Izabela Sykulska, Expert, Insurance Supervision Department, UKNF

Proportionality is not necessarily associated with financial market supervision. Let’s try to explain this concept, though, in this particular context.

The principle of proportionality, as a postulate in the regulatory framework of the European Union (‘EU’), appears in the Treaty on European Union. In accordance with this postulate, the measures that the EU and Member States can take to achieve the goals defined in the Treaty should be:

1) appropriate, to achieve the intended purpose, 
2) necessary, i.e. necessary to achieve the purpose, 
and

3) proportionate in the strict sense of the word, which means that such measures mustn’t create excessive burden for entities and citizens in relation to the intended purpose.

Such guidelines on standards and legislation for legislative bodies are the guidelines that our supervisory authority wants to apply as well.

This is why calibrate our actions. Both the supervisory actions we take and the supervisory measures we choose depend on the assessment (weight) of risk, for example the risk of imbalance in the market.

The assessment of related irregularities and risks usually requires professional judgement and expertise. Therefore, there’s no room for automatism.

In the proportionate approach, we do our best to ensure that the requirements that we – the supervisory authority – impose on the entities we supervise be proportionate not only to the risk and its impact on the market, but also to the costs and expected benefits resulting from our actions. Both strict regulations and excessive supervisory expectations are never going to eliminate risk completely but they might hurt the development of the firms they’re addressed to. This in turn might lead to an unreasonable increase in the costs of services or products. Expectations that are excessive and incommensurate with the weight of risk entail adaptation costs that might even hamper innovativeness or exacerbate the exclusion of some consumers due to higher prices of financial services or products.

Proportionality in the supervisory approach consists, then, in choosing supervisory measures that are appropriate, necessary and proportionate in the narrow sense of the word. So we’re talking about measures that are necessary to achieve the purpose they serve. They’re not too strict or burdensome but they’re going to help achieve the intended statutory objectives set for the supervisory authority. Moreover, the benefits to the market justify the costs related to the efforts made by supervised entities to adapt to such measures.

Consistent application of supervisory actions in accordance with the principle of proportionality builds trust in the supervisory authority.

We understand the benefits of proportionality in supervisory approach. This is why our strategic goal for the years 2021–2025 is to elaborate a new approach to proportionality at our Office. We’ve already taken actions in this regard and we’re also being active in other areas, which haven’t been supervised by the KNF so far, for example reporting on sustainability, or adaptation to the requirements under DORA. In these actions, a safe and stable development of the financial market and protection of the interests of market participants are our top priorities.