Monday May 14 2012 - Top 10 risk and compliance management related news stories and world events


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Monday May 14 2012 - Top 10 risk and compliance management related news stories and world events

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Monday May 14 2012 - Top 10 risk and compliance management related news stories and world events

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,Are regulations holding back growth?This is a really interesting question. Read the answer at No 8 of our list!_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  2. 2. Page |2Welcome to the Top 10 list.PCAOBKeynote Address: Driving Change toAchieve Independent and High QualityAuditsJeanette M. Franzel, Board MemberChairman Ben S. BernankeAt the 48th Annual Conference on Bank Structureand Competition, Chicago, Illinois (via satellite) -May 10, 2012Banks and Bank Lending: The State of PlaySpeechGabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the Loss Adjusting ProfessionGeneral Assembly of the European Federation of LossAdjusting Experts, Porto, 11 May 2012_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  3. 3. Page |3“Shaping the future of Europe’s financialmarkets”Verena Ross, Executive Director of ESMA,Centre Forum, London, 11 May 2012Formation of the Enhanced DisclosureTask ForceThe importance to market confidence of useful disclosure by financialinstitutions of their risk exposures and risk management practices hasbeen underscored in recent years.FSA publishes Recovery and Resolution Plan(RRP) updateThe Financial Services Authority (FSA) has published a feedbackstatement setting out the approach being taken by the FSA to ensurefirms develop appropriate recovery plans and resolution packs.Speech by SEC Staff:Address at the Private Equity International Private Fund ComplianceForumBy Carlo V. di Florio, Director, Office of Compliance Inspections andExaminations, U.S. Securities and Exchange CommissionNew York, NY, May 2, 2012_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  4. 4. Page |4Recent U.S. Economic Growth in ChartsMay 2012Opening Remarks by Ms Jacqueline Loh, AssistantManaging Director, Monetary Authority of Singaporeat the EDHEC-RISK Days Asia 2012 Conference at Marina Bay SandsConference Centre on 9 May 2012Statistical release: OTC derivatives statistics atend-December 2011Monetary and Economic DepartmentMay 2012Bank for International SettlementsA summary of the latest statistics onover-the-counter (OTC) derivatives markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  5. 5. Page |5Keynote Address: Driving Change to Achieve Independent andHigh Quality AuditsDATE: May 3, 2012SPEAKER(S): Jeanette M. Franzel, Board MemberEVENT: Baruch College Financial Reporting ConferenceLOCATION: New York, NYGood Afternoon,I am honored to be here today at this important conference. I thank all ofyou for your interest in advancing and improving financial reporting andauditing, as evidenced by your participation in this conference today.I am the newest Board Member, appointed in February of this year, andIve been on the job for almost 9 weeks now (not that I am counting).In January 2011, three new members were appointed to the Board, LewFerguson, Jay Hanson, and our Chairman, Jim Doty.With 4 of the 5 Board members being relatively new, we are often referredto as the "new Board." Of course, Steve Harris continues as our seniorstatesman, having been on the Board since 2008.Today, I will provide my impressions and observations from my first nineweeks on the job, as well as an update on the current activities of this verybusy, "new Board."_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  6. 6. Page |6Before I go further, however, I must tell you that the views I express todayare my personal views and do not necessarily reflect the views of theBoard, any other Board member, or the staff of the PCAOB.Reliability, Role, and Relevance of the AuditAuditors have been given an important role in the capital markets — toprovide assurance to investors, owners, lenders and others that theaudited companys financial statements and related disclosures fairlypresent the institutions financial results in conformity with applicableaccounting and disclosure standards and rules.Clearly, reliable financial statements play a key role in the financialmarkets, which are integral to the success and well-being of Americanhouseholds and businesses, the U.S. economy, and participants andstakeholders from around the world.The securities markets provide a reliable funding mechanism forAmerican — and, increasingly, foreign — businesses.More than half of American households invest their savings in securitiesto provide for retirement, education, and other goals.Our economy is resilient, even in the face of the recent financial crisis, inpart because millions of savers continue to be willing to invest in businessenterprises to fuel growth, growth that results in more workers, moresavings and more investment.This cycle promotes economic wealth, but it relies on the system ofaccurate financial disclosures by public companies to the investors whoentrust capital to them.As we approach the 10th anniversary of the Sarbanes-Oxley Act and 9years of PCAOB operations, we seem to be, once again, in a period ofre-examination of the role, relevance, and reliability of financial audits inprotecting investors and the public interest._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  7. 7. Page |7Many of the topics currently being debated have been debated over thedecades—auditor independence, the role of audit committees,professional skepticism and objectivity, audit quality, and the auditorsreport, among others.One possible line of response to reevaluating these issues is "we decideddecades ago on this," or "this has worked fine for the last 70 years."Even if these are some of the "same old topics" that have been debatedfor decades, we can also look to the many corporate failures and financialcrises that have occurred over the decades and recognize the importanceof ongoing re-examination and adjustments in the auditing model.First of all, auditing is very difficult and filled with competing tensions,and we can and should continue to learn from years of experience.Secondly, rapid changes in the financial markets, globalization,technology, and how business is conducted continue to drastically impactfinancial reporting and auditing.Often, we are inspired to re-examine financial reporting and auditing inreaction to a crisis. In a way, we may be reacting to the financial crisis andserious economic situation over the past several years.But the current efforts are occurring in a measured and forward-lookingmanner, in addition to looking back to examine the impact of theSarbanes-Oxley Act and PCAOBs accomplishments to date.Also, the profession and its oversight bodies have new information,including a large body of PCAOB inspection results and recent academicresearch that shed light on auditor processes, behavior, and judgments.Role of the PCAOBAs you know, the Sarbanes-Oxley Act of 2002 established the PCAOB tooversee the audits of the financial statements of public companies._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  8. 8. Page |8In July 2010, the Dodd-Frank Act amended the Sarbanes-Oxley Act and,among other things, vested the PCAOB with the authority to overseeaudits of broker-dealers.The statutory mission of the PCAOB is to oversee the audits of publiccompanies in order to protect the interests of investors and further thepublic interest in the preparation of informative, accurate, andindependent audit reports.The PCAOB is also charged with overseeing the audits of broker-dealercompliance reports under federal securities laws to promote investorprotection.The PCAOB has four main responsibilities under the Act:- register public accounting firms that audit public companies or broker-dealers;- establish auditing and other professional standards;- conduct and report on regular inspections of registered public accounting firms that audit public companies or broker-dealers; and- conduct investigations and disciplinary proceedings in cases where auditors may have violated certain provisions of the Sarbanes-Oxley Act of 2002, the rules of the PCAOB and the Securities and Exchange Commission, and other laws, rules, and professional standards governing the audits of public companies, brokers, and dealers.Currently, approximately 2,400 firms are registered with the Board.Of those, approximately 516 are firms that reported auditingbroker-dealers but no issuers.In addition, the 2,400 total registered firms include approximately 815firms that reported issuing no audit reports for issuers or broker-dealers,but have nonetheless chosen to register with the PCAOB._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  9. 9. Page |9PCAOB annually inspects firms that audit over 100 issuers, while firmsthat issue 100 or fewer audit reports each year are subject to inspectionevery three years.PCAOB does not inspect firms that do not perform audit work for issuers.In addition, PCAOB is currently conducting an interim inspectionprogram for auditors of broker-dealers, and will use information from thisinterim program to guide its decisions about a permanent program,including whether to differentiate among classes of brokers and dealers interms of inspection schedules, and possible exemptions from inspections.During 2011, PCAOB inspected 10 firms that audited more than 100issuers.As part of those inspections, PCAOB inspectors examined portions ofmore than 340 audits.Also during 2011, PCAOB inspected 203 firms in the 3-year category,examining portions of more than 485 audits by those firms.Finally, in the interim inspection program for broker-dealer auditors,PCAOB inspected 8 audit firms in 2011, covering portions of 19 audits ofbroker-dealers.Since it began its inspections operations, the PCAOB has conducted over1800 inspections and reviewed over 7800 audits.PCAOB inspection reports issued to the firms after their inspectionsidentify deficiencies in the firms audit work as well as weaknesses ordeficiencies in the firms quality control policies and procedures.Certain portions of the inspection reports — those dealing withparticularly significant audit deficiencies identified by inspectors — aremade publicly available.With respect to any problems found by the Board in the firms qualitycontrol systems, firms are given twelve months to remediate those issues_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  10. 10. P a g e | 10or face publication of the portion of the inspection report describing thoseissues.Remediation is a very important part of the process.It is through these actions that firms propose to correct their qualitycontrol deficiencies in order to drive improvements in auditing.We have seen most firms take their responsibilities for remedial effortsand improvements seriously.In addition to our activities in connection with registering and inspectingfirms, the Board is responsible for setting auditing standards for theaudits of public companies and brokers and dealers.I will talk in a few minutes about some of our priorities in this area.Finally, the PCAOB also has an active Division of Enforcement andInvestigations.To date, the PCAOB has taken 49 disciplinary proceedings against 39registered accounting firms and 52 persons associated with registeredfirms.The sanctions have included censures, fines, suspensions or bars frombeing associated with a registered firm, and revocations of firmregistrations.To date, the Board has revoked the registration of 25 firms, barred 41individuals, and suspended 5 individuals and 1 firms registration.In my short time with the Board, I have put the registration, inspection,standards, and enforcement roles that I have just described into a"bucket" that I think of as the Boards "ordinary business operations."The workload associated with carrying out the Boards "ordinarybusiness" is heavy and varied, and is integral to fulfilling the Boardsmission and statutory responsibilities._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  11. 11. P a g e | 11The information and knowledge we gain from our operations alsoprovides input for the Boards priorities and consideration of longer-terminitiatives in order to promote independent and high quality audits thatprotect investors and further the public interest.PCAOB Priorities and InitiativesPCAOB is in a unique position given the knowledge and informationgained through the inspection program to identify trends and risks in theauditing profession.PCAOB staff and the Board also work one-on-one with firm personneland firm leadership in discussing issues impacting audits, includingeffective audit practices and responses and ways to enhance audit qualityin light of current pressures and risks.The Board also issues practice alerts, summary reports, research notes,interpretative releases and other communications in order to alsocommunicate these issues broadly.Finally, PCAOB uses input from its inspections, task forces, theAcademic community, and other stakeholders in developing its standardssetting agenda.I mentioned earlier the category of the PCAOB workload that I think of as"ordinary business operations."I think of our other work as being in the category of "leadership inprotecting investors and the public interest" by being a driving force forchange when needed, to ensure independent and high quality audits.In this category, we have several layers:- Drive change in the profession to correct gaps in auditing practice under the current audit model in order to achieve needed improvements in the near term._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  12. 12. P a g e | 12- Determine what types of changes are needed in the audit model—including auditing standards, as well as the business model used by the firms in implementing those standards—in order to help ensure reliable audits and investor protection in the future.- Determine through ongoing monitoring whether, at any time, immediate actions are needed to mitigate unusual, emerging risks to financial audits from a variety of factors, including rapid changes and increasing complexity in business operations and financial markets, evolving technology, the global business environment, and other factors.Improvements Needed in Current Audit PracticesRegarding the current gaps in practice, PCAOB inspections continue tofind serious audit deficiencies on a regular basis.In fact, our inspection reports issued during 2011 related to the 2010inspection cycle, including reports on inspections of some of the largestfirms, show a significant and concerning increase in inspection findings.Such deficiencies include cases where auditors issue clean opinions eventhough:- the audit work is incomplete or not properly conducted;- financial statement information is contradicted by other available evidence; and/or- audit conclusions on material issues are based on managements views without independent verification.Clearly improvements are needed in current audit process under currentstandards.In that regard, the PCAOB staff and Board Members devote considerableattention and time to working with firms to evaluate systemic root causes_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  13. 13. P a g e | 13within a firms structure, operations, processes or other areas that detractfrom audit quality or cause deficiencies.When the Board issues inspection reports, the portion of the reportcontaining findings about deficiencies in a firms system of qualitycontrol, referred to as "part 2" of the report, are subject to statutoryrestriction on public disclosure.The firm has 12 months from the issuance of the inspection report toaddress the issues to the Boards satisfaction.The PCAOB staff and Board also spend considerable time evaluatingfirms remediation plans and actions.If a firm does not satisfactorily address any of the quality controlcriticisms within 12 months, the portion of the report discussing theparticular criticism(s) is made publicly available.PCAOB Standards-Setting ActivitiesThe Board uses information that it learns in its inspections and fromother sources to evaluate the need for changes in auditing standards.In developing new standards, the PCAOB also seeks advice from a widevariety of interested stakeholders on ways to improve audits.The Boards standards activities are informed by meetings and dialoguewith investors, auditors, representatives of public companies, members ofthe academic community, and through its Standing Advisory Group.The Board also holds roundtable discussions and other public meetingsto deepen its dialogue with commenters and other interested parties.The Board works closely with the SEC on the development of standardsand monitors the work of accounting standard setters, such as theFinancial Accounting Standards Board, for developments that may affectauditing._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  14. 14. P a g e | 14The Board currently has a full agenda for seeking views on ideas andspecific proposals impacting auditing and related professional practicestandards through concept releases, proposed standards, and potentialfuture projects.Concept ReleasesThe Board is currently evaluating comments and feedback on twoconcept releases, one dealing with the auditors reporting model andanother with auditor independence and mandatory firm rotation.These concept releases did not propose new auditing standards.Rather, they sought the publics views on particular matters so that theBoard can better evaluate the need for future standard-setting.- Auditors Reporting Model — On June 21, 2011, the Board issued a concept release to seek public comment on potential changes to the auditors reporting model. Such potential changes could include a supplement to the auditors report in which the auditor would be required to provide additional information about the audit and the auditors view of the companys financial statements (an "Auditors Discussion and Analysis"); required and expanded use of emphasis paragraphs in the auditors report; auditor reporting on other information outside the financial statements; and clarification of certain language in the auditors report. The concept release was preceded by several discussions with the PCAOBs advisory groups, and extensive outreach by PCAOB staff in 2010 and early 2011. In addition, the Board solicited further comment at a roundtable on Sept. 15, 2011. The deadline for comments on the concept release was Sept. 30, 2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  15. 15. P a g e | 15 Staff is currently preparing a proposed standard.- Auditor Independence and Audit Firm Rotation — As a result of PCAOB inspections, the experience of other audit regulators and concerns expressed by investors, the Board issued a concept release Aug. 16, 2011, seeking public comment on a variety of possible approaches to improving auditor independence, objectivity and professional skepticism. As part of that concept release, the Board sought comment on whether a rotation requirement would risk significant cost and disruption and how mandatory rotation would serve the Boards goals of protecting investors and enhancing audit quality. The Board also sought comment on whether other measures could meaningfully enhance auditor independence. The deadline for comments was Dec. 14, 2011. The Board held a public meeting to obtain further comment on the concept release on March 21 and 22, for which the comment period was reopened. Future such public meetings are planned.Proposed standardsThe Board is currently evaluating comments on several proposedstandards and seeking comment on one proposal.- Audits of SEC-Registered Brokers and Dealers — The Dodd-Frank Act gave the PCAOB the authority to oversee auditors of SEC-registered brokers and dealers, including authority to set standards and rules for audits of brokers and dealers. On July 12, 2011, the Board proposed standards dealing with (1) examination engagements for compliance reports, (2) review engagements of exemption reports, and (3) auditing supplemental information._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  16. 16. P a g e | 16 The deadline for comments on the proposed PCAOB standards was Sept. 12, 2011. Further action on the Boards proposals is dependent on the SECs adoption of the proposed amendments to its Exchange Act 17a-5 rule.- Transparency — On Oct. 11, 2011, the Board proposed amendments to its standards that would improve the transparency of public company audits by requiring that audit reports disclose the name of the engagement partner as well as the names of other independent public accounting firms and other persons that took part in the audit. The amendments would also require registered public accounting firms to disclose the name of the engagement partner for each audit listed on the firms annual reports filed with the PCAOB. The deadline for comments on the proposed amendments was Jan. 9, 2012.- Communications with Audit Committees — On Dec. 20, 2011, the Board reproposed a new auditing standard, Communications with Audit Committees, and related amendments. The standard is intended to benefit investors by establishing requirements that enhance the relevance and quality of the communications between the auditor and the audit committee. The deadline for comments was Feb. 29, 2012.- Auditing Related Party Transactions — On February 28, 2012, the Board proposed a new standard, Related Parties, as well as amendments to certain PCAOB auditing standards to assist auditors in detecting and addressing the audit risks associated with related parties and other unusual transactions. The comment period expires May 15, 2012._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  17. 17. P a g e | 17Potential future projectsThe Board is also considering possible revisions to standards in thefollowing areas to strengthen and clarify requirements:  auditors use of specialists,  part of the audit performed by other auditors,  assignment and documentation of firm supervisory responsibilities,  fair value measurements,  going concern,  confirmation,  quality control,  codification of PCAOB standards, and  subsequent events.As you can see, the Board is working on an ambitious agenda includingnumerous areas of audit practice aimed at strengthening auditingstandards themselves, while improving audit practices and approaches.Risk Monitoring, Assessment, and ResearchThrough the Office of Research and Analysis, the PCAOB also monitorsinformation obtained from a variety of sources, including PCAOBinspections, public company financial reporting, price and volatilityinformation from debt and equity markets, and corporate governanceinformation in order to identify emerging risks to financial reporting andauditing.This information is then used by PCAOBs inspections, standards setting,and enforcement functions. In addition, information is provided to thepublic, as appropriate.On March 15, 2011, PCAOB issued its first public "Research Note" toprovide new data on the growth of reverse merger transactions involvingcompanies based in China, Hong Kong, and Taiwan._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  18. 18. P a g e | 18A reverse merger typically occurs when an operating company mergeswith a U.S. shell company that had previously registered its securities on aU.S. exchange.The Research Note, along with Staff Audit Practice alerts issued in July2010 and October 2011, represented an effort by PCAOB to provide moreinformation to investors and other users of financial statements about theaudit environment for companies from the China region.Additionally, the Office of Research and Analysis performs regularresearch and analysis to support the various efforts of the Board while alsomonitoring risks and identifying emerging issues.Current Legislative InitiativesCurrently, legislation is pending (HR 3503 and S 1907) that would amendthe Sarbanes-Oxley Act of 2002 to make PCAOB disciplinary proceedingsopen to the public.Under the Sarbanes-Oxley Act as it exists today, the PCAOBsdisciplinary proceedings are nonpublic, unless the Board finds there isgood cause for a hearing to be public and each party consents to publichearings.PCAOB disciplinary proceedings remain nonpublic even after a hearinghas been completed and adverse findings made by a disinterested hearingofficer, if the auditors and firms opt to appeal and do not consent to makethe proceedings public.The auditors and audit firms charged with violating applicable laws, rulesor standards have little incentive to consent to public disclosure ofdisciplinary proceedings against them, and in fact, none have ever doneso.Continued litigation postpones — often for several years — publicdisclosure that the PCAOB has charged the auditor or firm, the nature ofthose charges, and the content of adverse findings._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  19. 19. P a g e | 19In addition, unlike the authority the Securities Exchange Act of 1934provides the SEC in its administrative proceedings, the PCAOB has noauthority, while litigation is pending, to issue temporary cease-and-desistorders in appropriate cases, to prevent potential further harm to investorsor the public interest.This situation results in a variety of unfortunate consequences for investorprotection and the public interest.The public is denied access to important information regarding PCAOBcases and respondents alleged misconduct — no matter how serious.As a result, investors are unaware that companies in which they may haveinvested are being audited by accountants who have been charged, evensanctioned, by the Board, and meanwhile, the audit firm and associatedpersons may continue to issue audit reports.If the SEC were to bring the same case as the PCAOB, alleging the sameviolations, against the same auditor, the SECs charges would bedisclosed at the time the Commission instituted its proceeding.Any administrative trial would be open to the public.If there were an appeal to the Commission and an oral argument, thepublic could attend. The ability — or inability — of the SECs staff toprove its charges would be a matter of public record.The non-public nature of PCAOBs enforcement proceedings is not goodfor investors, for the auditing profession, or for the public at large.* * *The reliability, role, and relevance of financial audits, auditorindependence, and audit quality are enduring themes that we mustregularly monitor and evaluate in order to protect investors and the publicinterest in a dynamic, global business environment.This involves looking beyond the status quo and the current business_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  20. 20. P a g e | 20cycle.We also need to carefully consider and analyze the potential costs andbenefits of various actions as well as the risks of unintendedconsequences.I am pleased to have the opportunity as a Board member to explore thebroad range of issues impacting the auditing profession as we seek tomake progress to strengthen the reliability and accuracy of audit reports._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  21. 21. P a g e | 21Chairman Ben S. BernankeAt the 48th Annual Conference on Bank Structure and Competition,Chicago, Illinois (via satellite) - May 10, 2012Banks and Bank Lending: The State of PlayI am pleased to speak this morning at what has become, over nearly 50years, perhaps the most prestigious conference for bankers, academics,and bank supervisors in the United States.The first part of my remarks will highlight the significant progress thathas been made over the past several years toward restoring the bankingsystem to good health.I will also talk about some of the challenges banks face as they adapt tothe post-crisis economic and regulatory environment.I will then review recent trends in credit conditions, noting that banklending has generally been improving but remains restrained in someareas.The State of the Banking System_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  22. 22. P a g e | 22Since the financial crisis, banks have made considerable progress inrepairing their balance sheets and building capital.Risk-based capital and leverage ratios for banks of all sizes haveimproved materially and are significantly above their previous highs.Importantly, the 19 largest banking institutions that participated in the2009 stress tests, as well as the two subsequent Comprehensive CapitalAnalysis and Review (CCAR) processes, have considerably more andbetter-quality capital than a few years ago.Indeed, those firms have increased their Tier 1 common equity, the bestbuffer against future losses, by more than $300 billion since 2009, to nearly$760 billion.The Tier 1 common ratio for these firms, which compares thishigh-quality capital to risk-weighted assets, stood at 10-1/2 percent at theend of last year.The latest CCAR, conducted earlier this year, demonstrated that most ofthe 19 firms would likely have sufficient capital to withstand a period ofintense economic and financial stress and still be able to lend tohouseholds and businesses.The hypothetical supervisory stress scenario used in the CCAR was quitesevere; it included a peak unemployment rate of 13 percent, a 50 percentdrop in equity prices, and a 21 percent further decline in housing prices,as well as steep falls in prices of financial assets most exposed toconditions in Europe.Under this highly adverse scenario, the 19 bank holding companies wereprojected to incur aggregate losses of more than $500 billion through thefourth quarter of 2013.Nevertheless, their aggregate Tier 1 common ratio was projected to be 6.3percent at the end of the scenario period, and 15 of the 19 bank holdingcompanies were projected to maintain capital ratios above all four of theregulatory minimum levels--even after taking into account their proposalsfor capital actions such as dividends, share buybacks, and share issuancein the baseline scenario._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  23. 23. P a g e | 23The banking sector overall also has substantially improved its liquidityposition over the past few years.Indeed, large banks in the aggregate have more than doubled theirholdings of cash and securities since 2009.Large banks have reduced their collective dependence on short-termwholesale funding, and many are flush with retail deposits, which tend tobe a more stable funding source.Challenges on the liquidity front remain, however: Some large firms stillrely heavily on wholesale short-term funding; and the liquidity needs ofthe banking system as a whole may become somewhat higher for a whileas some of the securities issued under the Federal Deposit InsuranceCorporations Temporary Liquidity Guarantee Program come due, and asthe unlimited insurance on noninterest-bearing transaction accountsexpires at the end of the year.Nevertheless, over time, greater liquid asset positions and reduceddependence on wholesale short-term funding, together with more andbetter capital, will make the banking sector less susceptible tounexpected disruptions in short-term funding markets.The credit quality of large banks assets is looking better as well, althoughthe improvements have been uneven across types of loans.In the aggregate, delinquency rates on loan portfolios at large banks havedeclined substantially from their peaks.However, while delinquencies on commercial and industrial (C&I) loansand consumer loans have fallen to the lower end of their historical ranges,delinquencies on loans backed by commercial or residential real estatehave declined only moderately and remain elevated.The profitability of large banks has been edging up as credit quality hasfirmed and banks have trimmed noninterest expenses.Even so, large banks profitability remains well below the levels thatprevailed before the financial crisis began, and banks continue to struggleto expand their revenues._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  24. 24. P a g e | 24Developments that can be traced back to the financial crisis--including astill-weak economy, changes in market conditions and practices, andtighter financial regulations--are clearly important reasons for thesetrends.Community banks play important roles in local economies, and so it isnotable that their condition has also improved.Their regulatory capital ratios have increased significantly since 2009 andstand well above their recent norms.As has been the case at large banks, delinquency and charge-off rates atcommunity banks have declined across most major categories of loans,and fewer institutions failed in 2011 than in each of the previous two years.That said, clusters of small bank failures can affect credit availability in acommunity while bank-dependent borrowers work to establish newrelationships with surviving institutions.In addition, while standard measures of community banks profitability,such as return on equity and assets, improved last year, as was also true atlarger institutions, most of the gains were due to reductions in loan lossprovisions rather than to more sustainable sources of profit such asexpanded lending.Financial-market indicators reflect the substantial improvements inbanks financial conditions since the crisis as well as the sizablechallenges remaining.Bank credit default swap (CDS) premiums are now well below their crisispeaks, and bank stock prices have retraced some of their earlier lossesand have outperformed the broader market this year, boosted somewhatby the release of the CCAR results in March and first-quarter earningsthat largely beat analysts expectations.However, CDS premiums remain elevated for some of the larger, moreglobally connected firms, and their stocks continue to trade atmarket-to-book ratios of less than 1._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  25. 25. P a g e | 25A number of key systemic risk measures that evaluate the potentialperformance of firms during times of financial market stress haveimproved in recent months.These indicators of systemic risk are now well below their levels in thecrisis, and, overall, they present a picture of a banking system that hasbecome healthier and more resilient.Regulatory and Financial ChallengesBanks face a number of significant challenges as they adapt to thepost-crisis economic environment and to new domestic and internationalregulatory requirements.The most systemically important financial firms will face meaningfullyhigher capital and liquidity requirements and continue to undergo regularsupervisory stress tests.They will also be required to submit so-called living wills to facilitate theirorderly resolution if necessary.Additionally, banks must enhance their reporting systems and improvedisclosure.These new requirements are critical to safeguard the stability of thefinancial system and to help prevent another costly crisis.At the same time, regulators appreciate that the new rules imposesignificant burdens on banks.For that reason, and to minimize adverse effects on the supply of credit,many of the most significant rules are being phased in gradually and onlyafter extended processes of consultation with industry and otherstakeholders.It is worth reiterating that most of these enhanced regulatory andsupervisory measures focus on the largest, most interconnected financialinstitutions, and we are working to ensure that community banks are notsubjected to rules designed primarily to constrain risks at largerinstitutions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  26. 26. P a g e | 26We have an ongoing dialogue with community banks through manychannels, including, for example, our Community Depository InstitutionsAdvisory Council.The council, whose membership is drawn from smaller banks, creditunions, and savings associations in each of the 12 Federal ReserveDistricts, meets with the Board in Washington twice a year to discusssupervisory and regulatory issues that affect their institutions.We have also established a special supervisory subcommittee of theBoard which focuses on community banking issues.In addition to strengthened regulatory and supervisory requirements,banks face market demands that they operate with more resilientbusiness models.In many contexts, counterparties are demanding greater security in theform of more and better-quality collateral or higher margins.In addition, lenders to banks may be requiring greater compensation forrisk, thereby raising banks funding costs.Banks have also been navigating an economic recovery that has beenhalting at times.Consequently, although the condition of the banking system is improving,demand for credit generally has remained sluggish, and thecreditworthiness of some borrowers that would normally turn to banks forloans remains impaired.These factors, together with tighter credit policies imposed by manylenders, have restrained somewhat the expansion of bank credit.Credit Conditions and Bank LendingNotwithstanding the various headwinds, credit conditions in the UnitedStates have improved significantly in a number of areas.Many--though certainly not all--businesses and households are finding iteasier to borrow than they did a few years ago, in part because of betterconditions in financial markets more broadly._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  27. 27. P a g e | 27Large businesses with access to capital markets have generally been ableto raise funds at attractive terms, with both investment- andspeculative-grade firms taking advantage of historically low interest ratesto issue bonds at a robust rate.Moreover, consumers with strong credit histories have ready access tocredit cards and auto loans, supported by solid issuance ofconsumer-related asset-backed securities.Banks also supply credit by purchasing securities, and their purchaseshave grown rapidly in recent months--in particular, those ofagency-guaranteed mortgage-backed securities (MBS).In this challenging time for housing markets, banks are attracted by thesecurities government guarantee.Additionally, some larger banks may be accumulating these securities inpreparation for more-stringent liquidity regulations.Signs of improvement notwithstanding, credit conditions in some sectorsand for some types of borrowers remain tight.Mortgage lending is an important example.Since its peak, U.S. home mortgage credit outstanding has contractedabout 13 percent in real terms.Many factors suggest that this situation will be difficult to turn aroundquickly, including the slow recovery of the economy and housing market,continued uncertainty surrounding the future of the government -sponsored enterprises (GSEs), the lack of a healthy private-labelsecuritization market, and cautious attitudes by lenders.Financing conditions in the commercial real estate sector also remainstrained as fundamentals, including high vacancy rates, depressedproperty prices, and the poor quality of existing loans, continue to beweak.Moreover, the market for commercial MBS--a source of liquidity for somelenders in this sector--is still struggling to regain its footing._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  28. 28. P a g e | 28The Federal Reserves quarterly Senior Loan Officer Opinion Survey onBank Lending Practices (SLOOS) offers a more-nuanced view of howlending terms are changing.The SLOOS indicates that standards and terms in many loan categorieshave eased somewhat further in recent quarters from the very tightconditions that prevailed earlier in the recovery.For example, the April SLOOS pointed to the first material net easing inlending standards for commercial real estate loans since 2005 and to afurther easing of standards for most types of consumer loans.In addition, SLOOS respondents suggested that stepped-up competitionhas induced a large number of domestic banks to reduce fees and spreadson C&I loans to firms of all sizes.The SLOOS also indicates that demand for many types of loans hascontinued to increase, with demand for C&I loans having risen torelatively high levels.Consistent with the results of the SLOOS, C&I lending has indeed beenrising sharply lately.Banks have focused on C&I lending because business borrowerscreditworthiness is improving and because the majority of C&I loanscarry floating interest rates that reduce interest rate risk.In addition, domestic banks reportedly are picking up customers as aresult of a pullback by some European institutions.Auto lending also has reportedly been solid, reflecting strongfundamentals in auto markets--such as robust demand for used cars andrelatively low delinquency rates on existing auto loans.The strong fundamentals for auto loans in turn also appear to havecontributed to an easing of lending standards and terms.But, as I mentioned earlier, residential mortgage lending has beenparticularly sluggish.Tight lending standards and terms remain especially evident._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  29. 29. P a g e | 29To be sure, a return to pre-crisis lending standards for residentialmortgages wouldnt be appropriate; however, current standards may belimiting or preventing lending to many creditworthy borrowers.For instance, in the April SLOOS, we asked banks a hypotheticalquestion about their willingness to originate GSE-eligible mortgagesrelative to 2006 for borrowers with a range of credit scores and availabledown payments.The SLOOS found that even when the loans were accompanied by a 20percent down payment, many banks were less likely to originate loans toborrowers with given GSE-eligible credit scores, despite the originatingbanks ability to sell the mortgage to the GSEs.Most banks indicated that their reluctance to accept mortgageapplications from borrowers with less-than-perfect records is related to"putback risk"--the risk that a bank might be forced to buy back adefaulted loan if the underwriting or documentation was judged deficientin some way.Small businesses owners, who in the past might have tapped into theequity in their homes or used their homes as collateral for small businessloans, also have found conditions challenging in recent years.The stock of small loans to businesses on bank balance sheets at the endof last year was more than 15 percent below its peak in 2008.These loans looked to have ticked up in the fourth quarter of 2011,consistent with the reported increase in demand for loans by small firmsin the SLOOS.Responses to the monthly National Federation of Independent Businesssurvey also suggest some modest improvement in the small businesssector: The share of respondents reporting a need for credit has moved upfrom lows of recent years, and the net share of respondents who say thatcredit is more difficult to obtain than it was three months ago is notablybelow its peak in 2009._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  30. 30. P a g e | 30The Federal Reserve is keenly interested in understanding how shifts inloan supply, loan demand, and borrower quality may be affecting lendingand, by extension, the broader economy.Of course, sorting out the relative effect of changes in loan demand fromthe effect of changes in loan supply can be quite difficult because theycan be influenced by the same factors.For example, a shift in the economic outlook can affect both thewillingness of banks to lend and the desire and ability of firms andhouseholds to borrow.Recent research at the Federal Reserve examines cyclical changes inbanks lending standards as reported in the SLOOS--a commonly usedindicator of loan supply.It attempts to assess how much of those changes were a "typical"response to macroeconomic and bank-specific factors, and how muchwas "atypical" or unexplained.This analysis suggests that the tightening of lending standards thatoccurred between 2007 and 2009 was much greater than a model based onhistorical experience would predict, contributing to the subdued pace oflending.These results are consistent with other evidence that the crisis inducedexceptionally high levels of risk aversion and uncertainty on the part ofboth lenders and borrowers, constraining the flow of credit.As these factors have receded and the economy has improved, lendingstandards have become less stringent.Some bankers and borrowers believe that enhanced supervision andregulation has made it more difficult for banks to expand their lending.The Federal Reserve takes seriously its responsibility to ensure thatsupervisory actions to protect banks safety and soundness do notunintentionally constrain lending to creditworthy borrowers, and we havetaken a variety of steps to address these concerns._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  31. 31. P a g e | 31For example, we have issued guidance to supervisors stressing theimportance of taking a balanced approach to supervision and of promptlyupgrading a banks supervisory rating when warranted by a sustainableimprovement in its condition and risk management.Some analysis has indicated that, all else being equal, banks with lowersupervisory ratings tend to lend less; prompt upgrades by supervisorswhen such upgrades are appropriate may thus ease an unnecessaryconstraint on lending.Indeed, in the fourth quarter of 2011 and the first quarter of this year, thenumber of ratings upgrades for banks and bank holding companiessupervised by the Federal Reserve exceeded the number of downgrades.The last time that upgrades exceeded downgrades was in 2005.In addition, we have stepped up examiner training on relevant lendingissues, and we have emphasized to examiners that an open dialogue withbank management is essential.We have also looked into specific concerns raised about the examinationprocess and its effect on banks willingness to lend.For example, during 2011, we reviewed commercial real estate loanclassification practices to assess whether examiners were properlyimplementing the interagency policy statement on workouts ofcommercial real estate loans.We analyzed documentation for more than 300 loans with identifiedweaknesses in six Federal Reserve Districts.We found that Federal Reserve examiners were appropriatelyimplementing the guidance and were consistently taking a balancedapproach in determining loan classifications.Moreover, the documentation we reviewed indicated that examiners werecarefully considering the full range of information provided by bankers,including relevant mitigating factors, in determining the regulatorytreatment for the loans._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  32. 32. P a g e | 32ConclusionTo sum up, conditions in the banking system--and the financial sectormore broadly--have improved significantly in the past few years.Banks have strengthened their capital and liquidity positions.The economic recovery has facilitated the rebuilding of capital andhelped improve the quality of the loans and other assets on banksbalance sheets.Nonetheless, banks still have more to do to restore their health and adaptto the post-crisis regulatory and economic environment. As the recoverygains greater traction, increasing both the demand for credit and thecreditworthiness of potential borrowers, a financially stronger bankingsystem will be well positioned to expand its lending.Improving credit conditions will in turn help create a more robusteconomy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  33. 33. P a g e | 33SpeechGabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the LossAdjusting ProfessionGeneral Assembly of the EuropeanFederation of Loss Adjusting ExpertsPorto, 11 May 2012Important partsI will touch on three main issues:I. What is EIOPA, the European Insuranceand Occupational Pensions Authority forwhom I have the privilege to serve aschairman;II. How Solvency II can contribute to theimprovement of risk management;III. The loss adjusting profession, its relevance for the insurance marketand the overall society.What is EIOPA?EIOPA is the European supervisory authority for the insurance andoccupational pensions sectors.We are a young organisation: in January, we completed our first year as aEuropean agency, one of the three European Supervisory Authorities inthe financial system.We are an independent Union body with legal personality, accountable tothe European Parliament and the Council._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  34. 34. P a g e | 34We clearly see our mission, tasks and responsibilities. We see EIOPA’smission in protecting public interest by contributing to the short, mediumand long term stability and effectiveness of the financial system, for theEU citizens and economy.This mission is pursued by promoting a sound regulatory framework andconsistent supervisory practices in order to protect the rights ofpolicyholders, pension scheme members and beneficiaries and contributeto the public confidence in the European Union’s insurance andoccupational pensions sectors.This is a very important mission if we realize the relevance of insuranceand occupational pensions in the daily life of citizens and on thedevelopment of the economy.The objectives of the new European supervisory authorities, andparticularly of EIOPA, are extremely relevant:  Contribute to a stable and effective financial system;  Promote sound regulation and supervision;  Enhance customer protection;  Ensure the transparent, efficient and orderly functioning of the markets;  Contribute to international supervisory co2ordination;  Avoid regulatory arbitrage;  Ensure equal conditions of competition; and  Implement appropriate regulation and supervision of risks.In order to fulfil these objectives, EIOPA has important powers.We develop technical standards that become binding for all insuranceundertakings in the EU and issue guidelines and recommendations thatnational supervisors apply on a “comply or explain” basis.We settle disagreements between national supervisory authorities in crossborder situations and have a coordinating role in crisis situations._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  35. 35. P a g e | 35EIOPA monitors the correct application of the EU law in the differentMember States, by using, if necessary, its powers of investigation in localmarkets.EIOPA and national supervisors are independent from one another, butclosely cooperate with one another.EIOPA does not substitute local authorities.It has its own powers and responsibilities, but day to day supervisionremains a task of the national authorities.The key decision organ of EIOPA is the Board of Supervisors, where theheads of the national supervisory authorities are represented.However, it is very important to mention that the EIOPA Regulationprovides that members of the Board of Supervisors must act withindependence and within the sole interest of the European Union.Most of our decisions are taken by simple majority, some by qualifiedmajority.EIOPA wants to represent an added value to European consumers and tothe European supervisory landscape.In order to fulfil its mandate, EIOPA is building up its own resources andexploiting the knowledge and experience of its Members.This is a very important element. We want to create a truly Europeansupervisory culture. A culture based on best and robust practices.In order to create this culture, I want to bring together all the nationalsupervisory authorities. All of them have an important contribution tomake.EIOPA’s regulatory tasks_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  36. 36. P a g e | 36EIOPA has been working on Solvency II, advising the EU Commissionon the Level 2 implementing measures.We have also been developing draft technical standards and guidelines onaround 40 different areas of Solvency II.We are doing this in a transparent way by informally consulting with keystakeholders.We plan to publicly consult as soon as the legal framework will allow us todo that.In order to facilitate the preparatory work of insurance undertakings forSolvency II, we launched a number of important public consultations inareas such as the Own Risk and Solvency Assessment (ORSA) andSupervisory Reporting and Public Disclosure, including the Solvency IIXBRL Taxonomy.We continued to work on the Solvency II specifications for example byissuing a joint report on calibration of non life risk factors in the standardformula.EIOPA also provided input into the Commission’s revision of theInsurance Mediation Directive (IMD) by carrying out an extensive surveyof national laws providing for sanctions (both criminal andadministrative) for violations of the provisions of the IMD.The Commission’s legislative proposal (IMD2) is expected soon and I amaware that the Commission intends to capture loss adjusters under thescope of IMD2.Also, on the regulatory side, we delivered our advice to the Commissionon the revision of the IORP Directive. Stability and consumer protectionwere at the core of our advice.We advocate the use of a consistent and realistic measurement of allassets and liabilities and proposed the adoption of a Key Information_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  37. 37. P a g e | 37Document (KID), containing the fundamental elements aboutperformance, costs, charges and risks of defined contribution schemes.I believe that this will help to increase the confidence of consumers in thistype of plans.OversightAt EIOPA, we are committed and motivated to contribute to the creationof a truly European supervisory culture: a culture that promotes stability,enhances transparency and fosters consumer protection.A culture based on intelligent and effective regulation which does notstifle innovation.That is why in the area of oversight we took as a priority our participationin the colleges of supervisors, contributing to a more consistent practice.In the course of 2011, colleges of supervisors with at least one physicalmeeting or teleconference were organized for 69 European insurancegroups.Last year, we set an annual action plan for colleges of supervisors andwere monitoring its actual implementation.In February 2012, EIOPA issued the report on the functioning of collegesin 2011 and the Action Plan 2012 for colleges of supervisors.In the Action Plan, we defined clear timelines within the colleges for thesetting up of an appropriate work plan to deal with the group internalmodel validation process.Consumer protection and financial innovationConsumer protection and financial innovation are priority areas forEIOPA._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  38. 38. P a g e | 38We have prepared Guidelines and a Best Practices Report on ComplaintsHandling by Insurers.With these Guidelines, we intend to fill an existing regulatory gap at EUlevel and promote convergence of regulatory practice.They were the subject of a public consultation at the end of last year andare due to be finalised in the second quarter of 2012.At the end of last year, EIOPA published a Report on Financial Literacyand Education Initiatives by national competent authorities; it was astock take of existing structures/processes in Member States.This was in line with a requirement under our empowering legislation toreview and coordinate such initiatives.We collected data on consumer trends amongst our Members authorities.This helped us to prepare an Initial Overview, analysing and reporting onthose trends.This Overview was published this year in February.The Overview identified three key trends:(i) Consumer protection issues around Payment Protection Insurance(PPI)(ii) Development of unit linked life insurance and(iii) Increased use of comparison websites by consumers.This is just the start of our ongoing monitoring of consumer trends.And finally, we focused on disclosure and selling practices of VariableAnnuities._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  39. 39. P a g e | 39This exercise was brought about by the fact that some variable annuitiesproducts may achieve outcomes that are not easy for consumers tounderstand.We consulted on a draft Report at the end of last year and its final versionwas published this year in April.Finally, last year, we organized our first EIOPA Consumer Strategy Daywhere we had the opportunity to discuss important consumer issues withdifferent stakeholders.Financial stabilityEIOPA was also active in the financial stability domain by assessing theresilience of the EU insurance sector to major shocks through the EUwide stress test exercise and by testing different scenarios on the low yieldstress test which shows that the insurance industry would be negativelyaffected if a scenario were to materialize where yields remain low for aprolonged period of time.EIOPA also issues, on a biannual basis, Financial Stability Reports.One of the conclusions we made in our December publication is that“due to significant natural catastrophes during the examined period,reinsurers suffered above average losses.Furthermore, life insurers may be subject to the risk of having insufficientliquidity, which can be emphasised by banking related transactions, e.g.through “liquidity swaps” and similar products as well as due toincreasing surrenders”.Furthermore, EIOPA is contributing to macroprudential discussions andrisk analysis in the context of the European Systemic Risk Board,supported by the establishment of the EIOPA Risk Dashboard.International relations_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  40. 40. P a g e | 40EIOPA is fully aware of the importance of international relations in aglobalized world.In this area, we provided final advice to the European Commission on theassessment of the Solvency II equivalence of the Swiss, Bermudan andJapanese supervisory systems and we have started to contribute to thedevelopment of robust international standards by actively participating inthe work of the International Association of Insurance Supervisors (IAIS).During 2011, EIOPA maintained its regulatory and supervisory dialogueswith the US National Association of Insurance Commissioners (NAIC),the China Insurance Regulatory Commission, the Japanese FinancialServices Authority and the Latin American Association of InsuranceSupervisors.EIOPA also enhanced its regular exchanges with the US FederalInsurance Office (FIO) in the context of FIO’s responsibilities forinsurance law harmonisation at US federal level and in the area ofinternational relations.EIOPA’s valuesI would like to say a couple of words about EIOPA’s values.In our daily activities and relations with our members and stakeholders,we are governed by the principles of Independence, Responsibility,Integrity, Transparency, Efficiency and Team Spirit.We aim to be a modern, competent and professional organization that isaware of the expectations of European citizens and wants to ensure thatthey all are taken on board in our strategies and actions.Our goal is to act independently in an effective and efficient way towardsthe creation of a common European supervisory culture – and this shouldnot be just empty words._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  41. 41. P a g e | 41We consider it our shared responsibility to build a sound framework forthe future of insurance activities; a framework that takes into account thespecificities of their business models.I would like to assure you that we are ambitious in fulfilling ourobligations towards EU citizens and businesses and I am confident thattogether we will succeed.Solvency IIAs you know, Solvency II is the new regulatory regime for the EUinsurance industry and will be implemented on 1 January 2014.Solvency II will bring a better alignment between risk and capital,promoting good risk management practices and fostering transparency.Regulatory regimes are always a result of a balancing act betweendifferent objectives.Solvency II will provide an appropriate basis for increased policyholderprotection and will contribute to reinforce financial stability, allowinginsurance companies to continue to play their natural countercyclical rolein times of stressed markets.Gladly, the Solvency II regime is increasingly being perceived as morethan a “check the box” regulatory exercise that determines capitalrequirements.It requires the European insurance industry to critically analyze its risks,and in the process, assess the true costs attached to them.Today, I would like to talk to you particularly about risk management,which I think is of particular relevance for your profession.Now, more than ever, insurers need to rely on strong risk managementcapabilities in order to deal with the different challenges posed by theeconomic slowdown, the financial market volatility, the stress on_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  42. 42. P a g e | 42sovereign debt, the demographic changes and the evolving pattern ofnatural catastrophes.During the last decade, not only risk management itself but also itspractical application underwent a major transformation.Improvements in modelling methodology, significant development ofnew internal control instruments, increasing investors’ and analysts’pressure as well as a new generation of risk managers with a more holisticview arriving in the company’s also triggered change.Companies which invested, early and continuously, in establishing aneffective and well integrated risk management are now taking the benefitsfrom that strategic decision.It should not come as a surprise that insurance and reinsuranceundertakings are at the forefront of applying sound and robust practicesof risk management.After all, insurance is in itself a risk management tool and thus theindustry possess a wide range of specific know how and experience in thisarea.Nevertheless, from an historical perspective, risk management has notbeen viewed as a relevant element of the insurance regulatory regime.This has changed with Solvency II.I believe that appropriate risk management is a cornerstone of anymodern risk based regulatory regime and consequently has its own role inthe supervisory process.Solvency II is mostly known for its risk based capital requirementcalculation.However, it is essential to recognize that one of the most importantelements in this regime is the heavy reliance on robust risk managementpractices._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  43. 43. P a g e | 43Under the Solvency II regime, insurance and reinsurance undertakingsmust have in place an effective risk management system comprisingstrategies, processes and reporting procedures necessary to identify,measure, monitor, manage and report, on a continuous basis the risks, atan individual and at an aggregated level, to which they are or could beexposed, and their interdependencies.Importantly, risk management cannot be seen as a point in timeprocedure.It is a continuous process that should be used in the implementation ofthe undertaking’s overall strategy and should allow an appropriateunderstanding of the nature and significance of the risks to which it isexposed, including its sensitivity to those risks and its ability to mitigatethem.Taking into consideration some lessons learned from the financial crisis,Solvency II identifies a number of elements which are particularlyrelevant for a robust implementation of a risk management system:• First of all, it is paramount to recognize the ultimate responsibility of themanagement body in ensuring that the implemented risk managementsystem is suitable, effective and proportionate to the nature, scale andcomplexity of the risks inherent in the business.• Secondly, the risk management system needs to be documented andcommunicated to the relevant management and staff, to ensure it isembedded within the business.• Thirdly, an effective risk management system should cover all materialrisks the undertaking might be exposed to.• Finally, and significantly, the risk management system must beintegrated into the organizational structure of the undertaking and itsdecision making processes.From a supervisory perspective, the insurance undertaking’s riskmanagement system must be comprehensive, covering at least areas like_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  44. 44. P a g e | 44underwriting and reserving, asset–liability management, investment,liquidity and concentrations, operational risk and reinsurance and otherrisk mitigation techniques.In each of these areas, supervisors have been transparent in theirexpectations towards undertakings.Let me touch particularly on the area of underwriting and reserving.Underwriting risk is at the centre of the insurance business.The risk of loss or of adverse change in the value of insurance liabilities,due to inadequate pricing and reserving assumptions is clearly related tothe quality of the information available and its management.Consequently, supervisors expect that suitable processes and procedureswill be in place to ensure the reliability, sufficiency and adequacy of boththe statistical and accounting data to be considered both in theunderwriting and reserving processes.As part of the system of governance, insurance undertakings should berequired to employ personnel with the skills, knowledge and expertisenecessary to discharge the responsibilities allocated to them properly.Furthermore, insurance undertakings should ensure that effectivesystems are in place to prevent conflicts of interest and that potentialsources of conflicts of interest are identified and procedures areestablished in order to ensure that those involved with theimplementation of the undertaking’s strategies and policies understandwhere conflicts of interest could arise and how such conflicts are to beaddressed.Furthermore, the undertaking should ensure that all policies andprocedures established for underwriting are applied by all distributionchannels of the undertaking insofar as they are relevant for them and thatthey have in place adequate claims management procedures whichshould cover the overall cycle of claims: receipt, assessment, processing_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  45. 45. P a g e | 45and settlement, complaints and dispute settlement and reinsurancerecoverables.I believe that the practical implementation of these requirements is offundamental relevance for the loss adjusting profession.The Loss Adjusting professionThe profession of loss adjuster is crucial for the insurance business andfor the society.The services provided by loss adjusters to insurers and other customersshould be based on professionalism, independence and impartial andaccurate assessment of claims.These are indeed the key words of your federation.Your role is particularly sensitive in the relationship between insurers andtheir clients and claimants.You have a particularly relevant role when dealing with majorcatastrophes.I am aware that, during the years of its existence, FUEDI made a lot ofefforts in maintaining high standards of professional conduct andcompetence, high educational standards as well as unified standards ofcustomer services.I believe that these efforts represent a priceless contribution to the fullyintegrated and reliable insurance market of the European Union and tothe overall reinforcement of consumer protection.I am sure that, in the near future, the loss adjusting profession will befurther recognized at the EU level.In my opinion, it is fundamental to assure that all loss adjusters workingin the EU follow strict rules of professional conduct including_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  46. 46. P a g e | 46maintaining qualities of integrity and impartiality and are bound bysound loss adjusting practices.It is also my belief that proper self regulation is an important tool in thisarea, but nevertheless, some basic principles should be incorporated inthe EU regulatory framework.I am looking forward to work in close cooperation with your professionand with the insurance industry to ensure increased confidence forpolicyholders and beneficiaries in the insurance sector._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  47. 47. P a g e | 47“Shaping the future of Europe’s financial markets”Verena Ross, Executive Director of ESMA,Centre Forum, London, 11 May 2012Ladies and Gentlemen,I am very pleased to be with you today and I would like to thank you forinviting me to deliver the keynote speech this morning.I am keen to share with you my views on the future of Europe’s financialmarkets, and in particular on the role of ESMA in meeting the challengesof regulating these markets.I would like to begin by addressing some of the background behind thecurrent system of regulation in the EU before moving on to speak aboutESMA and our Work Programme.What kind of financial oversight system is now developing in Europe?In June 2009, the Heads of EU Member States and governments called fora move towards more harmonised regulation and integrated Europeansupervision in order to ensure a true level playing field for all actors at theEU level.This call reflected not only the repercussions of the financial crisis, whichhas deeply affected, and continues to affect, Europe, but it also respondedto failings in the areas of cooperation, coordination, consistentapplication of Union law and trust between national supervisors._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  48. 48. P a g e | 48The response of the EU was the establishment of the European System ofFinancial Supervision and the creation of the European SupervisoryAuthorities for securities, banking and insurance in 2011, as well as theEuropean Systemic Risk Board.This was a crucial political decisions on the part of the European Unionto improve financial services regulation in Europe.The new system’s objective is not only to secure a more robust legalframework for financial markets and all its players, but also to providebenefits to investors and the wider economy.Moreover, the benefits of a single financial market are even more obviouswhen looking at the alternative: 27 separated and isolated financialsystems functioning with their own rules.The 16 months, since our establishment on 1 January 2011, have been abusy time for ESMA, on the organisational, regulatory and supervisoryfronts.We have set about building the new organisation at a time of ongoingturmoil in the EU financial markets and of significant legislative activityin the area of securities regulation.In terms of operational set-up, ESMA began life with about 35 staff fromits predecessor body, the Committee of European Securities Regulators,at the beginning of 2011 but by year’s end had nearly doubled to about 70.This included the reorganisation to align the structure and thesubsequent recruitment of the management tier to ensure that we had therequired basis in place to support delivery of our responsibilities.We have succeeded in recruiting highly qualified candidates from variedbackgrounds including government, regulatory bodies and the privatesector.And we are not finished yet._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  49. 49. P a g e | 49By the end of this year we intend to have 100 staff on board and I wouldlike to take this opportunity to say that we are still keen on attractingexperienced candidates from as broad a range of backgrounds aspossible.I/ ESMA’s Role in the new EU frameworkWhat is our role in the new EU regulation framework?ESMA has two key aspects to its mission as an organisation, which are:the building of a “single rulebook” for the regulation of the EU’s financialmarkets and ensuring its consistent application at national level.While this is an ambitious mission, presenting significant challenges, Ifeel that ESMA has already made some substantial progress in meetingthe challenges in both these areas over its first 16 months of existence.Development of a Single RulebookIn terms of the development of a single rulebook for Europe, ESMA tookon its new role as EU securities markets standard setter with clearresponsibilities for the development of technical standards and advice fornew, or soon to be revised, pieces of legislation.Over the last year, we not only produced the first technical standards (forcredit rating agencies (CRAs) and short-selling), but also conductedsignificant preparatory work for the enormous task of devising thestandards for the OTC derivatives markets (under EMIR) this year.We provided advice to the Commission for secondary legislation in theareas of prospectuses and alternative investment funds under AIFMD.Furthermore, we used our powers to issue guidelines andrecommendations to enhance the regulatory regime on "Systems andcontrols in an automated trading environment" as well as on "regulatoryframework for ETFs and other UCITS" that will be published by ESMAin June._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  50. 50. P a g e | 50Supervisory ConvergenceWhile the single rulebook will be the basis achieving supervisoryconvergence, purely having a single legal text does not actually achieveconvergence in implementation and actual regulation on the ground.Supervisory convergence is still very much work in progress, but I want topoint to a number of work streams through which ESMA has activelyworked on achieving this common approach to regulation.ESMA has issued opinions on the treatment of sovereign debt underIFRS and on a number of pre-trade transparency waivers - basicallyagreeing on what the national regulatory treatment should be in these twoimportant areas.During the difficult market period last August, ESMA co-ordinated -without formal legal powers - simultaneous bans on net short positions inBelgium, France, Italy and Spain, playing a role in aligning whereverpossible the interpretation and implementation of the measures.Similarly, we coordinated monitoring of market developments andmarket infrastructure resilience through this difficult period.ESMA also conducts peer reviews of national authorities’ activities, whichwe publish.These reviews look at such elements as the degree of convergencereached in the application of EU law and in its enforcement.One area which ESMA has recently conducted a peer review on is marketabuse and the use of sanctions in this area.Direct supervisionGoing beyond supervisory convergence, ESMA has been givenresponsibility to directly supervise a number of cross-border marketplayers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  51. 51. P a g e | 51In July 2011 we took on the responsibility for the registration andsupervision of CRAs wishing to conduct business in the EU.Bringing CRAs under the umbrella of EU supervision is a milestoneachievement which will contribute to a sounder rating process and thusmore resilient markets and improved investor protection.In this context, we have undertaken our first on-site inspections beforethe end of the year, and will conduct further individual and thematicsupervisory reviews, on-site inspections and off-site monitoring and riskanalysis, this year.From 2013, ESMA will also take on direct supervisory responsibility forTrade Repositories (TRs) under the EMIR regulation - expanding thecross EU supervisory role.Key priorities for 2012The introduction of new and the overhaul of existing legislation will be akey challenge for ESMA this year.ESMA will work on establishing harmonised binding implementingmeasures in different areas such as: OTC derivatives (EMIR), investmentfunds (UCITS), alternative fund managers (AIFMD) and issuers(Prospectus directive).EMIR in particular will dominate our agenda for the next 6 months, witha consultation paper in June and final standards due to be delivered byend September.In addition, ESMA will provide advice and support on legislation beingintroduced and debated by Council and Parliament, includingMiFID/MiFIR, MAD/MAR, CSD, Venture capital etc.We will need to start conducting some preparatory work in many of theseareas, as the issues ESMA is likely to have to work on (once the Level 1_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  52. 52. P a g e | 52legislative process is completed) are not only numerous but oftentechnically complex and difficult.ESMA will want to collect information and data, for example to supportits future work in areas such as non-equity transparency underMiFID/MiFIR.On the supervision side, 2012 will be the first year in which ESMA willfully exercise its duties on CRAs and - as I already mentioned - needs toprepare itself to also take up supervisory responsibilities for TradeRepositories.ESMA will also need to prepare for the work on supervisory collegeswhich will be established in 2013 for the regulation of cross-border centralcounter parties under the OTC derivatives legislation.The reach and impact of these institutions operating in one country coulddramatically affect investors and intermediaries of other countries. ESMAwill play, in this framework, a co-ordination and a mediation role ifneeded.II/ ESMA’s stakeholders - national regulators, market playersand investorsWhile ESMA has many new tasks and powers, the new framework isbased on effective and extensive cooperation with and between nationalsupervisory authorities.In this context I would like to mention the very active participation by theUK FSA in ESMA’s activities, at technical level and in ESMA’s Board ofSupervisors.It is important for us to have this strong input especially into ESMAs rulemaking process.In addition, we continue to rely on the UK - as on any other nationalcompetent authority - to conduct the day to day supervision of their_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  53. 53. P a g e | 53authorised firms and market infrastructure players, many of which areactive across the whole of the Union.ESMAs mandate is clear: building “one set of rules” for an “effective EUsingle market” – and I know that UK investors and financial institutionssupport this motto.It is in the interest of issuers, investors and intermediaries to have thesame rules across Europe.It makes it easier for issuers to raise cheaper funding and for financialinstitutions to develop their business across the EU single market.It is also in the retail investor’s interest to have a larger choice of financialproducts and the same level of protection wherever a product is sold inEurope.To create this single set of rules and achieve an effective EU singlemarket, ESMA needs input not only from national competent authorities,but also from the wider stakeholder community.This includes the key market players - buy side/sell-side, infrastructure,issuers, etc - but also retail investors, small and medium size companiesas well as the European institutions.We are dependent on receiving thoughtful and informed views, but alsodata and information that allows us to evaluate different policy optionsimpartially, in order to develop the high quality standards and advice thatyou expect from us on the wide range of topics that are under ESMAsremit.In this context, I would remind this audience that while it may be thenational tendency to see rules and regulations emanating from Brusselsas an attempt to stifle the UKs financial services sector, they should viewthis consultative process as an opportunity for them to contribute to thedevelopment of a regulatory system which takes into account the bestattributes of Europe’s largest capital market while ensuring that thesemarkets are allowed to flourish to the benefit of all. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  54. 54. P a g e | 54III/ ESMA’s role in international cooperationOn international cooperation ESMA will play a central role with theobjective of fostering consistent application of European rules towardthird country entities. In coordination with the European Commission,ESMA will also ensure that Europe speaks with one single voice when ithas to deal with third county regulators and will strengthen Europe’sposition.Global leaders have established common objectives at G20 levels andregulators have set up a number of international groups aiming atinternational consistency of the different regimes.At the end of the process we will need to rely on equivalence andco-operation among authorities. We will never be effective if a singleregulator seeks to regulate global financial markets from one singlelocation.ESMA is already and will continue to play its full role in the globaldialogue, whether that is in relation to the OTC derivative agenda, theregulation of CRAs or alternative investment fund managers.Concluding remarksI would like to conclude by saying that ESMA has a big contribution tomake to the new European system and financial supervision. I haveexplained this morning what we have already done and what we areplanning to do, to contribute to the objective of a stable financial marketfor Europe.In this endeavour we will be working closely with national supervisors,the European institutions and our wider stakeholders, while also keepingan eye on the international dimension of financial markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  55. 55. P a g e | 55Formation of the Enhanced Disclosure Task ForceThe importance to market confidence of useful disclosure by financialinstitutions of their risk exposures and risk management practices hasbeen underscored in recent years, and the FSB mentioned, in its pressrelease on 20 March 2012, that it will facilitate the formation of aprivate-sector task force to develop principles for improved disclosures.The FSB is pleased to announce that the Enhanced Disclosure TaskForce (EDTF) has been established.The co-chairs of the EDTF are: Hugo Bänziger, Chief Risk Officer andMember of the Management Board, Deutsche Bank; Russell Picot, GroupGeneral Manager and Group Chief Accounting Officer, HSBC Holdingsplc; and Christian Stracke, Managing Director, Member of InvestmentCommittee, and Global Head of Credit Research Group, PIMCO.In addition to the co-chairs, the EDTF initially has 25 senior officials andexperts representing financial institutions, investors and analysts, creditrating agencies, and external auditors. Summary biographies of theco-chairs and a listing of the task force’s initial participants are shown inthe annex to this press release.The primary objectives of the EDTF are(i) to develop principles for enhanced disclosures, based on currentmarket conditions and risks, including ways to enhance the comparabilityof disclosures, and_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  56. 56. P a g e | 56(ii) to identify leading practice risk disclosures presented in annualreports for end-year 2011 based on broad risk areas such as thoseidentified in the summary of the first FSB roundtable on risk disclosuresheld in December 2011.The EDTF will have dialogue with standard-setting bodies, such as theInternational Organization of Securities Commissions, the BaselCommittee on Banking Supervision, the International Association ofInsurance Supervisors, the International Accounting Standards Board,the US Financial Accounting Standards Board, and the InternationalAuditing and Assurance Standards Board, at key stages as it develops itsrecommendations.The recommendations of the EDTF are expected to be reported to theFSB and published during October 2012.The FSB will consider holding another international roundtable byend-2012 to facilitate further discussion by investors, financialinstitutions, auditors, standard setters, regulators and supervisors onmarket conditions and risks at that time and the progress towardimproving the transparency of risks and risk management throughrelevant disclosures.Mark Carney, Chairman, FSB, said “We welcome the formation of theEnhanced Disclosure Task Force”.He added “The FSB supports these efforts which, together with theactivities of standard setters, are expected to result in improved riskdisclosure practices by financial institutions that will provide timely anduseful information to investors”.Summary of key themes that arose during an FSB roundtable onrisk disclosureThe FSB held a roundtable on risk disclosure in Basel on 9 December2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)