Q&A

Question

Guideline 13 (Guidelines on Classification of Own Funds) requires to consider encumbrances including,

but not limited to the effect of a transaction or a group of connected transactions which have the same

effect as holding of own fund items of the undertaking. For the purpose of the accurate application of

Guideline 13 the following questions are raised as to whether such cases should be deemed to

represent encumbrances and whether para. 1.60 from Guideline 13 should apply:

1. The holding of shares or bonds issued by a direct or indirect shareholder of the insurer:

i) Clarification is also necessary as to whether the shares/bonds should be issued around the

same time of a capital increase of the insurer in order to be deemed an encumbrance, or any

holding of shares/bonds of a direct or indirect shareholder regardless of their time of issue

should be deemed an encumbrance.

ii) Clarification is also necessary whether the holding of shares/bonds of a related undertaking (controlled by the same direct or indirect shareholder) should be considered an encumbrance – with or without relation to the time of issue or acquisition of the shares/bonds by the insurer.

2. The holding of assets representing loans provided by the insurer to direct or indirect shareholders of the insurer (including individuals that are final beneficiaries):

i) Clarification is also necessary as to whether the loans should to be provided around the same time of a capital increase of the insurer in order to be deemed an encumbrance, or any loans provided to direct or indirect shareholders regardless of their time of disbursement should be deemed an encumbrance.

ii) Clarification is also necessary whether the loans provided to a related undertaking (controlled by the same direct or indirect shareholder) should be considered an encumbrance.

EIOPA answer

This Answer is based on the examples provided. It is specific to the case and specifications described and does not prejudge other cases including implications where entities are in the scope of group supervision in accordance with Article 213(2) (a) and (b) of Directive 2009/138/EC.

According to para. 1.59 (a) of Guideline 13 of the EIOPA Guidelines on Classification of Own Funds, the assessment of whether an own-fund item is encumbered is based on the economic effect of the encumbrance and the nature of the item, applying the principle of substance over form. On this basis, the following holds:

1. Holding shares or subordinated debt issued by a direct or indirect shareholder results in an encumbrance.

2. If an insurer has provided directly or indirectly a non-subordinated loan to a major investor in the own-fund items of the insurer and this has the same effect as the insurer holding own-fund items of itself, then the own-fund items held by the major investor are encumbered.

An example would be a case where the major investor has no other assets than the own-fund items of the insurer and the non-subordinated loan is her main source of funding.

3. An encumbrance may occur if the transaction or group of transactions involves non-related undertakings (i.e. transactions outside a group).

4. Temporal proximity or a certain sequence of transaction is not a requirement for an encumbrance to occur.

In compliance with the features set out in Articles 71(1)(o), 73(1) (i) and 77(1)(h) of Commission Delegated Regulation 2015/35, the amount to be deducted in case of an encumbrance should be determined as described in the explanatory text of Guideline 14 in the “Final Report on Public Consultation No. 14/036 on Guidelines on classification of own funds”. The encumbrance deduction should be made by the insurer in its solo calculation since it is its own funds that are encumbered.