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Summary of Comments on Review of FCD by Länsförsakringar AB

Core Content

Länsförsakringar AB, a Swedish financial conglomerate, has provided detailed comments on the Review of FCD (Financial Conglomerates Directive), specifically on the Paper JCFC-09-10, in response to proposed changes in the regulatory framework. The comments focus on the capital requirements, supervision of mixed financial holding companies (MFHCs), definition of financial sectors, treatment of asset management companies (AMCs), and supplementary supervision thresholds.

Main Views and Key Points

1. Capital Requirements and Risk Diversification

• Länsförsakringar AB is a holding company with subsidiaries in banking, non-life insurance, and life insurance.
• They welcome the inclusion of diversification between risk types in the draft Solvency II rules, as it aligns with their own risk management approach.
• They advocate for allowing diversification between credit risks in banking and insurance risks in insurance operations in the capital requirements of financial conglomerates.
• They emphasize that these risks are not perfectly correlated, citing examples such as:
  • Severe windstorms without impact on loan losses
  • Stock market downturns without significant effects on loan losses
  • Loan loss cycles without major impacts on insurance outcomes
• They argue that not recognizing this diversification would place their business model at a disadvantage, requiring a higher protection level compared to single-sector groups.

2. Mixed Financial Holding Companies (MFHCs) and Supervision

• Uncertainty exists regarding whether MFHCs should be classified as both FHCs (Financial Holding Companies) and IHCs (Insurance Holding Companies) or if it should be an option for supervisors.
• They question the consequences of dual regulation, such as potential duplication of supervision and legal uncertainty due to differing rules for MFHCs and FHCs/IHCs.
• They suggest that supervisors should pre-determine which rules apply to each conglomerate to avoid ambiguity.

3. Sectoral Definitions and Threshold Conditions

• They question the neutrality of the proposed rules, particularly in paragraph 41, which states that supervisors should have the same powers over MFHCs as they did under previous sectoral regimes.
• They point out that this could lead to inconsistent treatment of otherwise identical conglomerates depending on their historical composition, as the dominant sector may have shifted over time.

4. Asset Management Companies (AMCs)

• They raise concerns about the allocation of AMCs to a particular sector and the use of income structure and off-balance sheet activities to determine sector significance.
• They suggest that the guidance should address the issues of sectoral allocation and provide clear criteria for distinguishing AMCs within banking groups from those within insurance groups.

5. Supplementary Supervision Thresholds

• They question whether quantitative thresholds should determine supplementary supervision and suggest that the guidance should address the implications of such thresholds.
• They advocate for a more flexible and risk-based approach to supervision rather than relying solely on quantitative measures.

Conclusion

Länsförsakringar AB emphasizes the importance of recognizing risk diversification within financial conglomerates, particularly between banking and insurance operations, to ensure fair regulatory treatment. They also highlight the need for clarity and consistency in the supervision of MFHCs, the definition of financial sectors, and the treatment of AMCs, suggesting that sectoral neutrality and risk-based supervision should be central to any regulatory framework. Their comments call for more detailed guidance to support the implementation of these changes and to avoid potential legal and operational ambiguities.