5 October 2023, the European Parliament published a press release announcing that it had adopted at first reading the proposed Directive on financial services contracts concluded at a distance.
As previously outlined in the FIG Top 5 at 5 15 June 2023, a provisional agreement had been reached by the European Parliament and the Council of Europe on 6 June 2023.
The proposed Directive aims to better protect consumers by ensuring that all financial services are covered by these rules, including those which are not covered by specific sectoral legislation, by introducing additional supports for consumes and prohibiting dark patterns.
If the European Council adopts the proposed Directive, then the Directive will enter into force twenty days after its publication in the Official Journal of the European Union. Member States will then have two years to transpose the rules into national law and a further six months to apply them.
3. European Consultation Papers
EIOPA Consultation on the Supervision of Captive (Re)insurers
On 6 October 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published a public consultation on its draft Opinion regarding the supervision of captive (re)insurance undertakings with a particular focus on intra-group transactions, the prudent person principle and governance ("Opinion").
The Opinion, addressed to national competent authorities, outlines the supervisory expectations while taking into account the specificities of a captive (re)insurer's business model which include
- intra-group transactions, especially cash pooling;
- consistent application of the prudent person principle; and
- governance-related aspects relevant to key functions and outsourcing requirements.
The purpose of the Opinion is to facilitate a risk-based and proportionate supervision of captive (re)insurance undertakings and further develop the convergence of supervisory practices to achieve a level playing field within the EU. Ensuring high quality and convergent supervision is part of EIOPA's priorities as defined in the 2022 and 2023 Supervisory Convergence Plans.
Stakeholders will be able to submit their feedback until 5 January 2024 when the consultation will close.
ESMA consults on second set of RTS and ITS under MiCA
On 5 October 2023, the European Securities and Market Authority ("ESMA") published its second consultation package under Markets in Crypto-Assets Regulation ("MiCA") on regulatory technical standards and implementing technical standards. The consultation paper contains 6 chapters which address:
- content, methodologies and presentation of sustainability indicators and adverse impacts on climate;
- continuity and regularity in the performance of crypto-asset service provider ("CASPs") services;
- offering pre and post-trade data to the public;
- content and format of order book records and record keeping by CASPs;
- machine readability of white papers and the register of white papers; and
- the technical means for appropriate public disclosure of inside information.
The consultation will remain open until 14 December 2023. Based on the feedback it receives, ESMA will publish a final report and submit draft technical standards to the European Commission for endorsement by 30 June 2024. ESMA will also publish a third consultation package within Q1 of 2024.
4. EIOPA publishes report on the Impact of Inflation on the Insurance Sector
On 5 October 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published its Report on the Impact of Inflation on the Insurance Sector ("Report"). The aim of the Report is to analyse the impact of inflation and to assess potential risks and vulnerabilities given the uncertainty of how inflation will develop in the short, medium and long term. The following is a brief overview of the main areas of focus in the Report:
- claims and expenses inflation tends to exceed consumer price inflation, particularly in non-life business as demonstrated by Solvency II data which shows that claims and expense inflation has significantly exceeded the general inflation for many years with a sharp increase seen between 2020-2022; and
- balance sheets of insurers can indicate how insurers react to macroeconomic developments over time. The portfolio composition of EEA insurers has remained stable following the introduction of Solvency II, however high interest rates have led to volatility in asset valuation. The total investments of EEA insurers had dropped by 15.8%, amounting to €5.8 trillion, by the end of 2022, compared to 2021. Technical provisions for life also dropped significantly by 23% from Q4 2021 to Q4 2022, while non-life decreased by 2% over the same period.
- non-life insurers are often negatively impacted through the increase in the expected costs of claims and the costs of activities needed to service them. A risk of under-reserving may lead to under-funding and a deterioration in the solvency position of insurers as insurers must make assumptions about future claims. On the other hand, life insurers are less prone to claims inflation, but may experience lower new business as a consequence of higher interest rates; and
- for life insurers the increase in interest rates overcompensates the negative effects of inflation on the liabilities. In contrast, non-life insurers do not benefit enough from interest to compensate the effects of inflation. Considering the uncertainty surrounding inflation, insurers need to choose a prudent approach to reserving and include sensitivities on longer lasting inflation when considering their vulnerabilities in ORSA.
- non-life insurers will experience a negative short-term impact on profitability as premiums can only increase gradually but increased reserves are also needed. However, for life insurers, while higher expenses caused by inflation can reduce profits, it also can be beneficial as higher rates can cover the guaranteed rates for existing businesses with investment income, as new investments would generate higher yields. However, as the rates to policyholders increase gradually, policyholders may be more attracted to more profitable investments;
- the underwriting profitability of non-life insurers declined in 2022, compared to 2021 and the return on life investments was the lowest since 2016, while at the same time, all categories of expenses increased;
- for non-life insurers, the medium to long term impact on the profitability of non-life insurers depends on the extent to which they can increase premiums. Both the ability and willingness of policyholders to pay higher premium and competitive pressures are key factors in this area. If inflation is coupled with higher interest rates, then the higher return on new investments should enable insurers to maintain their overall profitability or mitigate the negative effect in instances where they are not able to increase premiums; and
- for life insurers, higher future interest rates may mean that insurers are able to invest new premiums and bonds at higher rates, however this will bring about a gradual change in the yield of portfolios, and rates credited to policyholders will only rise gradually. This can create competitive challenges as the initial rates that they can offer new clients will be lower than other products, and there is a risk that existing customers will be tempted to give up their policies.
- the ratio between net cash flows and investment income to liquid assets turned negative in 2022; and
- the lapse of life policies increased to almost 28.9% of the gross-written premiums.
- high interest rates can also motivate customers to surrender insurance savings contracts for short term investments with higher short term interest rates. In addition, the lower real income of policyholders may urge vulnerable customers to access their funds due to higher living costs; and
- where there is high inflation, insurers often pass their cost increases onto their clients by way of increased premiums. For customers, this can result in them no longer being able to afford their existing cover, and either reduce their level of cover or not renew it at all which in turn deepens the protection gap.
5. Basel Committee publishes its Report on 2023 Banking Turmoil
On 5 October 2023, the Basel Committee ("Committee") published its report on the 2023 banking turmoil, its agreement to consult on climate and crypto-asset disclosures and approves annual G-SIB assessment ("Report"). Within the Report, the Committee addressed a number of items including the macrofinancial backdrop; the 2023 banking turmoil; its agreement to consult on climate and crypto-assets; and the digitalisation of finance. The following is a brief summary of these items:
Macrofinancial Backdrop and Digitalisation
The banking events of 2023 happened on foot of a number of years of low interest rates; many jurisdictions introducing fiscal policies to mitigate the effects of the Covid-19 pandemic and many banks undertook large scale asset purchase programs. In addition, non-bank financial intermediation grew to account for 50% of total global assets; crypto assets grew to $1 trillion in March 2023; and financial digitalisation saw advances in faster payment methods and facilitating the ability of depositors to move their funds.
2023 'Banking Turmoil'
The Report states that the banking events of this year have been the most substantial since the Great Financial Crisis in terms of scale and scope, triggering a confidence crisis in bank resilience. The key findings of the Committee were:
- importance of solid bank risk management practices and governance arrangements: the Report highlighted a number of fault lines that existed such as fundamental shortcomings in basic banking risks; failing to appreciate how interrelated various individual risks are and how they can compound each other; inadequate business models with excessive focus on growth and short term profitability at the expense of proper risk management; ineffective senior management and board oversight; and failures to respond to supervisory feedback and recommendations;
- strong and effective supervision: the Report highlighted the importance of the ability and willingness of supervisors to both identify weaknesses and enforce prompt actions; ensuring that supervisory teams have the appropriate quantity and quality of resources; continually monitoring exogenous and structural changes to the banking system and adapting approaches to overseeing risks; and maintain effective, timely cross-border supervisory cooperation; and
- robust regulatory standards: the Report highlighted the importance of a full and consistent implementation of regulatory standards; robust global standards for internationally active banks; a balance approach to Pillar 1 and Pillar 2 supervision, ensuring that Pillar 2 approaches are seen as compliments rather than substitutes; the potential for banks that are deemed to be not internationally active in a jurisdiction to pose cross-border financial stability risks, including through indirect contagion channels; and the need for proportionate regulatory frameworks which are commensurate with a bank's risk profile and systemic importance.
The Report also indicated a number of follow-up initiatives which include:
- the prioritisation of work which strengthens supervisory effectiveness and identifies issues which may benefit from global level guidance; and
- carry out follow up work based on empirical evidence to assess whether specific features of the Basel Framework perform as intended during the turmoil.
The Committee also agreed to consult on a Pillar 3 disclosure framework for bank exposures to climate-related financial risks, and will publish a consultation paper on the proposed framework by November.
In addition, it agreed to consult on disclosure requirements regarding bank's crypto-asset exposures, which would complement the prudential standards published in December 2022.