## The 2012 Revised Core Principles (assessment completed January 2013) ## Source details **Canonical URL:** [The 2012 Revised Core Principles (assessment completed January 2013)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13301.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13301.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13301.pdf.json) --- ### Introduction and methodology - Assessment completed by Ms. Fabiana Melo and Mr. Jose Tuya as part of an FSAP update undertaken by the IMF in January 2013. - Assessment reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - Focus: - Review of legal framework and detailed examination of policies and practices of institutions responsible for banking regulation and supervision. - Focused on Banca d’Italia (BI) as the main supervisor of the banking system. - Did not cover specificities of regulation and supervision of other financial intermediaries (covered elsewhere in the FSAP). - Did not cover issues related to the newly agreed Single Supervisory Mechanism (SSM) operational details not fully defined at the time. - Italy agreed to be assessed according to the Revised Core Principles (BCP) Methodology issued by the BCBS in September 2012. - Revised methodology increased emphasis on risk management, supervisory intensity, macroprudential perspective, crisis management, recovery/resolution, and market discipline. - Assessment against both Essential Criteria (EC) and Additional Criteria (AC); Italy was the first country rated also against ACs under the 2012 Revised BCP. - Grading system: compliant; largely compliant; materially noncompliant; noncompliant. - Assessment process elements: - Review of laws, rules, guidance. - Extensive meetings with BI, auditing firms, and banking sector participants. - Consideration of proportionality—expectations commensurate with complexity, interconnectedness, size, risk profile, and cross-border operations of banks. ### Quantitative changes in the revised methodology (as reported) - Number of principles increased from 25 to 29. - Number of essential criteria expanded from 196 to 231 (includes amalgamation of previous criteria and introduction of 35 new essential criteria). - For countries choosing assessment against additional criteria, there are 16 additional criteria. --- ### Main findings on banking supervision (BI) - Core supervisory process at BI is strong with a well-defined and integrated supervisory approach. - BI is well regarded in terms of independence, professional qualification, and integrity. - Supervisory components integrated in the Supervisory Review and Evaluation Process (SREP). - Key pillars: offsite analysis, onsite inspections, and analytical data. - BI collects and analyzes detailed credit records (feed the credit registry) and broader risk management information contained in the ICAAP. - In-house tool SIGMA provides data access to the offsite unit for analysis. - Onsite inspections scheduled based on offsite analysis and identified risks. - SREP produces bank-specific risk assessment grades covering credit, financial, operational, profitability, capital, strategic and governance risks; an overall risk grade is assigned and informs supervisory planning. - Supervisory coverage is comprehensive and follow-up is intensive; BI takes supervisory action on quantitative and judgment issues. ### Progress and remaining legal/regulatory issues from prior assessments - Progress: - Legal protection of supervisors amended in 2005 and 2006 establishing that staff are not legally liable for actions taken or omissions made while discharging their duties in good faith. - Loan loss provisioning rules modified in 2012 to consider as nonperforming loans past due from 90 days (instead of previously 180 days). - Banking Law amended in 2008 to allow regulation of related-party lending limits and procedures. - Remaining issues: - Procedure for covering legal costs of supervisors remains unresolved. - Lack of power to remove members of the board and senior officials of banks remains. - Lack of power to remove external auditors of banks remains. ### Areas requiring attention to meet highest supervisory effectiveness - Lack of powers to suspend and remove directors and senior managers limits BI’s timely corrective action capacity and affects corporate governance. - Lack of power to remove external auditors can be a significant limitation where supervisor cannot issue or interpret accounting standards. - Recommendation (general): complete the regulatory framework so market participants clearly understand supervisory expectations. --- ### Deficiencies in the legal and regulatory framework largely mitigated by intrusive supervisory action ### Overview - Deficiencies exist but are "largely mitigated by intensive and intrusive supervisory action on- and offsite, on a bank-by-bank basis." - Recommendation: complete the regulatory framework so market participants clearly understand supervisory expectations. ### Country and transfer risk (CP 21; links to CP 15) - Regulatory framework for management and control of country and transfer risk is "not adequate." - BI addresses material country/transfer risk on the largest internationally active banks; other banks with active exposures are less directly covered. - Recommendation: BI is strongly recommended to issue guidance applicable to all banks. - Supervisory point: "an overall deterioration of credit risk in a country can lead to many private contracts not being observed, independently of sovereign risk or currency risk." ### Concentration risk and large exposures (CP 19) - Revised CP focuses on "risk concentration" beyond large/name exposures (industry, sector, geographic, market/product/currency). - Regulatory framework mostly focuses on large exposures and name risk; supervisory practice considers broader concentrations case-by-case. - Identified deficiency: exceptions to large exposure limits reduce prudential effect (e.g., risk-weighting of exposures for application of large exposure limits to some asset classes). - Constraint: BI’s scope for revision may be limited by EU legislation. ### Related-party lending (CP 20) - New framework for related party lending entered into force January 2013; implementation could not be observed by assessors. - Deficiencies that may reduce effectiveness: - Some exposures are risk weighted. - No explicit requirement that the board member or persons involved be excluded from decision-making. - No requirement that related party lending occur on no more favorable terms than to non-related parties. - Definition of connected parties differs from that used in the large exposures regime: economic dependence not considered for related parties. - BI empowered to impose stricter definitions by judgment other than control but practical capacity to do so remains to be determined. ### Loan loss provisioning, NPLs, and fiscal/judicial influences (CP 18) - Loan loss provisioning practices "heavily influenced by fiscal and judicial requirements over prudential considerations." - Fiscal treatment specifics: - Write downs deductible when "circumstances of legal certainty and accuracy of loss amount" met—so far met by declaration of insolvency and court judgments. - Judicial process length ranges from "6 to 11 years" depending on the region. - Without legal certainty support, write downs can only be deducted within "0.30 percent" of the overall book value of the loans. - Excess gives rise to a deferred tax asset amortized in "18 years." - Consequence: banks structure provisioning/write-offs to accommodate tax authority ("Agenzia delle Entrate") requirements, resulting in longer loan workout timeframes. - Policy action: June 2012 "Growth Decree" to encourage write off or sale of NPLs: - Tax deductibility for losses resulting from small loans delinquent for over "six months." - Tax deductibility for losses resulting from sale of assets or derecognition according to "IAS 39" for IAS-adopting companies. - NPL treatment under IAS 39: - NPLs may remain on books for years and include interest based on bank management’s estimation of collectability and collateral support. - Collateral valuation hampered by declining prices and low turnover. - BI conducted horizontal monitoring at main medium-large banking groups to check coverage ratios against those observed in "2007" and assess robustness of provision criteria and practices. ### Supervisory powers, reporting and enforcement - Supervisory tools: Risk Assessment System, ICAAP, credit registry, onsite inspections (full scope, targeted, horizontal), offsite reviews. - Identified limitation: BI lacks capacity to remove or suspend administrators and board members; removal often achieved by moral suasion. - Expectation: CRD IV transposition into Italian law expected to provide power to temporarily ban bank managers. - Current limitation: pecuniary sanctions on entities are largely unavailable outside AML breaches; BI expects EU action to resolve this. ### Licensing and corporate governance (CP 5, CP 11) - Licensing deficiencies: - BI cannot revoke a license if granted based on false application after the bank has started operations. - Initial capital can be mostly subscribed with assets (up to "7/10"); shareholders allowed to use borrowed money for initial subscription. - No legal restriction to shareholders being leveraged or borrowing to finance capital subscription or increases. - Responsibility for fit and proper assessment lies with the bank’s board; BI does not systematically perform its own verification. - Integrity requirements in Ministerial Decree No. 161/1998 are narrow and do not include adverse regulatory judgments unrelated to criminal activities. - Mitigation: well-structured licensing procedure and quality of analysis; BI actively imposes conditions on authorizations. ### Selected Core Principle observations (selected CPs) - CP 1: Responsibilities, objectives, and powers clearly defined; BI depends on MEF decree for final liquidation decision. - CP 2: BI governance conducive to independence; resources adequate; legal protection of supervisors improved; Board decision on "December 18, 2012" to allow anticipation of reimbursement of legal costs to staff in cases of legal suits. - CP 7: EU framework allows acquisitions of financial firms below "10 percent" of regulatory capital without prior approval (only notification); notification period of "30 days". - CP 15: Extensive risk-management compendium in place; some guidance is principles-based or deficient in operational, credit, country/transfer, and concentration risk areas. - CP 16: Italy’s capital adequacy framework consistent with Basel II standards at the time of assessment. - CP 17: No requirement that large exposures or highly risky and complex operations be approved by the Board nor that lending be on market terms (arm’s length). - CP 19: BI monitors concentration risk with rich information and bank-by-bank analysis within SREP; no systematic guidance beyond name risk/large exposures; exceptions to limits reduce prudential effect. --- ### Transactions with related parties (CP 20) ### Framework and implementation status - Framework was majorly deficient before amendments to the BL in 2006 and Circular 263 in 2011. - New framework entered into force December 31, 2012 (full force January 2013); implementation evidence was insufficient to verify compliance at time of assessment. - New regulatory framework may need enhancements; various exceptions to the limits may affect effectiveness. ### Specific concerns about regulatory design - Exposures are risk weighted. - Intra-group exposures between parent and wholly owned subsidiary are: - exempt from the limits, and - exempt from approval and monitoring procedures. - No specific requirement that conflicted board members be excluded from decision-making. - No explicit requirement that related party lending be on no more favorable terms than to non-related parties. - Regulation allows BI to impose case-by-case broader definitions; practical capacity to do so remains to be determined. ### Potential mitigants identified - Deficiencies might be mitigated by: - specific procedures for related party transaction approval and disclosure; - active enforcement of risk management procedures by BI; - BI powers to require consolidation and other corrective measures. - Implementation evidence not available because the regulatory framework only came into full force on December 31, 2012. ### Linked recommended actions - Amend regulations to require explicitly that conflicted board members or persons with conflict of interest are excluded from the decision making process. - Amend regulation to require that related party transactions do not occur on more favorable terms than those to non-related party clients. ### Authorities’ response (relevant excerpts) - BI adopted completely new, comprehensive supervisory provisions for all banks, with quantitative limits to exposures, governance arrangements and specific internal control requirements. - Listed banks (accounting for more than 60 percent of total banking system assets at the end of 2011) also subject to CONSOB regulation on RPT since January 2012. - BI confident off- and onsite controls, once fully operating, will effectively complement the regulation. ### Further BI clarification (CP 20 points) - Board approval required when transaction value exceeds 5 percent of regulatory capital. - CP 20 does not explicitly prohibit risk-weighting; weights applied are those for concentration risk and are limited to specific asset classes and more stringent than those for credit risk. - Economic connection not required under CP 20; BI authorized to impose broader related-party definitions case-by-case. - Civil Code does not specify automatic exclusion of conflicted members; regulation envisages cases where interested member cannot take part. - Regulation does not impose market conditions (arm’s length) because comparable market prices may not exist; independent directors must motivate deviations from market conditions. - BI instituted periodic reporting for exposures to related parties; first set of data for thorough analysis expected by March 2014 to permit fine-tuning. - Authorities will consider whether conflict-of-interest legislation needs modification to systematically exclude interested parties from approval. --- ### Insurance supervision (IAIS ICP assessment; IVASS) — high-level findings ### Scope and timing - Full assessment of Italy’s compliance with the Insurance Core Principles (ICPs) of the IAIS adopted October 2011. - Review carried out as part of the 2013 FSAP. - Assessors: Dr. Rodolfo Wehrhahn and Ms. Christina Urias. - Supervisory authority: Institution for the Supervision of Insurance (IVASS), newly established; assessment based on laws, regulations and practices in place at time of assessment. ### Main high-level findings - Improvements since 2005–2006: IVASS enhanced inspection powers, risk-based supervision, onsite inspections, reinsurance reporting, corporate governance, risk management, and disclosure. - Best-practice areas: - Active group supervision and early establishment of supervisory colleges (by 2000). - Strict monitoring and enforcement of intragroup transactions and related party participation limits. - Comprehensive reinsurance reporting and monthly liquidity monitoring data collection. - Active involvement in internal model pre-approval for Solvency II preparation. - Strong consumer protection in conduct-of-business supervision. - Staffing and inspection quality: - Highly qualified staff each assigned to handle all aspects of supervision for individual companies. - Onsite inspections need upgraded quality and focus; planned frequency every four years is not always met. - Supervisory staff lack sufficient specialized training for particular focus areas. - Supervisory quality controls: - Need for quality controls and a task force to share best practice, develop IVASS positions, provide quality control, and act as reference for troubled companies. - Group-focused supervision and specialization: - Recommendation: adopt group-focused approach for nationally significant insurers and develop specialized offsite monitoring and ad hoc inspections for smaller entities. - Technical reserves and actuarial practices: - Need further clarification of margins, parameters and technical reserve methodologies; miscommunication with auditors and actuaries noted. ### Organizational and operational timing issues - IVASS had been in existence only since January 1, 2013; assessment occurred after one month of IVASS operation. - IVASS required to provide new structure in the next four months; clear assignment of responsibilities and operational delegation necessary to guarantee continuity and avoid loss of institutional knowledge. - Special attention required for Solvency II developments. --- ### Risk Management and Internal Controls (Insurance) ### Regulatory foundation - Regulation 20/2008 requires effective systems of risk management and internal controls, including functions for: - risk management (Article 21); - compliance (Article 23); - actuarial matters (Regulations 21, 16, 7, 22 and Insurance Code, Articles 31,34,190); - internal audit (Article 15). - ISVAP required risk management functions starting in 2005; Regulation 20/2008 established standards and implementation requirements. ### Supervisory review and reporting — findings - IVASS uses "Fast Track" indicators for preliminary analysis to establish an annual inspection plan; indicators comprehensive and objective. - Staff act as generalists with particular skills; formal specialization is limited (actuarial skills mainly dedicated to technical provisions). - Two Supervisory Divisions operate independently; divided unilateral supervision challenges consistency and internal quality control. - File reviews show delays in regulatory action and absence of ladders of intervention procedures; example of no inspection of a major insurer for more than four years. - No centralized asset valuation process; asset valuation handled individually by staff. - No objective formal criteria for requiring inspections; IVASS attempts inspection once every four years but benchmark is not followed. ### Recommendations for IVASS (risk management and internal controls) - Implement internal quality controls and adopt formal communication and peer review processes. - Develop specialized staff expertise (financial analysis, inspection experts, governance and ERM). - Establish a centralized asset valuation process. - Develop objective formal criteria for inspections and set required inspection frequencies. ### Preventive/corrective measures and enforcement - IVASS has power under the Insurance Code to take timely preventive and corrective measures. - Enforcement constraints: - Joint Directorate approval required on several enforcement activities. - If parent holding company does not infuse capital, IVASS can only order ring fencing. - IVASS can remove or restrict board members but cannot impose sanctions on board members individually; sanctions only against the undertaking. - Fine and penalty structure may be capped and may not have desired preventive impact given undertaking size. - Recommended legislative amendments: - Explicitly enable IVASS to restrict or suspend dividends or other payments when payments would jeopardize solvency. - Allow for individual pecuniary sanctions in the Insurance Code. - Consider increasing/restructuring fines and penalties. ### Winding-up and exit from the market - Insurance Code provides options and prioritizes protection of policyholders (Articles 245–265). - Legal proceedings for winding up are lengthy and complicated; policyholder payments delayed—apart from motor vehicle liability, policyholders partly paid within three years. - Recommendation: institute procedures to expedite payments to policyholders (partial distributions or timeframe deadlines). ### Valuation, capital adequacy, and Solvency II preparation - Valuation largely based on amortized cost reducing regulatory usefulness, especially in winding up. - Anti-crisis measures allow sovereign bonds to be valued at cost and add complexity. - Technical provisions under Solvency I: - No explicit Current Estimate or MOCE calculation; margins for adverse deviation not quantified. - Solvency I approach does not consider interdependence between assets, liabilities, and capital. - Two explicit solvency control levels: required solvency margin; guarantee fund. - Anti-crisis law measures allow difference between cost and market value of certain sovereign bonds as a “non-distributable reserve.” - IVASS involved in internal model pre-application; approximately "65 percent" of the Italian insurance market, based on premium, is considering use of an internal model. - Full ICP expected to be observed with Solvency II implementation. ### Intermediaries, conduct of business, public disclosure, and anti-fraud - Intermediaries must register in IVASS Register (Article 110); Law 135/2012 requires moving registration to an ad hoc private institution under IVASS supervision. - IVASS Intermediaries Department staffing: 28 people (19 handle Register updates; 9 handle offsite intermediary monitoring). - No requirement for intermediaries to report financial statements directly to IVASS; reporting through principal insurer. - Recommendation: ensure good governance and systems for ad hoc private institution and establish market-wide notification practices when systemic issues arise. - Conduct of business framework ensures fair treatment; IVASS can regulate advertising but cannot require payment of claims; recommendation to consider alternative dispute resolution schemes. - Public disclosure: - Solo entities use Italian GAAP with regulatory enhancements; consolidated entities use IFRS. - IVASS requires disclosure of technical provisions and methodologies; recommends disclosure of stress testing results and sensitivity analysis at solo level, following IFRS7. - Anti-fraud: - IVASS created an Anti-Fraud Division and enacted Regulation 44 in 2012; division expected to issue first report on 2012 data in early 2013. - Claims Data Bank reporting enhanced. - Recommendation: specialized training for Anti-Fraud Division and proactive inspections. --- ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CTF) — insurance ### Regulatory framework and responsibilities - Regulation 41/2012 requires insurers to implement explicit AML/CTF controls. - Delay in establishing Regulation 41/2012 partly due to alignment with Bank of Italy legislation. - IVASS Inspection and Anti-Fraud Division responsible for AML/CTF oversight and enforcement. - Under EU Directive, AML applies only to life insurers; assessors recommend applying AML requirements to non-life companies. ### Supervisory activity and capacity - Anti-Fraud Division conducted only one AML/CTF inspection since enactment of Regulation 41/2012. - Companies must designate an AML function and person in charge; implementation not yet supervised. - Anti-Fraud Division inspection capacity: can do 5 inspections a year; at this rate it would take at least 10 years to inspect all applicable companies. - Recommendation: provide AML/CTF training; promptly initiate focused inspections; communicate expectations; implement risk-based inspection prioritization; consider extending AML to non-life insurers. ### Information flows and reporting - Insurers and intermediaries must inform IVASS quarterly and in aggregate on suspicious transactions reported. - IVASS cannot directly receive suspicious transaction reports (Law 231/2007 (art. 41)); insurers report aggregated AML data to UIF; IVASS receives UIF general data on inspections and criminal investigations only. - Recommendation: improve information sharing and access to individual company information from UIF and Bank of Italy where possible. --- ### Macroprudential surveillance, cross-border cooperation, and crisis management (insurance) ### Macroprudential surveillance - Recommendation: develop an early warning system leveraging EIOPA/ESRB tools (e.g., Risk Dashboard) calibrated to Italian market. - EIOPA stress test not a substitute for national industry-wide stress tests; reverse stress testing recommended. - Tools to address systemic risk from anti-crisis measures need further development (e.g., delayed payment of surrenders, payments in sovereign instruments); public communications strategy recommended. - IVASS should remain engaged in G-SII determination discussions and start framework to determine and supervise domestic systemic insurers considering size, connectivity and substitutability. - IVASS participation in national stability board should continue with a strong voice on insurance risks. ### Supervisory cooperation and cross-border crisis coordination - Recommendation: IVASS take leadership in implementing measures to allow cross-border supervision similar to EU college approach including third countries. - Develop agreements/procedures for third countries for cross-border crisis preparedness. - Require an annual test of contingency plans and supervise compliance. ### Authorities’ response (IVASS) - IVASS acknowledges FSAP issues and recommendations and commits to take necessary actions exploiting synergies with Bank of Italy under Law 135/2012. - Notes assessment timing influenced results: FSAP carried out in early January 2013, in the first days of IVASS operation. - Notes 2012 ISVAP reorganization intended to rationalize processes for Solvency II but transformation to IVASS limited full deployment of intended benefits. --- ### IOSCO assessment and principles for secondary markets (selected findings and recommended actions) ### Market infrastructure and authorization - RMs operators and MTFs subject to authorization requirements including financial, fit and proper, and organizational requirements; MTFs must hold a license of IF or market operator. - Pre- and post-trade transparency requirements exist for trading venues; intermediaries obliged to report off-market transactions in instruments admitted to a RM. - CC& G monitors clearing members’ exposures daily and can request intraday additional margins; default procedures are transparent. - Reporting obligations apply to short selling and failed settlements. ### Implementation of IOSCO Principles (selected) - Principle 1: BI and Consob mandates clearly defined; allocation of responsibilities complex and requires cooperation. - Principle 2: Framework for independence and accountability robust; strengthen legal protection of staff during lawsuits. - Principle 3: Broad powers but limitations: - No power to remove individual directors except in narrow cases. - Pecuniary sanctions can be imposed on individuals but not legal entities (entities jointly and severally liable); sanction levels low except for market abuse/short selling. - Principle 12: Supervisory approach relies heavily on offsite monitoring with more limited onsite inspections; enforcement leans toward remedial actions with lower pecuniary sanctions outside market abuse. - Principle 16–19: Robust issuer disclosure and auditor oversight frameworks; auditors of PIEs subject to Consob oversight with onsite inspections on a three-year cycle. - Principle 32: Crisis management tools robust for banks, IFs and AMCs, including special administration and compulsory liquidation; investor compensation scheme exists. ### Recommended actions (selection) - Principle 1: Establish mandatory consultation with Consob for bank applications to provide investment services; streamline twin-peak structure; consider transferring approval of fund rules to Consob. - Principle 2: Strengthen legal protection of staff (support during legal defense throughout the action). - Principle 3 / 11: Reform legal framework to allow authorities to impose pecuniary sanctions on regulated entities as well as individuals; increase sanction levels; provide power to remove individual directors; consolidate compulsory powers; transfer residual MEF functions to regulatory authorities. - Principle 12 / 31: Increase use of onsite inspections; monitor enforcement strategy to balance remedial actions and sanctions. - Principle 24 / 29: Amend MEF regulations to broaden fit and proper definition and give regulators better mechanisms to verify compliance. - Principle 35 / 37: Monitor market fragmentation and implement EMIR promptly to allow portability of client margins and positions. --- ### Authorities’ responses and concluding notes - Italian authorities expressed appreciation to the FSAP mission, noted high level of compliance with IOSCO Principles, and committed to consider recommendations to achieve "Fully Implemented" status for all principles. - BI and IVASS signalled willingness to revisit and fine-tune regulations (e.g., related-party rules) once implementation data become available (first related-party reporting data expected by March 2014). - Authorities noted timing of assessments (e.g., IVASS in first month of operation) affected some findings and committed to exploit synergies with Bank of Italy to improve supervisory capacity and quality. *Source: IMF FSAP ROSC chapter "The 2012 Revised Core Principles" and associated sections from document _cr13301 (assessment completed January 2013).* ### 1. The 2012 Revised Core Principles _______________________________________________________________ 8 ### 1. The 2012 Revised Core Principles ### Introduction - Assessment completed by Ms. Fabiana Melo, Financial Supervision and Regulation Division, Monetary and Capital Markets Department, and Mr. Jose Tuya, external consultant, as part of an FSAP update undertaken by the International Monetary Fund (IMF) in January 2013. - Assessment reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - Assessment focus: - Review of legal framework and detailed examination of policies and practices of institutions responsible for banking regulation and supervision. - Focused on Banca d’Italia (BI) as the main supervisor of the banking system. - Did not cover specificities of regulation and supervision of other financial intermediaries (covered elsewhere in the FSAP). - Did not cover issues related to the newly agreed Single Supervisory Mechanism (SSM) in the Euro Area because operational and regulatory details were not fully defined at the time of the assessment. - Contextual note on the SSM (as described in the source): - European Commission proposed to have the SSM in place by January 1, 2013, with a phasing-in period. - As of January 1, 2013, the ECB would be able to decide to assume full supervisory responsibility over any credit institution, particularly those which have received or requested public funding. - As of July 1, 2013, all banks of major systemic importance would be put under the supervision of the ECB. - Phasing-in period should be completed by January 1, 2014 when the SSM will cover all banks. ### Information and Methodology Used for Assessment - Italy agreed to be assessed according to the Revised Core Principles (BCP) Methodology issued by the BCBS in September 2012. - The revised methodology has a heightened focus on risk management and its practice by supervised institutions and its assessment by the supervisory authority. - The 2012 assessment is not directly comparable with the previous BCP assessment carried out in 2006. - Italy chose to be assessed and rated against both Essential Criteria (EC) and Additional Criteria (AC). - The BCP Methodology uses essential and additional assessment criteria for each principle. - Essential criteria (EC) are usually the elements on which to gauge full compliance with a CP. - Additional criteria (AC) are recommended best practices; Italy is the first country being rated also against ACs under the 2012 Revised BCP. - Grading system used: compliant; largely compliant; materially noncompliant; and noncompliant. - Assessment process: - Review of framework of laws, rules, and guidance. - Extensive meetings with BI officials and additional meetings with auditing firms and banking sector participants. - Authorities provided a comprehensive self-assessment and responses to additional questionnaires; facilitated access to supervisory documents, files, staff, and systems. - Assessment considered proportionality—supervisory expectations and imposed standards should be commensurate with the complexity, interconnectedness, size, risk profile, and cross-border operations of banks. Box: The 2012 Revised Core Principles (summary points from source) - Revised BCPs reflect developments since the last revision and lessons from the 2008/2009 financial crisis. - Greater emphasis on: - supervisory intensity and allocation of adequate resources for systemically important banks; - applying a system-wide, macro perspective to microprudential supervision to identify and address systemic risk; - effective crisis preparation and management, recovery and resolution measures; - fostering robust market discipline through corporate governance, disclosure, and transparency. - Supervisors are required to assess banks’ risk profiles in terms of risks they run, efficacy of their risk management, and risks they pose to banking and financial systems; also to consider macroeconomic environment and build-up and concentration of risk inside and outside the banking sector. - Heightened focus on actual use of supervisory powers in a forward-looking approach through early intervention. - Quantitative changes in the revised methodology: - Number of principles increased from 25 to 29. - Number of essential criteria expanded from 196 to 231 (includes amalgamation of previous criteria and introduction of 35 new essential criteria). - For countries choosing assessment against additional criteria, there are 16 additional criteria. - The revised methodology reinforces proportionality to allow assessments commensurate with risk profile and systemic importance. ### Main Findings - Overall supervisory framework and BI: - The core supervisory process at the Banca d’Italia (BI) is strong with a well-defined and integrated supervisory approach. - BI is well regarded in terms of independence, professional qualification, and integrity. - Supervisory components are integrated in the Supervisory Review and Evaluation Process (SREP). - Key pillars: offsite analysis, onsite inspections, and analytical data. - Progress on prior recommendations: - Authorities have made progress addressing recommendations from the 2006 FSAP: - Legal protection of supervisors amended in 2005 and 2006 establishing that staff are not legally liable for actions taken or omissions made while discharging their duties in good faith. - Loan loss provisioning rules modified in 2012 to consider as nonperforming loans past due from 90 days (instead of previously 180 days). - Banking Law amended in 2008 to allow regulation of related-party lending limits and procedures. - Remaining issues from prior assessments: - Procedure for covering legal costs of supervisors remains unresolved. - Lack of power to remove members of the board and senior officials of banks remains. - Lack of power to remove external auditors of banks remains. - Areas requiring attention to meet highest supervisory effectiveness: - Lack of powers to suspend and remove directors and senior managers negatively affects BI’s timely corrective action capacity and is not conducive to good corporate governance, particularly given the narrow fit and proper definition in legislation. - Lack of power to remove external auditors can be a significant limitation where the supervisor cannot issue or interpret accounting standards. - Information collection and risk assessment: - BI collects and analyzes a wide range of information from detailed credit records (to feed the credit registry) to broader risk management overview contained in the ICAAP. - In-house tool SIGMA provides data access to the offsite unit for analysis. - Onsite inspections are scheduled based on offsite analysis and identified risks. - SREP produces bank-specific risk assessment grades covering credit, financial, operational, profitability, capital, strategic and governance risks; an overall risk grade is assigned. - Risk ratings inform the scope of the supervisory plan for each bank. - Supervisory coverage and follow-up: - Supervisory coverage of banks is comprehensive and the follow-up process is intensive. - BI takes supervisory action on quantitative issues (credit risk, loan classifications, capital adequacy) and on judgment issues (adequacy of corporate governance and internal controls). *Source: IMF FSAP ROSC chapter "The 2012 Revised Core Principles" (assessment completed January 2013).* ### 14. Deficiencies in the legal and regulatory framework are largely mitigated by intensive ### 14. Deficiencies in the legal and regulatory framework are largely mitigated by intensive and intrusive supervisory action on- and offsite, on a bank-by-bank basis ### Overview - Deficiencies in the regulatory framework exist but are "largely mitigated by intensive and intrusive supervisory action on- and offsite, on a bank-by-bank basis." - Recommendation: complete the regulatory framework so market participants clearly understand supervisory expectations. ### Country and transfer risk - Regulatory framework for management and control of country and transfer risk is "not adequate." - BI addresses material country/transfer risk on the largest internationally active banks; other Italian banks with active exposures are less directly covered. - Recommendation: BI is strongly recommended to issue guidance applicable to all banks. - Key supervisory point: banks need awareness that "an overall deterioration of credit risk in a country can lead to many private contracts not being observed, independently of sovereign risk or currency risk." ### Concentration risk and large exposures - Revised CP shifted focus from “large exposures” to “risk concentration” (includes name risk, industry, economic sector, geographic region, and market/product/currency concentrations). - Regulatory framework mostly focuses on large exposures and name risk; supervisory practice considers broader concentrations on a case-by-case basis. - Identified deficiency: exceptions to large exposure limits reduce prudential effect, e.g., risk-weighting of exposures for the application of large exposure limits to some asset classes. - Constraint noted: BI’s scope for revision may be limited by EU legislation. ### Related party lending - New framework for related party lending came into force in January 2013; implementation could not be observed by assessors. - Review identified deficiencies that may reduce effectiveness: - Some exposures are risk weighted for calculation of limits. - No explicit requirement that the board member or persons involved be excluded from decision-making. - No requirement that related party lending occur on no more favorable terms than to non-related parties. - Definition of connected parties differs from that used in the large exposures regime: economic dependence is not considered for related parties. - BI is empowered to impose stricter definitions of connected parties by judgment other than control and to intervene where economic influence is the real connecting element. - Supervisory practice may mitigate issues, but implementation is in its infancy and could not be observed. ### Loan loss provisioning, NPLs, and fiscal/judicial influences - Loan loss provisioning practices are "heavily influenced by fiscal and judicial requirements over prudential considerations." - Fiscal treatment: - Banks allowed to deduct losses resulting from "circumstances of legal certainty and accuracy of loss amount" — so far met by declaration of insolvency and court judgments. - Judicial process length ranges from "6 to 11 years" depending on the region. - Without legal certainty support, write downs can only be deducted within "0.30 percent" of the overall book value of the loans. - Excess gives rise to a deferred tax asset amortized in "18 years." - Consequence: banks structure provisioning/write-offs to accommodate tax authority ("Agenzia delle Entrate") requirements, resulting in longer loan workout timeframes. - Policy action: In June 2012, a decree ("Growth Decree") was issued to encourage banks to write off or sell NPLs by providing tax deductibility: - Tax deductibility for losses resulting from small loans delinquent for over "six months." - Tax deductibility for losses resulting from sale of assets or derecognition according to "IAS 39" for IAS-adopting companies. - Banks awaiting further interpretation of the decree. - NPL treatment under IAS 39: - NPLs may remain on books for years and include interest based on bank management’s estimation of collectability and collateral support. - Collateral valuation considers costs for obtaining and selling the collateral; valuation hampered by declining prices and low turnover. - Onsite inspections sample loan portfolios and review loan classification and practices to ensure IFRS compliance. - BI conducted a broad horizontal monitoring at main medium-large banking groups to check coverage ratios against those observed immediately before the financial crisis ("2007") and to assess robustness of provision criteria and practices. ### Supervisory approach, powers, and practices (summary of Core Principles) - Supervisory approach: - Forward-looking risk-based process; banks categorized by systemic significance and risk level. - SREP performed annually; assigns a risk rating to determine supervisory scope. - Supervisory tools include: Risk Assessment System, ICAAP, credit registry, onsite inspections (full scope, targeted, horizontal), and offsite reviews. - Offsite analysis is systematic and based on data banks report to BI. - Supervisory reporting and enforcement: - Ample supervisory reporting and statistical returns with in-depth analysis. - BI has several powers/tools for early corrective measures and is "very active" in supervision. - Identified limitation: BI lacks capacity to remove or suspend administrators and board members (removal often achieved by moral suasion). - BI expects CRD IV transposition into Italian law to provide power to temporarily ban bank managers. - Current limitation: pecuniary sanctions on entities are largely unavailable outside AML breaches; BI expects EU action to resolve this. - Consolidated and cross-border supervision: - BI has broad authority for consolidated supervision and collects group-wide information; can require consolidation of material non-bank entities. - BI established supervisory colleges for major cross-border groups; cross-border inspections conducted as warranted. - Limits on BI’s ability to develop cross-border resolution plans and early coordination due to current legislation on information exchange and resolution scope. - A proposed directive is expected to resolve confidentiality issues limiting information exchange with foreign MEF and Resolution Authorities. - Corporate governance and licensing: - Regulations identify board and senior management responsibilities; BI guidance issued and further guidance proposed. - Licensing framework established but with deficiencies: - BI cannot revoke a license if granted based on false application after the bank has started operations. - Initial capital can be mostly subscribed with assets (up to "7/10"); shareholders allowed to use borrowed money for initial subscription. - No legal restriction to shareholders being leveraged or borrowing to finance capital subscription or increases. - Responsibility for fitness and propriety assessment lies with the bank’s board; BI does not systematically perform its own verification. - Integrity requirements in Ministerial Decree No. 161/1998 are narrow and do not include adverse regulatory judgments unrelated to criminal activities. - BI can deny a license and “disqualify” a board member when listed integrity requirements are unmet but lacks broader removal powers (see CPs 11 and 14). - Mitigation: well-structured licensing procedure and quality of analysis; BI actively imposes conditions on authorizations. - Specific Core Principle observations (selected): - CP 1: Responsibilities, objectives, and powers are clearly defined; BI depends on MEF decree for final liquidation decision. - CP 2: BI governance conducive to independence; resources adequate; legal protection of supervisors improved but may remain an issue; Board decision on "December 18, 2012" to allow anticipation of reimbursement of legal costs to staff in cases of legal suits. - CP 5: Licensing criteria clear but need enhancement (see above). - CP 7: Acquisitions: EU framework allows acquisitions of financial firms below "10 percent" of regulatory capital without prior approval (only notification); notification period of "30 days" provides limited timeframe for BI. - CP 11: Corrective and sanctioning powers present but limited regarding removal/suspension of administrators and entity-level pecuniary sanctions. - CP 15: Extensive risk-management compendium in place; some guidance is principles-based or deficient in operational, credit, country/transfer, and concentration risk areas. - CP 16: At the time of assessment, Italy’s capital adequacy framework consistent with Basel II standards. - CP 17: No requirement that large exposures or highly risky and complex operations be approved by the Board nor that lending be on market terms (arm’s length). - CP 18: Loan provisioning and write-off heavily influenced by judicial and fiscal framework, resulting in highly aged NPLs. - CP 19: BI monitors concentration risk with rich information and bank-by-bank analysis within SREP; however, no systematic guidance or review beyond name risk/large exposures and exceptions to limits reduce prudential effect. Supervisory action has mitigated some deficiencies in practice. *Source: _cr13301 - 14. Deficiencies in the legal and regulatory framework are largely mitigated by intensive* ### 20. Transactions with related parties ### 20. Transactions with related parties ### Summary of framework and implementation status - Italy’s framework for related party lending was majorly deficient before the amendments to the BL in 2006 and to Circular 263 in 2011. - At the time of this assessment, the new framework had just entered into force, and there was no sufficient evidence available to assess implementation, as required by the methodology. - Because implementation evidence was insufficient, compliance could not be verified and will need to be reviewed in future assessment updates. - The new regulatory framework may need enhancements; various exceptions to the limits may affect their effectiveness. ### Specific concerns about the regulatory design - Exposures are risk weighted. - Intra-group exposures, including cross border, if between the parent and wholly owned subsidiary, are: - exempt from the limits, and - exempt from the approval and monitoring procedures. - There is no specific requirement that the board member or persons involved are automatically excluded from the decision-making process. - There is no explicit requirement that all related party lending should occur on no more favorable terms than those to non-related parties. - The regulation allows BI to impose case-by-case stricter definition; therefore: - the capacity of BI to impose definitions of connected parties by judgment other than control remains to be determined in practice, and - BI’s capacity to intervene in situations when economic influence is the real element connecting the related parties remains to be determined in practice. ### Potential mitigants identified - Deficiencies might be mitigated by: - the specific procedures for related party transactions approval and disclosure, - active enforcement of risk management procedures by BI, and - the use of BI powers to require consolidation and other corrective measures. - Implementation evidence was not available because the regulatory framework only came into full force on December 31, 2012. ### Linked recommendations (from Recommended Actions) - Amend regulations to require explicitly that the board member or persons with conflict of interest are excluded from the decision making process. - Amend regulation to require that related party transactions do not occur on more favorable terms than those to non-related party clients. ### Authorities’ response relevant to related party transactions - The Bank of Italy (BI) adopted completely new, comprehensive supervisory provisions for all banks, entailing quantitative limits to exposures, governance arrangements and specific requirements on internal control systems. - Listed banks are also subject to a regulation issued by CONSOB that imposes additional requirements concerning the decision-making process and disclosure to the market. - The Italian authorities consider the IMF assessment of CP 20 unduly severe, noting that the new BI regulation only went into effect in January 2013 and therefore evidence of its effectiveness was not yet available. - The Bank of Italy is confident that its off- and onsite controls, once fully operating, will effectively complement the regulation and ensure robust and effective supervisory action on a case-by-case basis. - For listed banks (which accounted for more than 60 percent of total banking system assets at the end of 2011), the new BI rules on RPT were less urgent because these banks must comply with the CONSOB Regulation on RPT (applicable to all listed companies since January 2012). *Source: _cr13301 - 20. Transactions with related parties* ### 32. As to the judgment of potential weaknesses in BI Regulation, the Italian authorities note that ### _cr13301 - 32. As to the judgment of potential weaknesses in BI Regulation, the Italian authorities note that ### Related-party transactions and BI Regulation (CP 20) - Board approval: - Board approval is always required when the transaction value exceeds 5 percent of regulatory capital. - Risk-weighting: - CP 20 does not explicitly prohibit risk-weighting. - The weights applied are those for concentration risk, which are limited to specific asset classes and are more stringent than those for credit risk. - Definition of related parties: - Economic connection in the definition of related parties is not required under CP 20. - The supervisory regulation authorizes BI to impose a broader definition of related parties on a case-by-case basis (including based on influence in decisions or economic dependence). ### Exclusion of conflicted board members and arm’s length principle - Exclusion from decision-making: - The Civil Code does not specify exclusion as a general rule. - The regulation envisages cases in which the interested member cannot take part in the approval process, as required by CP20. - Arm’s length principle: - The regulation does not impose market conditions, because transactions may not all have comparable market prices. - The assessment relies on independent directors, who are called on to consider also the economic terms of related party transactions (duly motivating any deviation from market conditions) and weigh their advantageousness for the bank. ### Bank of Italy (BI) monitoring, data, and possible regulatory adjustments - BI willingness to reassess: - BI is open to re-assessing the effectiveness of the Regulation when an impact assessment of its implementation in practice becomes possible. - Reporting and timing: - BI has instituted a periodic reporting system covering both banks’ risk exposures towards related parties and the decision-making processes required for RPTs. - A first set of data suitable for thorough analysis will be available by March 2014 to permit the possible fine-tuning of the Regulation. - Potential legislative review: - The authorities will consider whether the legislation on conflicts of interest needs modification to systematically exclude the interested party from the approval process. ### Country and transfer risks (CP 21 and CP 15) - The subject is addressed in the new draft Supervisory Instructions on internal controls systems, information systems and business continuity, which will go into force shortly. ### External auditors (CP 27) - Recommendation and authorities' view: - Recommendation: give the Bank of Italy power to remove auditors and to review external auditors’ papers. - Italian authorities view: not a regulatory priority; current framework is consistent with the overall supervisory approach to external audits. - Role and oversight of external auditors: - External auditors’ function is limited strictly to the auditing of financial accounts. - Pursuant to Legislative Decree 39/2010 the external auditors of listed financial intermediaries—most importantly banks—are supervised by the securities market regulator, Consob. - Consob assesses auditors’ organization and activity, to verify their independence and technical capability. - Consob periodically runs quality checks on external auditors and has access to their working papers. - Where irregularities are detected, the regulator has the power to revoke the audit assignment. ### IAIS Insurance Core Principles (ICP) assessment — Introduction and methodology - Scope and timing: - This report is a full assessment of Italy’s compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS), as adopted in October 2011. - The review was carried out as part of the 2013 Financial Sector Assessment Program (FSAP) assessment of Italy. - Assessors: - Carried out by Dr. Rodolfo Wehrhahn and Ms. Christina Urias. - Supervisory authority: - Regulation and supervision of the insurance industry in Italy is the responsibility of the newly established Institution for the Supervision of Insurance (IVASS). - Basis of assessment: - Based solely on laws, regulations, and supervisory requirements and practices in place at the time of assessment. - Assessors had access to a complete self-assessment and responses to a detailed questionnaire provided by IVASS. - Engagement: - Assessment informed by discussions with regulators and market participants, including IVASS staff, insurers, industry associations, professional bodies and audit firms. ### Main findings on insurance supervision (high-level) - Improvements since 2005–2006: - IVASS has enhanced inspection powers and supervisory processes, with increased emphasis on risk-based supervision, onsite inspections, reinsurance activities, enhanced corporate governance and risk management requirements and public disclosure. - Areas reaching best practice: - IVASS actively exercises group supervision. - By 2000, IVASS established the first college of supervisors. - Intragroup transactions and related party participations limits are strictly monitored and enforced. - Reinsurance reporting is comprehensive and allows tracking exposures even at an individual risk level. - IVASS collection of monthly data in key areas allows close monitoring of liquidity risk in the insurance sector. - IVASS is actively involved in internal models pre-approval in preparation for Solvency II implementation. - Supervision of conduct of business affords broad consumer protections. - Staffing and inspection quality: - Highly qualified IVASS staff members are each assigned to handle all aspects of supervision for individual companies. - Onsite inspections need upgraded quality and focus; general policy is to conduct onsite inspections every four years, but this is not always met. - Supervisory staff perform inspections in all areas without specialized training sufficient for particular focus areas. - Supervisory quality controls: - Need attention: IVASS needs to implement quality controls and communication and coordination processes between supervisory divisions. - Recommendation: create a task force of experienced supervisors charged with: - Sharing best practice within the organization and institutionalizing such procedures. - Discussing new and complex regulatory issues to develop IVASS position on those matters. - Providing quality control for the whole supervisory activity. - Being a source of reference for companies in trouble. - Ensuring adequate checks and balances and peer review on the supervision. - Group-focused supervision and specialization: - Recommendation: adopt a group-focused supervisory approach for nationally significant insurers and sophisticated offsite monitoring with ad hoc inspections for smaller entities. - Rationale: Solvency II, ORSA requirements, internal model use and higher standards on risk management and governance will require higher degree of specialization. - Technical reserves and actuarial practices: - Further clarification of appropriate margins, parameters, and technical reserve calculation methodologies is necessary to assure adequacy of technical reserves. - Evidence of miscommunication with external auditors and actuaries on acceptable methodologies suggests need for enhanced communication with insurers and service providers. - Operational and reputational risks during transition: - IVASS had been in existence only since January 1, 2013 (assessment took place after one month of IVASS operation). - IVASS is required to provide its new structure in the next four months. - Clear assignment of responsibilities and substantial operational delegation will be necessary to guarantee continuity in supervision duties and avoid loss of institutional knowledge. - Special attention required to address new developments in insurance regulation with the advent of Solvency II. ### Selected specific points from the Summary Compliance (ICP table excerpts) - Objectives, Powers and Responsibilities: - IVASS is the authority responsible for supervision; objectives include prudent management, transparency and fairness, stability, efficiency, competitiveness, protection of policyholders. - IVASS publishes registrations and regulations; coordinates with Ministry of Finance, CONSOB, COVIP, and the Antitrust Authority. - Supervisor (operational independence and resources): - IVASS operates with the Bank of Italy, under oversight of the President of IVASS (who also serves as the Director General of the Bank of Italy) and Council of IVASS, in a Joint Directorate. - Once IVASS is fully organized and structured in the next 120 days, it is recommended that the president and council exercise authority to delegate ministerial matters to appropriate heads of IVASS Divisions. - Internal audit is performed by one staff member who also has other duties; scope and audit detail need strengthening and additional resources. - Supervisory process is informal and lacks formal quality control over the supervisory process. - Recommendation: develop clear and consistent fundamental procedures for financial analysis supervision and implement a troubled company task force. - Recommendation: institute a formal internal quality controls process for supervision and develop formal supervisory processes that allow for emergency action and cross checking of supervisory divisions. - IVASS has discretion to directly hire up to 5 percent (20 persons) of staff without public competition. - Supervisory action suffers delays in some cases; examples cited of undue delays requiring several years of ISVAP letters before final action. - Post-crisis anti-crisis measures introduced by Parliament include elements of asset evaluation not market consistent; IVASS requires disclosure of calculations with and without anti-crisis measures and retains power to intervene in regulatory solvency situations. - Information exchange: - IVASS exchanges information with other supervisors subject to confidentiality, purpose and use requirements; has power to obtain information and perform inspections including non-regulated entities within groups. - IVASS has MoUs with FINMA and the Missouri Department of Insurance and is signatory of the IAIS MMoU. - Licensing: - Insurance Code defines activities and classes; licensing requirements are clear, objective, and public. - For non-EU applicants IVASS applies same procedures and checks with third country regulators on solvency, fit and proper status, and home authority issues. - Suitability of persons: - Insurance Code requires Board members, Senior Management and Significant Owners to be suitable. - IVASS can ask a company to remove the appointed actuary; upon notice the actuary usually resigns to avoid prohibition from working as an actuary, presenting a regulatory gap. - Recommendation: enact regulations to ensure actuaries and other professionals are prohibited from working in the industry in the event of adverse suitability findings. - Changes in control and portfolio transfers: - IVASS approval and advance authorization required for significant acquisitions, portfolio transfers, mergers, or changes resulting in control; regulations published with clear and objective procedures. - Corporate governance: - Italy’s two-tier system requires corporate governance framework including Board of Directors and Board of Statutory Auditors with independence requirements. - Recent enhancements to Regulation 20/2008 include specific instructions for compliance standards and roles/responsibilities of Board functions. - Regulation 39/2011 governing remuneration policies includes a “fairness to customers” consideration, requiring insurers to take into account “maintain(ing) efficiency in the management of services to customers.” *Italic: IMF staff report excerpt from the Italy FSAP assessment as provided in the source content.* ### 8. Risk Management and Internal Controls ### 8. Risk Management and Internal Controls ### Risk management and internal controls framework - Regulation 20/2008 requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for: - risk management (Article 21); - compliance (Article 23); - actuarial matters (Regulations 21, 16, 7, 22, and Insurance Code, Articles 31,34,190); - an internal audit function (Article 15). - ISVAP began requiring risk management functions in 2005 (Article 30), and Regulation 20/2008 established the standards and implementation requirements. ### Supervisory review and reporting — findings - IVASS financial supervision utilizes “Fast Track” indicators for preliminary analysis of key areas/ratios of an insurer’s financial position to establish an annual inspection plan. The criteria and financial and actuarial indicators were comprehensive and objective. - Staff roles: - Staff members act as generalists with particular skills; there is no formal specialization of specific supervisory skills or services, except actuarial skills mainly devoted to the assessment of technical provisions. - Organizational structure and challenges: - The two Supervisory Divisions operate independently overseeing the particular companies assigned to each division. - Divided unilateral supervision challenges IVASS’s ability to maintain internal controls on the quality and consistency of supervision between divisions and between individual staff members. - File reviews demonstrated delays in taking regulatory action and absence of ladders of intervention procedures assuring consistency and prompt regulatory action. - Example: insolvency of a major insurer and no inspection of that insurer for more than four years. - There are no regularly scheduled staff meetings between the divisions, or standing task forces or uniform procedures to focus on troubled companies or market-wide issues. - Absence of internal quality controls over financial analysis and examination creates danger of regulatory gaps and failure to discover a troubled company far enough in advance. - Asset valuation: - Individual staff members handle asset valuation individually in each division; there is no centralized asset valuation process to assure accuracy and consistency. - Solvency II preparation: - IVASS is preparing for Solvency II which will require a fully risk based proportionate and forward-looking supervision. - EIOPA does not yet provide a full scope of training and supervisor coordination services for member jurisdictions to ensure consistent Solvency II supervision. - Inspection frequency and criteria: - There are no objective formal criteria for requiring an inspection and no set requirement for inspection frequency. - IVASS attempts to conduct an inspection of a regulated entity once every four years, but this benchmark is not followed. ### Supervisory review and reporting — recommendations - IVASS should: - implement internal quality controls and adopt formal communication and peer review processes to ensure accuracy and consistency in offsite analysis and onsite inspections, particularly for nationally significant companies; - consider developing specialized staff expertise in specific supervision areas (financial analysis, inspection expert, governance and enterprise risk management expertise, etc.); - establish a centralized asset valuation process to assure accuracy and consistency in asset valuation; - develop objective formal criteria for requiring inspections and set required inspection frequencies. ### Preventive and corrective measures - IVASS has the power under the Insurance Code to take timely preventive and corrective measures to assure the prudent and sound management of insurance companies for the protection of policyholders. ### Enforcement — findings - IVASS has the power to timely impose and enforce corrective action when problems are identified. - IVASS regulations provide a necessary range of regulatory enforcement options; however, IVASS must obtain Joint Directorate approval on several enforcement activities. - Limitations on remedies: - If a parent holding company does not infuse capital into the insurance entity as requested, IVASS can only order ring fencing of the insurance entity. - IVASS can limit dividend distribution only in cases involving breach of the group solvency margin when the parent undertaking is an insurance holding company, but may require the undertaking to set aside distributions in an ad hoc reserve net of assets (Article 228). - IVASS can remove or restrict board members, but does not have the power to impose sanctions on board members individually; sanctions are only imposed against the undertaking. - IVASS fine and penalty structure includes different levels for different situations and may be capped in certain situations and, considering the size and financial status of the undertaking, may not have the desired preventive impact. ### Enforcement — recommendations - It is recommended that legislation be amended to explicitly enable IVASS to: - restrict or suspend dividends or other payments to shareholders when such payments would jeopardize the undertaking’s solvency; - allow for individual pecuniary sanctions in the Insurance Code. - IVASS should consider legislative proposals to increase and restructure fines and penalties for certain offenses. ### Winding-up and exit from the market — findings and recommendations - The Insurance Code defines insolvency and provides for a range of options for insurers to exit the market according to IVASS procedure and EU Directive 2001/17 EC (Article 245–265). - In winding-up proceedings, the legal framework gives priority to protection of policyholders. - Legal proceedings for winding up are lengthy and complicated; there is a risk of loss for policyholders and beneficiaries and claims proceedings can delay final resolution for many years. - IVASS recognizes need to improve timely provision of benefits payments to policyholders. Apart from motor vehicle liability situations, policyholders are partly paid within three years. - Recommendation: institute procedures to expedite payments to policyholders during the resolution process, either by partial distributions or setting timeframe deadlines for payments to policyholders. ### Reinsurance and other forms of risk transfer - Reinsurance regulation has developed constantly and with the latest changes in August 2012, IVASS is in observance with the IAIS reinsurance principle. ### Valuation — findings and recommendations - Valuation of assets and liabilities is undertaken in a reliable manner, but: - The accounting (and regulatory) framework is substantially based on amortized cost which diminishes its usefulness for regulatory purposes, particularly in winding up situations. - Anti-crisis measures allowing insurers to adjust reported value on sovereign bonds have added complexity and do not increase transparency or usefulness of accounting for regulatory action. - Technical provisions: - Solvency I requires technical provisions to be determined in a prudent way; technical provisions do not calculate the Current Estimate nor the MOCE explicitly. - Life business: technical assumptions must be most likely foreseeable and include a margin for adverse deviation, but there is no explicit requirement to evaluate the size of the margin. - Nonlife business: technical provisions are determined in a prudent manner; ultimate claim cost is used for claims outstanding implying an implicit margin, but there is little transparency on the size or sufficiency of the margin. - Amortized cost valuation deviations: - Amortized cost valuation deviates from economic valuation, especially in winding up situations where it might not reflect economic value. - Under anti-crisis measures, certain sovereign bonds are valued at cost. - Recommendation: - With Solvency II implementation clarity on resilience assessment will be gained; in the meantime IVASS should provide guidance on the expected level of prudency to be applied (for example, stating confidence levels or requirements on stochastic models). ### Investment - Regulation adopts a combination of principle-based and rules-based requirements: - Principle-based: invest in assets guaranteeing security, yield, liquidity, and adequate diversification. - Concentration limits per type of asset and issuer for assets representing technical provisions. - Investment in derivatives allowed only if they contribute to reduction of investment risks or facilitate efficient portfolio management. - The board is required to set and review annually general policies for use of derivative financial instruments, including structured products. ### Enterprise Risk Management for Solvency Purposes - IVASS requirements address all ICP standards except the solvency position aspect of the ORSA. - Under current regime, the capital position has minor relevance in risk management compared with risks that regulation requires to be addressed. ### Capital adequacy — findings - The current approach is based on Solvency I and does not consider interdependence between assets, liabilities, regulatory capital requirements, and capital resources for determining solvency requirements. - Two explicit solvency control levels in present legislation: - required solvency margin; - guarantee fund. - Levels of intervention differ between breach of solvency margin and breach of guarantee fund; breaches of guarantee fund are more severe and urgent and can quickly lead to freeze of assets, intervention, and winding up. - Solvency I limitations: - Not explicit on how, where, and to what extent each risk is addressed; calibration of required capital for a given risk is not possible or is cumbersome. - Supervisor can request variation to regulatory capital requirements only in emergency situations to protect policyholders. - Available solvency margin consists of net assets free of foreseeable liabilities, less intangible items. IVASS may require insurer to deduct from margin available assets where an adverse trend is identified. - Anti-crisis law (2008) measures allow difference between cost value and market value of certain sovereign bonds to be used as capital in the form of a “non-distributable reserve.” - Under Solvency I, several quantitative and qualitative limits apply on eligible capital resources mirroring a tiering system. The current guaranteed fund (MCR) can be covered by capital of the highest quality. - Insurers must calculate solvency margin according to formula envisaged by directives; internal models are not allowed under Solvency I. - Solvency II preparation: - Solvency I regulation does not allow internal models, but IVASS has started analysis of internal models and is strongly involved in pre-application process. - Approximately 65 percent of the Italian insurance market, based on premium, is considering the use of an internal model. - The full ICP is expected to be observed with implementation of Solvency II. ### Intermediaries — findings and recommendations - The Insurance Code (Article 110) requires intermediaries to be registered in the IVASS Register; IVASS Intermediaries Supervision Department manages the Register and is responsible for intermediaries’ supervision. - Law 135/2012 requires moving intermediaries’ registration out of IVASS to an ad hoc private institution to manage the Register under IVASS supervision. - Staffing and activity: - Currently, IVASS has 28 people in the Intermediaries Department, 19 of which handle Register updates and 9 handle offsite intermediary monitoring. - Offsite monitoring includes consumer complaint investigation on intermediaries and sanctions; the department may request onsite inspection if necessary. - Reporting and market communication gaps: - IVASS does not require reporting of intermediaries’ financial statements and does not publish market-wide notices if the department discovers problems in certain areas of supervision. - There is no direct IVASS reporting from intermediaries; they report to their principal insurer and the insurer reports to IVASS on intermediary training. - Recommendations: - Establishment of the ad hoc private institution is positive; IVASS should devote sufficient attention to its establishment, particularly proper governance, adequate systems and bylaws considering the particularities of insurance intermediation in Italy. - IVASS should initiate a practice of market-wide notification of issues or problems that supervision and inspections have revealed as systemic. ### Conduct of business - IVASS has a regulatory and supervisory framework ensuring fair treatment of consumers. - IVASS can regulate advertising and stop misleading advertising; intermediaries must submit prospective advertising to insurers for approval. - There is no ombudsman requirement for the industry; IVASS can investigate and fine a company for violations but cannot require a company to pay a claim of any amount. - Recommendation: consider introducing alternative dispute resolution schemes for insurance during the transition. ### Public disclosure — findings and recommendations - IVASS requires timely disclosure of significant financial and business activities and performance information to assess an insurer’s financial position, performance, business activities and risks, together with description of valuation principles at solo and group level. - Reporting standards: - Solo entities use Italian GAAP with regulatory reporting enhancements; IFRS consolidated financial statement reporting is required for group entities. - IVASS is preparing for Solvency II implementation and recognizes additional public disclosures required; anticipates good alignment with current disclosure requirements on market consistent valuation and narrative reporting. - Technical provisioning disclosure: - Disclosure of technical provisions and methodology, future cash flow assumptions, rationale for choice of discount rates, and risk adjustment methodology are described narratively in notes at both solo and group level. - Insurers use IVASS templates and publish disclosure of technical provisions by line of business (including IBNR reporting in notes on accounts), updated annually and semi-annually and available in the statistical data section of the IVASS website. - Following Italy’s proposal, claim development disclosures will be included under Solvency II requirements. - Management reports include business performance, material risk exposures, business development, portfolio changes, claims frequency and reinsurance arrangements. - Recommendation: IVASS should require disclosure of stress testing results and other sensitivity analysis that insurers perform also at solo level, following IFRS7. - Positive practice: solvency position of the insurer is disclosed at the point of sale. ### Countering fraud in insurance — findings and recommendations - The Insurance Code and Regulations, particularly those enacted in 2012, provide authority for IVASS to deter and prevent fraud. - IVASS created an Anti-Fraud Division and expects to issue its first report on 2012 data in early 2013. - The industry has published general fraud information and enhanced Claims Data Bank reporting provides more information to enhance anti-fraud activity. - Antifraud reporting requirements were enacted in 2012 (Regulation 44); effectiveness is not yet known. - Current Anti-Fraud Division activities: - Focused on monitoring quality of data in the Claims Data Bank and insurer reporting to the Data Bank. - The division keeps records on who accesses the Claims Data Bank (insurers and authorities—intermediaries cannot access the Data Bank) and verifies insurer reporting. - Recommendation: IVASS should implement specialized training for fraud division staff members to enhance the quality of fraud prevention activities and adopt a proactive approach with increased inspections. *Source: _cr13301 - 8. Risk Management and Internal Controls* ### 22. Anti-Money Laundering and Combating the Financing of Terrorism ### 22. Anti-Money Laundering and Combating the Financing of Terrorism ### Regulatory framework and institutional responsibilities - Regulation 41/2012 requires insurers to implement explicit anti-money laundering and counter terrorist financing controls. - Delay in establishing Regulation 41/2012 following the 2005 FSAP (Italian legislation foresaw, in 2007, that ISVAP enact regulation on these matters) was due in part to working with Bank of Italy to ensure regulatory alignment with Bank of Italy legislation. - The IVASS Inspection and Anti-Fraud Division is responsible for AML/CTF oversight and enforcement. - With the enactment of Regulation 41/2012, IVASS has the authority over intermediaries in this regard, but IVASS has not conducted any onsite inspections of intermediaries in this area. - Under the EU Directive, AML only applies to life insurers; the assessors recommend applying these requirements to non-life companies. ### Supervisory activity and capacity - The IVASS Inspection and Anti-Fraud Division has only conducted one AML/CTF inspection since the enactment of Regulation 41/2012. - In the past, IVASS used existing regulatory authority (Regulation 20/2008) in prior inspections of internal control system; enactment of Regulation 41/2012 clarified Anti-Fraud Division practices already in effect before the enactment. - Companies must now have a designated AML function and designate the person in charge of AML activities; the implementation of this requirement has not been supervised yet. - Even applying these standards only to the life companies doing business in Italy, the Anti-Fraud Division currently can only do 5 inspections a year; it would take at least 10 years to inspect all companies to whom the law was applicable. - The lower number of inspections and followed actions is probably not sufficient for proper supervision of the AML regulation. ### Information flows and reporting - Required intermediary recording procedures would provide records for transactions, thereby providing IVASS with the opportunity for greater oversight over improper transactions, although IVASS cannot directly receive and collect suspicious transaction reports (Law 231/2007 (art. 41)). - Insurers report aggregated AML data to UIF monthly and UIF can order inspections as appropriate. - IVASS does not have information on Bank of Italy and UIF activities and IVASS does not get individual company information, but only obtains UIF general data, of the inspections performed and criminal investigation information. - IVASS maintains an onsite tool for internal operations data in AML, including indicators for suspicious transactions. - The Inspection and Anti-Fraud Division reviews insurers’ intermediary report, but does not maintain specific records on individual companies. ### Risks, gaps, and assessors’ observations - Assessors recommend applying AML requirements to non-life companies because those engaged in AML try to find channels that are less controlled and regulated. - IVASS determination to narrow the scope of the group when there are “legal impediments to obtaining necessary information” from a third country could be problematic if IVASS cannot get information necessary for proper group supervision (related point in group-wide supervision section). - IVASS has not conducted any onsite inspections of intermediaries in AML/CTF despite having authority under Regulation 41/2012. - The Anti-Fraud Division’s inspection capacity (5 inspections a year) is insufficient to cover the universe of applicable companies within a reasonable timeframe (would take at least 10 years). ### Recommendations and required actions - Provide specific AML/CTF training for Anti-Fraud Division staff. - Promptly initiate focused AML/CTF inspections, including supervision of the requirement that companies have a designated AML function and person in charge of AML activities. - Communicate with industry on expectations and requirements under Regulation 41/2012. - Implement a risk-based approach to prioritize exposures and conduct AML/CTF inspections. - Consider applying AML requirements to non-life insurance companies to reduce regulatory arbitrage toward less controlled channels. - Improve information sharing and access to individual company information from UIF and Bank of Italy where possible to support effective supervision. *Source: _cr13301 - 22. Anti-Money Laundering and Combating the Financing of Terrorism* ### 22. Anti-Money Laundering and Combating the Financing of Terrorism ### 22. Anti-Money Laundering and Combating the Financing of Terrorism ### AML/CTF Reporting and Capacity - On a quarterly basis and on aggregate form, insurers and intermediaries should inform IVASS on all suspicious transactions reported. - AML/CTF training for IVASS staff working in this area is recommended. ### Macroprudential Surveillance and Insurance Supervision - IVASS is recommended to develop an early warning system leveraging from tools recently used by EIOPA/ESRB, like the Risk Dashboard identification by calibrating the different indicators to reflect the current situation of the Italian market. - The EIOPA stress test should not be seen as a substitute for the industry-wide stress test developed to analyse the resilience of the Italian market as a whole to extreme but plausible macro scenarios. Also reverse stress testing is recommended as further macroprudential surveillance tools. - Tools to address systemic risk that could result from the current anti-crisis measures need to be further developed, like delayed payment of surrenders or payments in sovereign instruments should be considered, and a public communications strategy on the anti-crisis measures is recommended. - IVASS should remain actively engaged in the international discussions, on the determination of G-SII and start developing the framework to determine and supervise domestic systemic insurers. Not only giving consideration to the size of the insurers but also connectivity and substitutability should be considered. - IVASS participation in national stability board should continue with a strong voice on insurance risks. ### Supervisory Cooperation and Coordination - IVASS is recommended to take a leadership role in implementing the required measures to allow for a similar approach to the cross-border supervision that applies to the EU colleges for colleges with the participation of third countries’ authorities. ### Cross-border Cooperation and Coordination on Crisis Management - IVASS is recommended to develop for relevant third countries similar agreements and procedures currently available for the cross-border crisis preparedness among EU members. - It is advised that IVASS should require an annual test of the contingency plans and supervise compliance. ### Authorities’ Response to the Assessment - IVASS acknowledges issues highlighted by FSAP as well as recommendations thereto and is firmly committed to take necessary actions to improve quality and quantity of its own activity. - These results will be sought by exploiting synergies with the consolidated experience in supervisory activity and with technical structures of Bank of Italy, as envisaged in IVASS’s establishing law 135/2012. - Synergies with Bank of Italy will be sought at first in main areas of onsite inspections, procedural settings and support for IT handle of data and analysis. - IVASS notes: - (i) notwithstanding our generalistic organizational setting, specialization of resources is taken into account in practice when carrying out supervisory activity, both onsite and offsite, in order to involve knowledge and skills appropriate to issues under scrutiny; - (ii) concerning the need for more detailed procedures underpinning supervisory actions as highlighted by the FSAP, it is to be noted that, where the Italian insurance framework is more principle-based, IVASS has developed internal procedures and tools in order to ensure consistency of approach towards supervised entities; this will also be developed for other areas, in order to further improve consistency. - IVASS underlines that the point in time in which the Assessment took place significantly influenced its results. The FSAP was carried out in early January 2013, in the very first days of IVASS, so that the activity and forthcoming organization of the new Authority could not be subject to assessment. - IVASS notes that in 2012 ISVAP had undertaken an internal reorganization meant to rationalize processes and resources in the view of the forthcoming Solvency II regime; however, this reorganization could not fully deploy its intended benefits due to the transformation into IVASS as announced in summer 2012. ### Related IOSCO Assessment Findings (selected points relevant to supervisory framework and enforcement) - An assessment of the level of implementation of the IOSCO Principles in the Italian securities market was conducted from January 18 to 31, 2013. - Italy exhibits a high level of implementation of the IOSCO principles. Overall the legal and regulatory framework is sound and the regulatory authorities have developed extremely sophisticated arrangements for offsite supervision. - Onsite inspections need to complement offsite arrangements to identify weaknesses in conduct practices, operational risk, governance, internal controls, and risk management systems. - The enforcement strategy should be continuously monitored and strengthened; remedial actions are necessary but not sufficient. Stronger use of pecuniary sanctions is a natural complement to corrective actions. - Criminal sanctions should be used sparingly but strategically to punish the most egregious violations and send deterrence messages. - Consob has done very effective work on identifying conflicts of interest across a range of areas in the securities markets; continued policy, supervisory, and enforcement actions are critical. - Strengthening of the licensing framework is required. Refinements to the allocation of responsibilities between BI and Consob are encouraged, including: - The definition of fit and proper should be strengthened and the regulatory authorities be given the power to remove individual directors. - A consultation process with Consob should be established for the review of applications by banks seeking to provide investment services. - The twin-peak structure could benefit from streamlining to eliminate ambiguities or inconsistencies and strengthen the functional approach. - Assessment methodology and scope notes: - The assessment used the IOSCO Objectives and Principles of Securities Regulation approved in 2010 and the Methodology adopted in 2011; Principle 38 is not assessed due to the existence of a separate standard for securities settlement systems. - Assessors relied on a self-assessment by CONSOB and BI; review of laws and reports; supervisory files; meetings with Consob, BI, MEF, prosecutorial authorities; and meetings with market participants. - Main findings on specific areas (summarized): - Preconditions: Foreign issuers can tap the markets under similar conditions to domestic issuers; company law is modern; insolvency procedures are very protracted; judiciary capacity for criminal enforcement needs strengthening. - Principles for the regulator: Legal framework for BI and Consob is sound but independence protections for staff and codes of ethics could be strengthened. - Principles for enforcement: Broad investigation and inspection powers exist, but limitations include inability to impose pecuniary sanctions on regulated entities (only on individuals, with entities severally liable) and generally low levels of pecuniary sanctions (other than market abuse/short selling). - Principles for issuers: Robust disclosure obligations for issuers subject to public offerings and RM listings; differences exist for MTF-only issuers and other categories. - Principles for auditors, CRAs, and information providers: Auditors of PIEs are subject to oversight by Consob with onsite inspections on a three-year cycle; CRAs are under ESMA supervision. - Principles for collective investment schemes: Authorization framework includes capital, fit and proper, organizational requirements; BI cannot order removal of individual directors except in narrow circumstances; robust custody and valuation guidance exist. - Principles for securities intermediaries: Authorization framework includes capital, fit and proper, organizational requirements; supervisory programs rely heavily on offsite monitoring with targeted onsite inspections; robust crisis management and resolution tools are available, including special administration and compulsory liquidation; an investor compensation scheme is in place. *Source: _cr13301 - 22. Anti-Money Laundering and Combating the Financing of Terrorism* ### 67. Principles for secondary markets: RMs operators are subject to authorization ### Principles for secondary markets: RMs operators are subject to authorization ### Summary of framework and market infrastructure - RMs operators and MTFs are subject to authorization requirements, which include financial, fit and proper, and organizational requirements; the process to review applications is thorough. - MTFs must hold a license of IF or market operator and are therefore subject to strong authorization requirements. - Trading venues are subject to pre- and post-trade transparency requirements, including in relation to financial instruments other than shares (although not required by EU law); SIs are also subject to post-trade transparency. - Intermediaries have obligations to report off-market transactions in financial instruments admitted to trading in a RM. - Consob and BI have developed robust arrangements for market surveillance for wholesale government securities markets; these are complemented by RMs and MTFs. - Consob and BI have formal and informal arrangements to oversee Borsa Italiana, MTS, and the MTFs. - Cassa di Compensazione e Garanzia (CC& G) monitors clearing members’ exposures on a daily basis and has powers to request members to post additional margins intraday. Default procedures are transparent. - There are reporting obligations in connection with short selling and failed settlements. ### Implementation of IOSCO Objectives and Principles — key findings (Principles 1–38) - Principle 1: BI and Consob mandates are clearly defined by the CL. Allocation of responsibilities is complex and requires significant cooperation; arrangements for coordination are in place. - Principle 2: Framework for independence and accountability is robust; arrangements concerning defense of staff during law suits should be strengthened. - Principle 3: BI and Consob have broad powers; limitations exist in intermediaries and CIS areas: (i) no power to remove individual directors except in narrowly defined cases; (ii) pecuniary sanctions can be imposed on individuals but not legal entities (legal entities are jointly and severally liable for payment); sanction levels for breaches other than market abuse/short selling are low. Both appear to have sufficient resources. - Principle 4: Development of regulations is subject to consultation; licensing requirements are clear and available on BI and Consob websites; decisions affecting third parties are subject to due process, including right to appeal to judiciary. - Principle 5: Staff subject to ethical rules and confidentiality obligations; duty to notify conflicts of interest; Consob has specific requirement to notify securities transactions; internal audit units monitor compliance. - Principle 6: Processes in place at BI and Consob to identify systemic risk; regular information exchange; a financial stability committee supports cross-sectoral risk identification, monitoring and crisis management. - Principle 7: Processes to review perimeter of regulation; obligation to review regulations on a three-year cycle; active support to MEF on EU directives and regulations. - Principle 8: Important conflicts of interest exist related to ownership structure of issuers and banks’ roles as issuers and distributors; Consob has adopted policy measures and reviews compliance as part of supervisory program. - Principle 9: RMs and MTFs play a limited role in market surveillance and listing; not considered SROs for this principle. - Principle 10: BI and Consob have broad powers to supervise, inspect, conduct surveillance and investigations; compulsory powers commensurate to mandates. - Principle 11: Consob has broad information-request powers, including compulsory powers; enforcement tools are wide-ranging except limits noted under Principle 3. - Principle 12: Supervisory approach relies heavily on offsite monitoring with more limited onsite inspections; market share coverage is high. Enforcement leans toward remedial actions; pecuniary sanctions for offences other than market abuse/short selling are low; criminal enforcement faces challenges including reliance on settlements and conditional execution. - Principle 13: Consob and BI required to cooperate and share information; Consob is the point of contact for international regulators; CL empowers Consob to share confidential information. - Principle 14: Several MoUs govern cooperation between Consob and BI; protocol for coordination on financial stability signed by BI, Consob, IVASS and MEF; Consob is signatory of the IOSCO MMoU. - Principle 15: Consob regularly collects information for foreign regulators; under the IOSCO MMoU, no request for assistance has been refused. - Principle 16: Issuers for public offerings and for admission to trading in a RM must submit a prospectus; robust ongoing and periodic requirements for issuers admitted to RMs; issuers whose securities are widely held face more limited periodic obligations but are not currently significant in size; AIM issuers have ongoing and periodic obligations via contract with exchange (more flexible). - Principle 17: Issuers admitted to trading in a RM subject to tender offer and related party transaction rules and notification of substantial and insider holdings; issuers whose securities are widely held are subject to many, but not all, of these obligations; AIM Italia issuers subject to similar but more flexible rules; AIM caters to SMEs and is not significant in size. - Principle 18: Issuers admitted to trading in a RM must prepare annual financial statements according to IFRS; Consob monitors compliance via risk-based approach; issuers with widely held securities must apply IAS/IFRS; AIM issuers may use local GAAP or US GAAP. - Principle 19: Auditors of PIEs subject to Consob oversight via onsite inspections on a three-year cycle; onsite inspections appear robust; remedial measures preferred though disciplinary actions taken. - Principle 20: Robust rules on independence of auditors of PIEs, including network-level rules and rotation requirements. - Principle 21: Domestic auditing standards are high quality and consistent with ISAs. - Principle 22: ESMA is the direct supervisor of CRAs in Europe; CRAs providing services in Italy underwent thorough registration via colleges of European regulators including Consob; ESMA has conducted onsite inspections of large CRAs and is finalizing a risk framework; additional resources necessary for ESMA. - Principle 23: Rules on fair disclosure and disclosure of conflicts of interest apply to persons providing recommendations; regulated entities subject to organizational requirements to manage conflicts. - Principle 24: AMCs subject to authorization requirements including capital, fit and proper, and organizational requirements; review of applications is thorough but definition of fit and proper is very narrow and verification relies mainly on self-certification; supervisory programs rely heavily on offsite arrangements with limited onsite inspections though market coverage is high. - Principle 25: Segregation rules are robust; assets must be placed in custody with a depositary bank that requires separate BI license; external auditors must submit annual report on AMCs’ compliance with segregation; changes to fund rules must be approved by BI; significant changes must be notified to investors. - Principle 26: CIS required to submit a prospectus; only prospectuses of closed-ended funds subject to pre-approval by Consob; BI pre-approves fund rules for every CIS; Consob reviews disclosure documents immediately for high-risk CIS and annually for a selected significant number based on risk criteria; CIS subject to robust periodic disclosure. - Principle 27: BI has rules for valuation of CIS assets, including illiquid assets, consistent with IFRS; external auditors must verify valuations in annual reports. - Principle 28: AMCs that manage hedge funds are subject to same authorization and periodic reporting obligations as other AMCs; hedge funds are part of regular supervisory program and Consob and BI can share confidential information per Principle 13. - Principle 29: IFs subject to authorization requirements including capital, fit and proper and organizational requirements; review of applications is thorough but fit and proper definition is narrow and verification limited. - Principle 30: IFs subject to initial and ongoing capital requirements reflecting risks; periodic reporting of capital (monthly or quarterly depending on activities) and annual audited financial statements; BI monitors prudential requirements closely. - Principle 31: IFs required to establish risk management, internal compliance, and internal audit functions; reports from these units submitted annually to BI and Consob; IFs subject to disclosure and suitability obligations; supervisory programs rely heavily on offsite reviews and limited onsite inspections though coverage by market share is high; Consob has conducted thematic inspections on MiFID implementation by banks. - Principle 32: Legal framework provides robust crisis management and resolution tools for banks, IFs, and AMCs including special administration and administrative compulsory liquidation; an investor compensation scheme exists. - Principle 33: Establishment of trading systems and exchanges subject to authorization and oversight; authorization requirements for RMs and MTFs include financial, fit and proper and operational requirements; review process by Consob and BI is thorough; RMs and MTFs subject to periodic reporting including annual audit report on IT systems. - Principle 34: Ongoing regulatory supervision of exchanges and trading systems aims to maintain trading integrity through fair and equitable rules; RMs and MTFs required to have market surveillance mechanisms complementing BI and Consob systems; Consob and BI have robust supervisory programs including onsite inspections for Borsa Italiana, MTS and MTF operators. - Principle 35: Pre- and post-trade transparency imposed in equity and bond markets (bond transparency not required under EU law), and on SIs; intermediaries obliged to report off-market transactions; fragmentation challenges are limited in equity markets but more present in bond markets where market solutions help consolidate prices. - Principle 36: Market abuse constitutes both administrative and criminal infractions; Italy allows administrative and criminal actions to proceed simultaneously; level of sanctions is high; Consob has robust detection systems, investigates cases, imposes sanctions and refers cases to criminal prosecutors. - Principle 37: CC& G monitors clearing members’ exposures on a real time basis and can request intraday additional margins; default procedures are transparent; reporting obligations exist for short selling and failed settlements. - Principle 38: Not assessed. ### Recommended actions (by Principle) - Principle 1 - Establish a mandatory consultation process with Consob for review of applications of banks that wish to be authorized to provide investment services. - Streamline the twin peak structure to eliminate ambiguities or inconsistencies and strengthen the functional approach. - Consider transferring approval of fund rules to Consob. - Principle 2 - Strengthen legal protection of staff, e.g., allow regulatory authorities to provide financial support for staff defending legal actions throughout the course of the action rather than only after its conclusion. - Principle 3 - Reform legal framework to allow regulatory authorities to impose pecuniary sanctions on regulated entities as well as individuals in areas of intermediaries and CIS where not currently possible. - Increase the level of sanctions for breaches different from market abuse/short selling violations. - Reform legal framework to provide authorities with the power to remove individual directors from boards of financial intermediaries where currently not possible. - Consolidate compulsory powers given to Consob by different provisions of the CL into one single provision applicable to all areas under Consob’s mandate. - Transfer residual functions currently vested in the MEF to the regulatory authorities. - Review allocation of resources, particularly between onsite and offsite functions. - Principle 5 - Review and strengthen current regulations and/or terms of employment, particularly regarding transactions in securities. - Principle 11 - Reform legal framework to provide regulatory authorities with power to impose pecuniary sanctions on regulated entities as well as individuals where currently not possible; increase sanctions for breaches other than market abuse violations. - Principle 12 - Complement current supervisory approach with more intensive use of onsite inspections; acknowledge BI’s new model for short onsite visits for smaller intermediaries under testing. - Monitor enforcement strategy to ensure a good balance between remedial actions and sanctions. - Consob should work with criminal authorities to identify mechanisms to strengthen criminal enforcement. - Principle 16 - Review framework to ensure issuers of widely held securities are subject to adequate periodic and ongoing disclosure consistent with the Principles, especially if this category expands. - Principle 17 - Review framework to ensure equity issuers of widely held securities are subject to investor protection requirements consistent with the Principles, particularly if the category expands. - Principle 24 - Amend MEF regulations to include a more comprehensive definition of fit and proper requirements and give regulatory authorities more comprehensive mechanisms to verify compliance. - Principle 29 - Amend MEF regulations to include a more comprehensive definition of fit and proper requirements and give regulatory authorities more comprehensive mechanisms to verify compliance. - Principle 31 - Consob and BI should increase use of onsite inspections; acknowledge BI’s new model for short onsite visits for smaller intermediaries under testing. - Monitor enforcement strategy to ensure a balance between remedial actions and sanctions. - Principle 35 - Monitor level of fragmentation in equity and bond markets to assess potential need for measures to ensure existence of a consolidated tape. - Principle 37 - Prompt implementation of the European Market Infrastructure Regulation (EMIR) should allow for portability of clients margins and positions. ### Authorities’ Response to the Assessment - (No response text provided in the supplied excerpt.) *Source: _cr13301 - 67. Principles for secondary markets: RMs operators are subject to authorization* ### 68. The Italian authorities wish to express their appreciation to the FSAP mission for its ### _cr13301 - 68. The Italian authorities wish to express their appreciation to the FSAP mission for its ### Assessment outcomes - The FSAP mission assessed the Italian security regulatory and supervisory structure. - The Assessment recognized a high level of compliance with the IOSCO Principles. - The Assessment noted a positive track record in the implementation of a robust system of supervision. - The Evaluation was conducted with the new release of the IOSCO principles, described as "more demanding and more oriented toward the quality and outcomes of supervision." ### Authorities' response and commitments - The Italian authorities express appreciation to the FSAP mission for its assessment. - The Assessment provided a number of recommendations for further improvement. - The Authorities will duly consider all recommendations. - In particular, the Authorities will implement those recommendations needed to achieve "Fully Implemented" status for all principles. *Source: IMF staff report excerpt paragraphs 68–69.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13301.pdf_