On 22 January 2015, Paul Fisher, the Deputy Head of the PRA, gave a speech at the Westminster Business Forum.

Paul Fisher has been an academic and a long-term central banker.  He’s also been acting as the PRA’s Executive Director of Insurance since mid-2014, when Julian Adams left.

In his speech, Paul Fisher said that:

  • The PRA is “not looking to use Solvency II as an opportunity to raise capital requirements across the board” (the first emphasis is Paul Fisher’s, the second is mine);
  • The PRA is not looking to “fix firms’ business models to be identical, nor to restrict the level of innovation across the market. Rather, Solvency II seeks to promote a better understanding of the risks being taken, allowing insurers to take informed decisions“;
  • The PRA still believes that “it is for firms’ management to decide upon their chosen risk appetite and the precise details of their risk models. What matters to the PRA is that firms hold capital commensurate to such risk exposures, in line with the Directive“;
  • The PRA “recognise[s] and respect[s] that Solvency II is a maximum-harmonising directive [which the] PRA is committed to … implement[ing] as intended. [So, it] can’t and won’t gold plate” (the emphasis here is mine).

Paul Fisher also sought to clear up what he described as “some uncertainty around our expectations of the non-executive director [at] firms that have internal risk models. Non-executive board members need not be technical experts in risk modelling. However, each board collectively should understand the key strengths, limitations, and judgments within their model. Over-reliance on a single measure can be misleading. Therefore, we want non-executives to have the right tools and sufficient knowledge to be able to challenge model outputs, rather than follow them slavishly” (the emphasis here is Paul Fisher’s).

Paul Fisher’s comments are unsurprising and uncontroversial. It may therefore seem odd that at least some market participants still expect the PRA to gold-plate Solvency II.

The following day, the PRA published Consultation Paper | CP3/15 Solvency II: transitional measures and the treatment of participations“, which describes the PRA’s proposed approach to implementing Solvency II’s transitional measures on risk-free interest rates (article 308c); technical provisions (article 308d); and the phasing in of the Solvency Capital Requirement (SCR) for insurers that will meet their pre-Solvency II Required Solvency Margin on 31 December 2015, but cannot meet their SCR in 2016 (article 308b).

These proposals are almost exactly what Solvency II requires and allows. So there’s no gold-plating here. (Move along, please.)

However, this consultation paper includes a cross-reference to an earlier consultation:  “Consultation Paper CP16/14 Transposition of Solvency II : Part 3“, which, by chance, includes at least one example of gold-plating. Solvency II will eventually require firms that are subject to a PRA imposed “capital add-on” or “undertaking specific parameters” (the so-called USPs) to publicly disclose that fact. It also allows the PRA to waive the publication obligation for a 5 year transitional period. At least some, and perhaps most, of the other European Economic Area Member States have decided to take advantage of the 5 year transitional period. But the PRA has decided that UK firms must publish after only two. That is arguably gold-plating, which it’s not too late to revisit. No doubt there are other clearer and more controversial examples too.

The PRA’s consultation period is open until 20 February 2015. The PRA “will publish a policy statement, addressing any feedback received … following the close of the consultation“.

Posted by Cooley