Regulation 

Knock-on effects

January 1 2016 is the now widely-known and understood as the official ‘go live’ date of Solvency II for insurance companies across Europe. What is less well-known is that for many financial services firms not subject to the regulation, their unofficial or virtual go live date is rapidly approaching. In fact, for some it may even have already passed.

This may sound a little strange, but the Solvency II directive – the new Europe-wide capital-based risk framework for insurers that is now passed into EU law – has an indirect knock-on effect on many of the key business partners and financial services firms those insurers work with, especially those that manage their assets. Solvency II demands that insurers understand the risk of their investments, to a finely detailed level, and hold enough capital to offset those risks should markets take a downturn. This is ultimately to protect their clients – namely all of us; their policyholders.

Insurance companies hold assets and make investments to provide the income to make good on their liabilities; the commitments they make to their policy holders. For many insurers, especially the life companies, this means investing in funds. If we follow the process through the many layers of regulatory complexity, what it boils down to is that asset managers who run the funds insurers invest in are having to react to one of the biggest data transfer challenges the industry has ever known, and they are under increasing pressure to help their clients comply with Solvency II.

With this data challenge in mind, it is clear that it is not just insurers that are affected by Solvency II. The new regulation places significant demands on asset managers to respond to their clients’ commitments under Solvency II – which is an insurance regulation, not a regulation for asset managers, as insurers must gather data on their investments at portfolio line item level.

The portfolios, their construction and investment strategies, are the crown jewels of asset managers’ businesses. Who would not want to protect them? Protect them from being unravelled by too much information reaching the public domain. Protect them by the individual strategies not being mirrored by other firms, and certainly protect their intellectual property from the competition.

With Solvency II being many years in the making, a certain level of fatigue has set in across the industry. This has resulted in a degree of numbness to the pain yet to come, and there is a risk that as the finish line approaches, after a very long distance race, the climb uphill to the sprint finish is under-estimated. The challenges facing asset managers with insurance clients – both direct and indirect through platforms, or even their competitors – places them in the difficult position of needing to protect their proprietary information in a regulatory landscape in which their clients are operating while at the same time having to react to their own ever-increasing direct regulatory environment.

It is fair to say that there is still uncertainty in some areas of Solvency II – such as technical interpretations, and qualitative or quantitative measures – however, one thing is clear: with deadlines looming fast, everybody affected by the regulations, whether directly or indirectly, needs to be doing something. But what is the right something?