Solvency II consultation opportunity to improve risk management, says IRM

A wide-ranging review of how financial services firms are regulated could be an opportunity to improve risk management, IRM has said in its response to consultation on the issue.

“This review represents an opportunity to improve the maturity of risk management and how it is enhanced by the relationship between regulators and firms,” said a letter from IRM’s ERM and insurance special interest group. The Financial Services Future Regulatory Framework Review – Phase II Consultation closed in February.

The consultation on how financial services policy and regulation are made in the UK proposes a model in which UK financial services regulators lead on developing regulatory requirements for firms, subject to arrangements allowing for accountability to and scrutiny by HM Treasury and Parliament.

Balance

The IRM said that the impacts of financial regulation result from the combination of what regulatory policy is and how it is supervised and implemented. Given the lead role that regulators could take in future, “regulators need to make sure independence and understanding, efficiency and challenge are well balanced across these different activities when regulating firms,” said IRM’s response.

That would include ensuring that the level of input and scrutiny over regulators’ activities was appropriate. “Given the increase in judgement as a result of the change in the relationship with Europe, we see this as requiring increased input and scrutiny from stakeholders, including industry as appropriate,” the letter said.

Weakened effectiveness

IRM’s response noted that risk management and Pillar 2 (the supervisory review process) were infrequently referenced in the call for evidence. But added that the review represented an opportunity to improve the maturity of risk management and how it is enhanced by the relationship between regulators and firms. “As an example, there is a risk that the ORSA is seen primarily as a regulatory report which could weaken its effectiveness as a risk management tool that supports Board decision making,” it said.

“We believe a better risk management relationship between regulators and firms would be based on more focus on substance over legal form and be less about what capital is needed and more about the management of risk,” IRM added.

IRM’s response was developed by the ERM in Insurance Special Interest Group (SIG). It drew on a number of sources of evidence, including a short industry survey questionnaire, discussions at an industry webinar in December with chief risk officers and other insurance industry and regulatory experts, additional discussions with insurance risk practitioners, and the review by the working group supporting the chairs of the ERM in insurance SIG.

 

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