The European Commission (EC) is open to easing the rules for insurers investing in securitised products, as part of the legislative reforms to build a capital markets union (CMU), according to Jonathan Faull, director-general for financial services at the EC.
Under Solvency II, the senior tranches of safe and transparent securitised products are treated in line with investments in the underlying assets, but junior tranches attract exorbitant capital charges.
In the case of AAA-rated securitisations, a 2.1% charge applies to senior tranches and a 12.5% charge applies to junior tranches.
Financial institutions claim this discrepancy makes it hard for banks to structure and trade the securitised products and have urged regulators to remove barriers if the market is to recover to pre-crisis levels.
Speaking at a conference in London on 5 March Faull said regulators are willing to weigh up an overhaul of the rules, provided there is evidence this helps to integrate capital markets in Europe and does not put financial stability in jeopardy.
In response to a question on the treatment of securitisations, Faull urged the industry to make its case for increased flexibility in investing when it responds to a series of consultation papers released in February on building the CMU (IAR, 18 February, EC Green paper could change treatment of long-term investments).
"Today everything, anything is possible. If you persuade us that flexibility is what is needed, flexibility there will be," Faull said during a panel discussion at the event organised by the Policy Network, a think tank.
The consultation closes on 13 May. In the second half of 2015 the EC plans to publish an action plan outlining regulatory initiatives to be implemented through 2019.
Potential changes in the treatment of securitisations would not be made in Solvency II only, but would be introduced in other regulatory texts covering other parts of the financial systems.
In his initial speech, Faull identified disparate insolvency and tax legal systems and the bureaucracy for issuing equity and private bonds as areas that the Commission also needs to look at.
He recognised that in some cases it might take long time to hammer out an agreement, but noted that priority will be given to actions that could be completed in the short term.
One of these reforms is the revision of charges for investments in infrastructure under Solvency II. The EC is to publish a delegated act before the end of the year – before Solvency II begins.
This will be influenced by a technical report from the European Insurance and Pensions Authority to be published in June. The report will propose a definition of safe and transparent infrastructure investments and the calibration of capital charges for those (IAR, 5 February, Eiopa reconsiders Solvency II infrastructure investments charge).
A favourable capital treatment of long-term investment funds (Eltifs) is also on the cards, Insurance Asset Risk understands (IAR, 17 February, Illiquid asset funds to attract low charges under Solvency II).
These funds are designed to encourage investments in asset classes that are too illiquid to be included in existing fund structures, which typically have flexible redemption rights.
The EC is going to propose that units of Eltifs are included in the lower equity part of the standard formula equity bucket. This means they will attract a capital charge of 39%, in line with European social entrepreneurship funds and European venture capital funds.