EU insurance: Recast Solvency II Directive

With the publication of the Solvency II Directive, major regulatory reform of the European insurance sector becomes official:



DIRECTIVE 2009/138/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (recast). This text with EEA relevance was published in the Official Journal of the European Union (OJEU) 17.12.2009 L 335/1.


In principle, Directive 2009/138 applies to the following activities:

Article 1
Subject matter

This Directive lays down rules concerning the following:

(1) the taking-up and pursuit, within the Community, of the self-employed activities of direct insurance and reinsurance;

(2) the supervision of insurance and reinsurance groups;

(3) the reorganisation and winding-up of direct insurance undertakings.

The EU member states have until 31 October 2012 to transpose the main provisions of Directive 2009/138 into national law (Article 309).



Recast?


The first recital of Directive 2009/138 says:



A number of substantial changes are to be made to First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance; Council Directive 78/473/EEC of 30 May 1978 on the coordination of laws, regulations and administrative provisions relating to Community co-insurance …[and a number of others]. In the interests of clarity those Directives should be recast.




The Legal Service of the Commission has a web page called Recasting, which explains the meaning of the term. I quote only the first sentence:

Recasting is like codification in that is brings together in a single new act a legislative act and all the amendments made to it. The new act passes through the full legislative process and repeals all the acts being recast. But unlike codification, recasting involves new substantive changes, as amendments are made to the original act during preparation of the recast text.


In other words, recasting is like walking and chewing gum at the same time: Real changes and simpler legislation go together.




Ralf Grahn



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European Union: Directors’ pay

The financial and economic mess continues to claim victims, including in the financial services sector and among company directors, but in some cases their remuneration has been excessive with regard to results and geared towards shortsighted targets.

The public has been called on to bail out companies by billions in any currency, while many continue to join the ranks of the unemployed.

Politicians have felt the need to show some consideration for the apprehension felt by voters.

Two European level recommendations have now been published.


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Remuneration in financial institutions

Based on Article 211 of the Treaty establishing the European Community (TEC) on the Commission’s responsiblities concerning the proper functioning of the common market (internal market), the Commission has issued:

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector, published in the Official Journal of the European Union (OJEU) 15.5.2009 L 120/22.



This text with EEA relevance points out that excessive risk-taking in the financial services industry and in particular in banks and investment firms has contributed to the failure of financial undertakings and to systemic problems in the Member States and globally. These problems have spread to the rest of the economy and led to high costs for society. Whilst not the main cause of the financial crisis that unfolded in 2007 and 2008, there is a widespread consensus that inappropriate remuneration practices in the financial services industry also induced excessive risk-taking and thus contributed to significant losses of major financial undertakings.


The Recommendation is directed at the EU member states:



SECTION I
Scope and definitions

1. Scope

1.1. Member States should ensure that the principles contained in sections II, III and IV apply to all financial undertakings having their registered office or their head office in their territory.

1.2. Member States should ensure that the principles contained in sections II, III and IV apply to the remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

1.3. When taking measures to ensure that financial undertakings implement those principles, Member States should take into account the nature, the size as well as the specific scope of activities of the financial undertakings concerned.

1.4. Member States should apply the principles contained in sections II, III and IV to financial undertakings on an individual basis and on a consolidated basis. Principles on sound remuneration policy should apply at group level to the parent undertaking and to its subsidiaries, including those established in offshore financial centres.

1.5. This Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.


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Directors’ pay in listed companies


On the same internal market basis and in the same OJEU issue, the Commission has published another recommenndation:


Commission Recommendation 2009/385/EC of 30 April 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies.




As an internal market measure, this text too has EEA relevance, and it starts with the presumption that experience over the last years, and more recently in relation to the financial crisis, has shown that remuneration structures have become increasingly complex, too focused on short-term achievements and in some cases led to excessive remuneration, which was not justified by performance.


The briefest look at the scope of the Recommendation. The crux of the matter lies in the additions to existing recommendations:


SECTION I
Scope and definitions
1. Scope

1.1. The scope of section II of this Recommendation corresponds to that of Recommendation 2004/913/EC. The scope of section III of this Recommendation corresponds to that of Recommendation 2005/162/EC.

1.2. Member States should take all appropriate measures to ensure that listed companies, to which Recommendations 2004/913/EC and 2005/162/EC are applicable, have regard to this Recommendation.


2. Definitions in addition to those laid down in Recommendations 2004/913/EC and 2005/162/EC

2.1. ‘Variable components of remuneration’ means components of directors’ remuneration entitlement which are awarded on the basis of performance criteria, including bonuses.

2.2. ‘Termination payments’ means any payment linked to early termination of contracts for executive or managing directors, including payments related to the duration of a notice period or a non-competition clause included in the contract.




Ralf Grahn

EU TFEU: Free movement of capital and third countries

The preceding Article 56 of the Treaty establishing the European Community (TEC) and Article 63 of the Treaty on the Functioning of the European Union (TFEU) prohibited all restrictions on the movement of capital and on payments between member states and between member states and third countries.

But the primary goal has been to guarantee the free flow of capital within the European Community (European Union), with third countries subject to exceptions detailed in Article 57 TEC and 64 TFEU.

As regards third countries liberalisation is till professed, but derogations confessed.


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Article 64 of the Treaty on the Functioning of the European Union (TFEU) is presented as it stands after the intergovernmental conference (IGC 2007) in the Treaty of Lisbon (ToL) and provisionally consolidated by the Council of the European Union (document 6655/08; page 93-94), with the location of the provision added from the table of equivalences (page 460 to 462):

Part Three ‘Policies and internal actions of the Union’

Title IV TFEU (ex Title III) ‘Free movement of persons, services and capital’

Chapter 4 ‘Capital and payments’

Article 64 TFEU
(ex Article 57 TEC)

1. The provisions of Article 63 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. In respect of restrictions existing under national law in Bulgaria, Estonia and Hungary, the relevant date shall be 31 December 1999.

2. Whilst endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt the measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets.

3. Notwithstanding paragraph 2, only the Council, acting in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament, adopt measures which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries.

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The specific Lisbon Treaty amendments to Article 57 of the Treaty establishing the European Community (TEC) are mentioned in point 60 (OJ 17.12.2007 C 306/55):

CAPITAL

60) In Article 57(2), the words ‘the Council may, acting by a qualified majority on a proposal from the Commission, adopt measures’ shall be replaced by ‘the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt the measures’ and the last sentence of paragraph 2 shall become paragraph 3, reading as follows:

‘3. Notwithstanding paragraph 2, only the Council, acting in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament, adopt measures which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries.’

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For comparison, the current Article 57 TEC looks like this (in the latest consolidated version of the treaties in force, OJ 29.12.2006 C 321 E/64):

Article 57 TEC

1. The provisions of Article 56 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Community law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. In respect of restrictions existing under national law in Estonia and Hungary, the relevant date shall be 31 December 1999.

2. Whilst endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of this Treaty, the Council may, acting by a qualified majority on a proposal from the Commission, adopt measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets. Unanimity shall be required for measures under this paragraph which constitute a step back in Community law as regards the liberalisation of the movement of capital to or from third countries.

____________________________________________________________________
A footnote to Article 57 TEC adds the following information: Article amended by the 2003 Act of Accession. See Appendix at the end of this publication.

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The European Convention proposed the following Article III-46 of the draft Treaty establishing a Constitution for Europe (18.7.2003 C 169/34-35):

Article III-46 Draft Constitution

1. Article III-45 shall be without prejudice to the application to third countries of any restrictions which existed on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment — including in real estate —, establishment, the provision of financial services or the admission of securities to capital markets.

2. European laws or framework laws shall enact measures on the movement of capital to or from third countries involving direct investment — including investment in real estate —, establishment, the provision of financial services or the admission of securities to capital markets.

The European Parliament and the Council of Ministers shall endeavour to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to other provisions of the Constitution.

3. Notwithstanding paragraph 2, only a European law or framework law of the Council of Ministers may enact measures which constitute a step back in Union law as regards the liberalisation of the movement of capital to or from third countries. The Council of Ministers shall act unanimously after consulting the European Parliament.

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Article III-157 of the Treaty establishing a Constitution for Europe added the effects of the 2003 Accession Treaty (OJ 16.12.2004 C 310/66-67):

Article III-157 Constitution

1. Article III-156 shall be without prejudice to the application to third countries of any restrictions which existed on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment — including investment in real estate, establishment, the provision of financial services or the admission of securities to capital markets. With regard to restrictions which exist under national law in Estonia and Hungary, the date in question shall be 31 December 1999.

2. European laws or framework laws shall enact measures on the movement of capital to or from third countries involving direct investment — including investment in real estate, establishment, the provision of financial services or the admission of securities to capital markets.

The European Parliament and the Council shall endeavour to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to other provisions of the Constitution.

3. Notwithstanding paragraph 2, only a European law or framework law of the Council may enact measures which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries. The Council shall act unanimously after consulting the European Parliament.

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What, if anything, happened to Article 57 TEC during the post-Nice treaty reform cycle?

Article III-46(1) of the draft Constitution was essentially the same as Article 57(1) TEC, but the Accession Act 2003 added the last sentence on national law in Estonia and Hungary and the stand-still date of 31 December 1999 to the latest consolidated TEC version.

Article III-46(2) of the draft Constitution was arguably easier to read than Article 57(2) TEC. The European Convention proposed its general terminology concerning legislative acts – European laws or framework laws – and substantially the extension of the ordinary legislative procedure (co-decision) to the movement of capital to or from third countries.

Backsliding on achieved liberalisation regarding third countries became Article III-46(3) in the draft Constitution instead of the last sentence of Article 57(2) TEC. Unanimity in the Council was retained, but the European Parliament was to be consulted.

Compared to the draft Constitution the Constitutional Treaty inserted the last sentence on the new member states Estonia and Hungary into the first paragraph of Article III-157.

In Article III-157 Constitution ‘a step back’ became ‘a step backwards’, but otherwise the draft and the Constitution have the same wording.

The Treaty of Lisbon, Article 64 TFEU, takes over as horizontal amendments ‘Union law’ instead of ‘Community law’ and ‘the Treaties’ instead of ‘this Treaty’ from the draft Constitution and the Constitutional Treaty.

The new entrant Bulgaria is added to Estonia and Hungary at the end of paragraph 1. The dash between ‘real estate’ and ‘establishment’, mislaid by the Constitution Article II-157(1) and (2), was retained in Article 64(1) and (2) TFEU as part of the Article 57(1) and (2) TEC text.

The ordinary legislative procedure is adopted in Article 64(2) TFEU, substantially in line with the European Convention’s proposal and the agreement by the IGC 2004.

When the last sentence of Article 57(2) TEC is deleted and replaced by the third paragraph the Lisbon Treaty Article 64 TFEU adopts, the wording resembles a hybrid between all the reform stages.

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Article 64(1) is a stand-still clause as regards capital movements to and from third countries. Its subject matter covers direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets.

The stand-still date is 31 December 1993 for Union law and national law in general, except for Bulgaria, Estonia and Hungary where the date is 31 December 1999.

The Appendix to the latest consolidated version of the current treaties ‘Amendments fo primary legislation further to the accession of the Republic of Bulgaria and Romania to the European Union’ contains the following text concerning the Treaty establishing the European Community (OJ 29.12.2006 C 321 E/327):

1. The last sentence of Article 57(1) shall be replaced by the following:

‘In respect of restrictions existing under national law in Bulgaria, Estonia and Hungary, the relevant date shall be 31 December 1999.’

This has now been inserted into the Treaty of Lisbon (TFEU).

New restrictions can be introduced only according to the special legislative procedure requiring unanimity in the Council (paragraph 3).

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As regards further reading, I refer the interested reader to yesterday’s post ‘EU TFEU: Free movement of capital’.


Ralf Grahn

EU TFEU: Transport, banking and insurance services

Important sectors of economic activity, such as transport, banking and insurance (financial services) are treated distinctly in the context of free movement of services within the European Community (European Union).

We look at the current Article 51 of the Treaty establishing the European Community and its position in the EU Treaty of Lisbon.

Further reading is suggested for readers interested in EU law and policies concerning the transport and financial services sectors.


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The Treaty of Lisbon (ToL) makes no specific amendment to Article 51 of the Treaty establishing the European Community (TEC). Cf. point 57 and 58 in Official Journal (OJ) 17.12.2007 C 306/55.

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The current Article 51 TEC is found in the latest consolidated version of the treaties, TEU and TEC, in OJ 29.12.2006 C 321 E/62:

Article 51 TEC

1. Freedom to provide services in the field of transport shall be governed by the provisions of the title relating to transport.

2. The liberalisation of banking and insurance services connected with movements of capital shall be effected in step with the liberalisation of movement of capital.

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According to the Lisbon Treaty, the provision should look like this in the Treaty on the Functioning of the European Union (TFEU) when we add the location of the Article and the future renumbering from the Tables of equivalences (OJ 17.12.2007 C 306/207-208) and note that no horizontal amendments seem to apply (Cf. OJ 17.12.2007 C 306/41-44):

Part Three ‘Policies and internal actions of the Union’

Title III (renumbered Title IV) ‘Free movement of persons, services and capital’

Chapter 3 ‘Services’

Article 51 TFEU (ToL), renumbered Article 58 TFEU

1. Freedom to provide services in the field of transport shall be governed by the provisions of the title relating to transport.

2. The liberalisation of banking and insurance services connected with movements of capital shall be effected in step with the liberalisation of movement of capital.

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The first paragraph of Article III-31 of the draft Treaty establishing a Constitution for Europe referred to the ‘Section’ instead of the ‘title’ relating to transport, but proposed no other change (OJ 18.7.2003 C 169/33).

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Only the referral to ‘Section 7 of Chapter III’ relating to transport differed from the other versions in Article III-146 of the Treaty establishing a Constitution for Europe (OJ 16.12.2004 C 310/63).

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In short, between Nice and Lisbon only technical adjustments have been proposed, boiling down to the renumbering effected by the Treaty of Lisbon.

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Article 51 TEC and ToL, renumbered Article 58 TFEU, encompasses the principle of freedom to provide services in the field of transport, but excepts transport services from the scope of the general chapter on services (Chapter 3).

TEC Title V ‘Transport’ reigns as ‘lex specialis’, meaning the current Articles 70 to 80 TEC on the common transport policy.

This corresponds with Title V ‘Transport’, Articles 70 to 80 ToL, but after renumbering these provisions are found in Title VI ‘Transport’, Articles 90 to 100 TFEU.

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Banking and insurance are treated differently. Liberalisation of these sectors is supposed to advance in step with measures to open up the capital markets.

The second paragraph refers to the current Chapter 4 ‘Capital and payments’, Articles 56 to 60 TEC.

The corresponding ToL chapter is Chapter 4 ‘Capital and payments’, Articles 56 to 59 (with Article 61h ToL being renumbered Article 75 TFEU and moved to the provisions on the area of freedom, security and justice).

In the consolidated Lisbon Treaty Chapter 4 ‘Capital and payments’ includes the Articles 63 to 66 TFEU.

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The interested reader can move directly to the sector specific treaty provisions mentioned above. This series of blog posts is advancing one Article at a time, so we will look at these provisions in due time.

At this stage, some further reading is suggested for interested readers.

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Transport

A general introduction to EU transport policies is offered through the links of the European Commission’s Transport home page:

http://ec.europa.eu/transport/index_en.html

The European Commission dedicates pages 76 to 83 of its ‘General Report on the Activities of the European Union 2007’ to transport with subheadings on rail transport, road transport, maritime transport, inland navigation, air transport, intermodal approach (Galileo), international developments and Trans-European transport networks (TEN-T).

The government of Sweden publishes yearly reports to the parliament (and the public) on the activities of the European institutions: the EU, the Council of Europe and the OSCE. The depth of the EU report ‘Regeringens skrivelse 2007/08: 85 Berättelse om verksamheten i Europeiska unionen under 2007’, published 6 March 2008, is fully comparable to that of the Commission.

Part 7 (Del 7 Transporter, elektroniska kommunikationer och energi) deals with transport policy from page 163 to 180.


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Banking and insurance (financial services; capital and payments)

A starting point for EU policies on financial services is offered through the links on the Commission’s internal market web page ‘Financial Services – General Policy:

http://ec.europa.eu/internal_market/finances/index_en.htm

Under the heading ‘Freedom to provide services and freedom of establishment’ the European Commission deals with developments concerning financial services on pages 50 to 53 of its ‘General Report on the Activities of the European Union 2007’.

Part 6 on competitiveness (Del 6 Konkurrenskraftsfrågor) of the Swedish report on EU activities in 2007 includes Chapter 29 on the free movement of services and capital (29 Fri rörlighet för tjänster och kapital), from page 139 to 142.

The UK House of Lords European Union Committee’s report ‘Single Market: Wallflower of Dancing Partner? Inquiry into the European Commission’s Review of the Single Market, Volume I: Report (HL Paper 36-I, published 8 February 2008) dedicates Chapter 7 to financial services (page 32 to 37).

The starting point of this timely assessment was the Committee’s feeling of an area in which the lack of progress has been disappointing.

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The separateness of transport services and the parallel introduction of measures concerning banking and insurance services (financial services) with liberalisation of capital markets is underlined by the fact that they are excluded from the scope of the general Services Directive, to be implemented by the member states before 28 December 2009.


See Article 1 ‘Subject matter’, Article 2 ‘Scope’ and Article 3 ‘Relationship with other provisions of Community law’ of Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market, OJ 27.12.2006 L 376, p. 36–68:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:376:0036:0068:EN:PDF

The express exclusion of transport services follows from Article 2(2)(d) and of financial services, such as banking and insurance from Article 2(2)(b) of the general Services Directive.


Ralf Grahn