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Part 1

990 Insurance corporate management

Update bulletin, April 2013Please note the following update to your October 2012 edition of the 990 study text. This update is in two parts:

Part 1: Changes to UK financial services regulation in 2013

Part 2: The Consumer Insurance (Disclosure and Representations) Act 2012

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2 990/April 2013 Update bulletinPa

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Part 1

Part 1: Changes to UK financial services regulation in 2013

ContentsIntroduction 5

1. The Financial Conduct Authority (FCA) 6

1.1 Scope 6

1.2 Objectives 6

1.3 The FCA’s approach to regulation 6

1.4 The FCA’s approach to supervision 7

1.5 Risk framework 8

1.6 Earlier intervention 8

1.7 Authorisation and approvals 10

1.8 Accountability 10

1.9 Engagement with consumers 10

1.10 Transparency and disclosure 10

2. The Prudential Regulation Authority (PRA) 11

2.1 Scope 11

2.2 Objectives 11

2.3 Threshold conditions 12

2.4 Authorising new insurers 12

2.5 Judgment-led regulation 12

2.6 Risk assessment framework 12

2.7 Intensity of supervision 13

2.8 Proactive intervention framework (PIF) 13

2.9 The regulation of Lloyd’s of London 14

2.10 Industry engagement 14

3. New Handbooks 14

4. Co-ordination 14

5. Financial Policy Committee (FPC) 15

5.1 Scope and objectives 15

5.2 Governance 15

5.3 Members of the FPC 15

5.4 Accountability 16


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6. European representation 16

7. Useful websites 16

8. Update on EU Solvency II Directive 17

Appendices 19

Appendix 1: 990 examination syllabus for October 2013 19

Appendix 2: Amendments to revision questions and scenario 8 23

Appendix 3.1: Replacement appendix 9.1 24

Appendix 3.2: Replacement appendix 9.2 26

Appendix 4: Types of firms and their respective regulatory bodies post 1 April 2013 27

Appendix 5: Overview of FCA and PRA Handbooks 28

Important note:The following update provides commentary on the main areas of change in UK financial services regulation due to the enactment of the Financial Services Act 2012; make sure you are monitoring the financial/insurance trade press and the new regulators’ websites for further developments and announcements.

Sections 8.4 & 9.1 of the 990 examination syllabus have been updated for the October 2013 examination (see Appendix 1) and all references to the FSA and UK financial services regulation throughout the 990 text should now be interpreted in the light of the new regulatory structure described below.

The principal text references affected are:

chapter 8: Introduction, sections A, C, D, E, G; and

chapter 9: sections A and B5, appendices 9.1 and 9.2 (which have been replaced).

See Appendix 2 for amendments to revision questions 8.2 & 8.5 and scenario 8.

Note: Website references current as at April 2013.

The CII thanks the Financial Conduct Authority for its kind permission to reproduce the image in Figure 2 for educational purposes and for which it holds the copyright. Use of this image does not imply any endorsement by the FCA of this publication.

Part 1 Changes to UK financial services regulation in 2013 5 Part 1

Introduction Figure 1: New Regulatory Structure – post 1 April 2013

Bank of England

Protecting and enhancing the stability of the financial system of the United Kingdom, aiming to work with other relevant bodies including the Treasury, the PRA and the FCA. The Bank’s Special Resolution Unit is responsible for resolving failing banks using the special resolution regime.

FPCContributing to the Bank’s objective to protect and enhance financial stability, through identifying and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system.

FCAEnhancing confidence in the UK financial system by facilitating efficiency and choice in services, securing an appropriate degree of consumer protection, and protecting and enhancing the integrity of the UK financial system.

PRAEnhancing financial stability by promoting the safety and soundness of PRA authorised persons, including minimising the impact of their failure.

Systemic infrastructureCentral counterparties settlement systems and payment systems

Prudentially significant firmsDeposit takers, insurance, some investment firms

Investment firms and exchanges, other financial services providersIncluding IFAs, investment exchanges, insurance brokers and fund managers

FPC powers of recommendations and directions to address systemic risk

Prudential and conduct regulation

Prudential regulation

Prudential regulation

Conduct regulation

Source: HM Treasury

The Financial Services Act 2012 gained Royal assent in December 2012 and from 1 April 2013 three new financial services regulatory bodies have been established:

Financial Conduct Authority (FCA) (website: www.fca.org.uk)

• A separate independent regulator responsible for conduct of business and market issues for all firms and prudential regulation of small firms, such as insurance brokerages and financial advisory firms.

• The FCA will be focused on taking action early, before consumer detriment occurs.

• There will be a shift towards thematic reviews and market-wide analysis to identify potential problems in areas such as financial incentives.

• The FCA will review the full product lifecycle from design to distribution with the power to ban products where necessary.

Prudential Regulation Authority (PRA) (website: www.bankofengland.co.uk/pra)

• The PRA sits within the Bank of England and is responsible for the stability and resolvability of systemically important financial institutions.

• It will not seek to prevent all firm failures but will seek to ensure that firms can fail without bringing down the entire financial system.

• The PRA will place emphasis on a ‘judgment based’ approach to supervision focusing on: the external environment, business risk, management and governance, risk management and controls and capital and liquidity.


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Financial Policy Committee (FPC)

• A committee within the Bank of England responsible for watching for emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime.

• The FPC will have the power to use so-called ‘macro-prudential tools’ to counteract systemic risk. The tools might include imposing leverage limits on banks or enforcing particular capital requirements for given asset classes.

• With the Bank of England now in charge of micro-prudential and macro-prudential regulation, on top of its responsibilities for monetary policy, it is fast becoming one of the world’s most powerful central banks.

1. Financial Conduct Authority (FCA)Chief Executive: Martin Wheatley

1.1 Scope The FCA will regulate approximately 27,600 firms. This includes:

• firms solely regulated (for prudential and conduct issues) by the FCA. These are firms that are deemed of limited systemic importance. Examples include: personal investment firms, investment management firms, mortgage or insurance intermediaries, authorised professional firms, providers of market trading infrastructure, and non-bank mortgage lenders. It will also include Lloyd’s members’ agents and Lloyd’s brokers.

• firms regulated purely for conduct of business issues. These firms, deemed to be systemically important are prudentially regulated by the PRA and conduct regulated by the FCA. They include banks, building societies, credit unions and general insurers and life insurers, Lloyd’s and Lloyd’s Agents.

• firms regulated under other legislation. These are electronic money institutions and payment institutions.

The FCA has also taken over the FSA’s responsibility for the Financial Ombudsman Service, will oversee the Money Advice Service, and also have responsibility for the Financial Services Compensation Scheme.

See Appendix 4 for types of firms and their new regulatory bodies post 1 April 2013.

1.2 Objectives The Financial Services Act 2012 states that the FCA will have an overarching strategic objective to ‘ensure that the relevant markets function well’ and FCA says that it ‘exists to make sure that markets work well so that consumers get a fair deal’.

It will also have three operational objectives:

• Consumer protection: securing an appropriate degree of protection for consumers.

• Integrity: protecting and enhancing the integrity of the UK financial system.

• Competition: promoting effective competition in the interests of consumers in the markets for:

– regulated financial services; and

– services provided by a recognised investment exchange.

Additional factors that the FCA (and PRA) must have regard to include:

• efficient and economic use of resources;

• proportionality;

• consumer responsibilities; and

• transparency.

1.3 The FCA’s approach to regulation Product intervention and governance: the FCA is aiming to be more proactive than the FSA and will ‘intervene earlier in the product’s life span and seek to address root causes of problems for consumers.’ Powers can include temporary intervention rules and product pre-approval. This is discussed in more detail below.

Super-complaints: the FCA is to be a body able to review and react to detailed submissions by consumer groups. Previously only the Office of Fair Trading could receive these ‘super-complaints’ highlighting systematic problems in particular markets. Previous submissions have led to inquiries from the Competition Commission into payment protection insurance and extended warranties.


Competition powers: the FCA’s competition objective – to promote effective competition in the interests of consumers means:

• firms must compete for business by offering better services, better value and types of products that customers want and need;

• prices offered are in line with costs; and

• firms will innovate and develop new products over time: the FCA will draw a distinction between ‘good’ innovation that meets consumers’ genuine needs and other types that exploit consumers.

1.4 The FCA’s approach to supervision

Figure 2: Supervisory Approach

Business model and strategy analysis

Stage 2

Post-sales/services and transaction handling – to assess how effectively a firm ensures its customers are treated fairly after the point of sale, service or transaction, including complaints handling

Product design – to determine whether a firm’s products or services meet customer needs and are targeted accordingly

Governance and culture – to assess how effectively a firm identifies, manages and reduces conduct risks

Sales processes – to assess firms’ systems and controls

Stage 1Are the interests of

customers and market integrity at the heart of how the firm is run?

Source: Journey to the FCA.

General principles: the supervisory system is designed so that firms are encouraged ‘to base their business model, culture and how they run the business on a foundation of fair treatment of customers set out in the Treating Customers Fairly (TCF) initiative.’ The system ‘will act more quickly and decisively and be more pre-emptive in identifying and addressing issues before they cause harm, with senior staff involved in decisions at an early stage.’

Supervisor organisation: this approach will require a more flexible focus on bigger issues as they emerge, either in individual firms or across sectors. This will mean that some larger-risk firms might have an assigned supervisor with highly intensive contact, whereas others might be contacted once every 3-4 years.

Firm categorisation: a new system is being introduced and firms have been contacted in advance about which category they fall into. The system covers risk categories C1 (large banking and insurance groups with very large number of retail customers) to C4 (smaller firms including most intermediaries).


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1.5 Risk frameworkA new risk framework will replace the previous ARROW system which operated under FSA. The new framework is based on the following three pillars:

1. Firm Systematic Framework (FSF): designed to assess a firm’s conduct risk, asking the question ‘are the interests of customers and market integrity at the heart of how the firm is run?’. This entails business model and strategy analysis, embedding of TCF including governance and culture, product design, sales and transaction process, and post-sales services.

2. Event-driven work: supervisory activity in response to issues that are emerging or have recently happened. This is the flexible element of how the FCA will allocate its supervisory staff so that resources are devoted to situations and firms of heightened risk to consumers. For example, whistle blowing alleged misconduct or a spike in reported complaints.

3. Issues and products: the flexible approach will also allow the FCA to look at reviews of issues and products as they take place.

Comparison between ARROW and FSF

ARROW FSF

Point-in-time assessment Form of continuous assessment for C1 and C2 firms

Primarily issues based i.e. discovery work on issues considered to be higher risk

Assessment of key drivers of conduct risk with work targeted by business and strategy analysis (BMSA)

Assessment results in letter and risk mitigation programme that frequently has many actions

Assessment results in letter and risk mitigation programme focused on a few key areas to be addressed

Extensive follow-up work by supervisors Follow-up work done by firm with greater use of, for example, skilled person’s reports, internal audit and non executive reports (section 166 powers)

In focus: the FCA’s approach to supervising small firmsThe FCA will place firms into four different categories according to size and type of customer base (i.e. retail/wholesale) ranging from those firms with a large number of retail customers (C1 firms) to ‘smaller firms including almost all intermediaries’ (C4).

C4 firms will experience the least intrusive regulation of all. But supervisors will still be looking for small firms to identify and take action to reduce risks to consumers. The FSA set in train a new supervisory model for small firms, known as the Revised Approach to Small Firms Supervision which the FCA will continue. This new framework consists of:

• A ‘touch point’ (e.g. roadshow, phone call or online assessment) with all C4 firms once every four years. Exact interaction will depend on FCA assessment of risks posed by firms.

• To identify initial level of risk the FCA will use the online reports that firms submit through the GABRIEL reporting system, along with other data sources such as information from firm visits or the FCA’s contact centre.

• Firms identified as high risk and 25% of medium risk firms will have face-to-face interviews. The FCA will provide verbal feedback at this stage, followed by a letter setting out any remediation points, which will need to be addressed by the firm’s senior management.

• Firms deemed to be ‘high risk’ after the interview will be subject to a follow-up visit.

Whilst the supervision of small firms will be relatively light-touch by comparison to larger firms, the degree of intrusiveness from the regulator will depend on the ability of small firms to show best practice in the interests of customers. Similar to large firms then, small firms must consider the appropriateness of employees’ training and competence, the governance of incentive schemes, and the kinds of systems and controls necessary to resolve potential conflicts of interest if they want to successfully navigate the new regulatory regime.

1.6 Earlier Intervention As noted above, the FCA has new powers to intervene to prevent detriment occurring. The Financial Services Act 2012 confirms a number of regulatory initiatives to shift the balance from tackling the symptoms of consumer detriment to the ‘root causes’. Examples include:

1.6.1 Banning products (applies to the retail sector) • Where the FCA identifies a serious problem with a product or product feature, it will be able to take timely

and necessary steps to ban it.


• The legislation enables the FCA to make temporary product intervention rules without prior cost-benefit analysis or consultation valid for up to 12 months.

• The FCA will be required to consult on a set of principles governing the circumstances under which it will use this power.

• The FCA will only be allowed to use its product intervention powers in relation to retail customers.

1.6.2 Withdrawing misleading financial promotions The FCA can take action in relation to misleading financial promotions. It can also disclose the fact that enforcement action against a firm or individual has commenced.

It will be required to alert a firm to its proposed course of action, and to allow for and consider representations by firms before publishing any details of its action.

1.6.3 Publication of enforcement actionThe FSA was already being more proactive about enforcement, and in 2011/2012 there had been a marked increase in the intensity and incidence of enforcement actions.

The FCA will drive this forward with even greater intensity, bringing more enforcement cases and pressing for tougher penalties, and being more willing to pursue cases against individuals including senior management.

The FCA is able to publish the fact that a warning notice has been issued about a firm as well as a summary of the notice. This new power is available to both the FCA and PRA.

In making a decision about whether or not to disclose the warning notice, the regulator must consider a number of factors including whether publication of the information would be unfair to the person to whom the warning notice relates.

1.6.4 Market intelligence gathering and researchThe FCA has a new Policy, Risk and Research Division that will ‘combine research into what is happening in the market and to consumers with better analysis of the type of risks where they appear.’ It will be the ‘radar’ of the organisation.

• It will identify and assess risks to consumers, creating a common view to inform the FCA’s supervision, enforcement and authorisation functions.

• While relying on existing sources for evidence including consumer groups, the media and ongoing market monitoring and analysis, more use will be made of the consumer action line.

In focus: the FCA’s thematic and proactive approachThe FSA had said that its investigation and subsequent guidance consultation on financial incentives was an example of the type of work that the FCA will be undertaking going forward. Following a thematic review of sales practices across retail financial services firms including banks, financial advisory firms and insurers, the regulator found that 20 out of 22 firms assessed did not properly identify how their incentive schemes might encourage staff to mis-sell. Indeed the FSA found that many firms did not understand their own incentive schemes because they were so complex, making the schemes hard to control.

As a result of the findings, the consultation noted that the FSA would consider strengthening the rules in the area of financial incentives. In the meantime, in order to help ensure better practice, the consultation set out the types of incentive schemes that might increase the risk of mis-selling and provided information on best practice in terms of the governance of incentive schemes.

The financial incentives work is a clear indication of the likely direction for the FCA – with a more ‘proactive’ interventionist remit using thematic reviews to focus on the culture of firms from product governance to front line sales. Through future supervisory visits and thematic reviews, the regulator will be looking for evidence that firms put the interests of consumers at the heart of what they do. We can expect to see more action by the regulator in this vein now the FCA is up and running.

For more information about the approach to handling financial incentives see FSA’s final guidance: Risks to customers from financial incentives:

www.fca.org.uk/static/fca/documents/finalised-guidance/fsa-fg13-01.pdf


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1.7 Authorisation and approvals While the fundamentals of the FSA’s authorisation function remain, the FCA will focus on the proposed business model, governance and culture, as well as the systems and controls the firm intends to put in place especially over:

• product governance;

• end-to-end sales processes; and

• prevention of financial crime.

The FCA will also work closely with the PRA in considering applications to approve individuals to roles which have a material impact on the conduct of a firm’s regulated activities. The FCA will seek to assess that applicants have a good understanding of how to ensure good outcomes through:

• corporate culture;

• conduct risk management; and

• product design.

1.8 Accountability The FCA will be required to report annually to Government and Parliament.

• There will be oversight of the FCA’s work by a Board appointed by the Government with a majority of non-executive directors.

• The Financial Services Act 2012 contains a provision for independent reviews of the efficiency and effectiveness of the FCA’s use of resources.

• There is also a requirement for the FCA to make a report to the Treasury in the event of a regulatory failure and where this failure was due to the FCA’s actions.

• However, it is noted that the obligation to publish a report, and the desirability of transparency, should not impede or prejudice the FCA’s ability to pursue enforcement investigations. In such circumstances, publication would be delayed until enforcement action is completed.

1.9 Engagement with consumers The FCA will seek to build a better understanding of consumer behaviour, consumer needs and consumer experiences to shape how it designs its interventions.

• It will also engage more with consumers directly, including through social media, consumer bodies, road shows, focus groups and face-to-face contact.

• Finally, the FCA will collect and analyse consumer information from other sources such as complaints, including those investigated by the Ombudsman, and external commercial, academic and public interest research.

1.10 Transparency and disclosure The FCA is required to put in place four statutory panels representing the views of consumers, regulated firms, smaller regulated firms and market practitioners.

• It will build on the FSA’s approach to consultation as part of the rule-making process and will seek to develop more effective ways of getting feedback on proposals, including from consumers and their representatives.

• It will publish more information about its views on markets (key trends, products and services) and the comparative performance of a firm.

• It will recognise that necessary restrictions on disclosure exist in UK and EU law. However, where disclosure of information would be incompatible with the FCA’s objectives, the FCA will not have to disclose information.


In focus: complaints against the FCA, PRA and Bank of England The new complaints regime for the FCA, PRA and Bank of England is similar to the FSA regime which the FSA argued had been an ‘effective and efficient way of dealing with complaints’ against the regulator. Indeed the FCA has pointed out that given ‘how closely the requirements set out [in the Financial Services Act 2012]….mirror those [already] in the Financial Services and Markets Act 2000, we propose adopting a very similar approach’. Key requirements include:

• Regulators must deal with complaints within four weeks and where that is not possible, will arrange a timetable with the complainant.

• The FCA will process complaints submitted centrally even if the complaints are about one of the other regulatory bodies.

• The FCA will be responsible for the recruitment of a new Complaints Commissioner, who will commence work around April 2014. However, any final decision on the appointment will require agreement by all three bodies.

2. Prudential Regulation Authority (PRA)Head: Andrew Bailey

2.1 Scope The PRA is responsible for the prudential regulation of all ‘systemically important firms’ defined as those firms that pose a risk to the financial system if they were to fail. The PRA is responsible for the regulation of all institutions that accept deposits or which accept insurance contracts. This will mean that the PRA will authorise and supervise all banks, building societies, credit unions, general insurers and life insurers.

2.2 Objectives Under the Financial Services Act 2012, the PRA has a primary objective to ‘promote the safety and soundness of PRA regulated persons’.

It will also have two secondary objectives:

• ensuring that PRA authorised persons carry on in a way which avoids adverse effect on the stability of the UK financial system; and

• minimising the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system.

Additional insurance objectiveThe Government also announced after considerable concerns raised by the CII and others that ‘the distinct nature of insurance business ought to be recognised in the regulatory framework, including the PRA’s objectives’. A new section was therefore added to the legislation to clarify the specific responsibilities that the PRA will face in relation to insurers.

The insurance objective is: contributing to the securing of an appropriate degree of protection for those who are or may become policyholders.

In relation to this additional objective, the PRA also has a specific responsibility to secure: an appropriate degree of protection for the reasonable expectations of policyholders as to the distribution of surplus under with-profits policies.

It is worth noting that regulation of with-profits will also be a concern of the FCA. In anticipation of co-ordination problems with respect to the regulation of this type of financial services business, the regulators will have to adhere to a specific Memorandum of Understanding regarding with-profits regulation.


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2.3 Threshold Conditions The ‘Threshold Conditions’ will be the minimum requirements that firms must meet in order to be permitted to carry on regulated activities. The Threshold Conditions for which the PRA will be responsible are designed to promote safety and soundness. At a high level, the Threshold Conditions require:

• A firm’s head office, and in particular its mind and management, to be in the United Kingdom.

• A firm’s business to be conducted in a prudent manner — and that the firm maintains appropriate financial and non-financial resources.

• The firm itself to be fit and proper and be appropriately staffed.

• The firm and its group to be capable of being effectively supervised.

Firms must ensure that they meet the Threshold Conditions at all times. The PRA will assess firms against them on a continuous basis.

2.4 Authorising new insurersFirms wishing to effect or carry out contracts of insurance must now apply to the PRA for authorisation (permission) to do so. The PRA will assess applicant insurers from a prudential perspective and will determine whether the applicant would meet the Threshold Conditions at the point of authorisation and on an ongoing basis, including an exit from the market in an orderly way.

The PRA will ensure that, at the point of authorisation, new insurers hold capital sufficient to cover the risks that they run.

At the same time the FCA will assess applicants from a conduct perspective. The PRA will lead and manage a single administrative process and will be responsible for co-ordination and transmitting all formal notices and decisions to the applicant insurer.

2.5 Judgment-led regulation The PRA’s judgment-led approach to supervision will be characterised by a move away from rules and a focus on forward looking analysis including an assessment of how a firm would be resolved if it were to fail, the impact this would have on the system as a whole and the use of public funds. The aim is therefore to ‘pre-empt risks before they crystalise’. Central to the new approach is a new risk assessment framework.

2.6 Risk assessment framework The new framework will operate in a way that reflects the PRA’s additional objective to protect policyholders as well as the financial system. The framework will capture three elements:

1. The potential impact on policyholders and the financial system of a firm coming under stress of failing.

2. How the macroeconomic and business risk context in which a firm operates might affect the viability of its business model.

3. Mitigating factors, including risk management, governance, financial position including its solvency position and resolvability.

On announcing this new framework, former FSA Chief Executive, Hector Sants, said that supervisors must be wary of the limitations of measures (i.e. fixed capital requirements) deployed which are intended to reduce the risks posed by firms. Ultimately what is appropriate under certain stressed conditions may not be appropriate under others. The PRA must therefore have good oversight of firms, and supervision must involve senior and experienced individuals.

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Figure 3: The PRA’s new risk framework

Gross risk

Potential impact Risk context

Mitigating factors

Operational mitigation Financial mitigationStructural mitigation

External context

Business risk

Management and

governance

Risk management and controls

CapitalLiquidity ResolvabilityPotential impact

Source: The PRA’s approach to insurance supervision, reproduced with permission of the PRA.

2.7 The intensity of supervisionThe intensity with which firms will be supervised by the PRA will depend on their level of riskiness related to the areas above.

However, all firms will face at least a ‘baseline level of monitoring’. This will involve:

• ensuring compliance with prudential standards for capital;

• liquidity, asset valuation, provisioning and reserving;

• at least an annual review of the risks posed by firms or sectors to the PRA’s objectives;

and

• assessing a firm’s planned recovery actions and how it might exit the market.

2.8 Proactive Intervention Framework (PIF) The PRA’s judgment about proximity to failure will be captured in a firm’s position within the Proactive Intervention Framework (PIF). Judgments about a firm’s proximity to failure will be derived from those elements of the supervisory assessment framework (see Figure 3) that reflect the risks faced by a firm and its ability to manage them — namely, external context, business risk, management and governance, risk management and controls, capital and liquidity.

There will be five clearly demarcated PIF stages, each denoting a different proximity to failure, and every firm will sit in a particular stage at each point in time. As a firm moves to a higher PIF stage — i.e. as the PRA determines that the firm’s viability has deteriorated — supervisors will review their supervisory actions accordingly. Senior management of firms will be expected to ensure they take appropriate remedial action to reduce the likelihood of failure, and the authorities will ensure appropriate preparedness for resolution.

The PRA will expect insurers to have a culture that supports their prudent management. Good prudential management must be pursued by all individuals working in an insurance company not just senior staff. But the PRA will have ‘no right culture in mind’ when making judgments about firms.

The PRA will focus instead on ‘whether boards and management clearly understand the circumstances in which the insurer’s solvency and viability come into question, whether accepted orthodoxies are challenged, and whether action is taken to address risks on a timely basis’.

In summary, under the PRA:firms must have sufficient controls to minimise excessive risk taking;

insurers and individuals must behave in an open and co-operative manner; and

an insurer’s board must take responsibility for establishing, embedding and maintaining the type of culture described above.

The PRA’s supervisory approach suggests that firms will face increased scrutiny the more their organisational culture fails to demonstrate a strong, joined-up model to managing the prudential risks related to their business. Supervisors will assess risks using expertise and judgment rather than box-ticking. It is therefore up to firms to show how their organisation is managing prudential risks appropriately – no one approach to risk management will be right for everyone. If firms fail to do this they could find themselves facing greater intervention from the regulator as they move up the PIF.


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2.9 The regulation of Lloyd’s of London The PRA will be the lead regulator for Lloyd’s as a whole although the FCA will take responsibility for certain conduct of business issues. The legislation confirms that ‘The Society of Lloyd’s and Lloyd’s managing agents will be dual regulated firms; Lloyds members’ agents and Lloyd’s brokers will be FCA-regulated firms’.

2.10 Industry engagementThe PRA will engage with the boards and senior management of firms in forming its decisions, using this dialogue both to ensure that it takes account of all relevant information in reaching its judgments, and to communicate clearly the rationale for them. Firms should not, however, approach their relationship with the PRA as a negotiation.

3. New Handbooks At legal cutover (1 April 2013), the FSA Handbook was split between the FCA and the PRA to form three new Handbooks: one for the PRA, one for the FCA, and a combined version showing provisions of both handbooks with ‘badges’ indicating which regulator applies each provision to firms. Most provisions in the former FSA Handbook have therefore been incorporated into either the PRA’s Handbook, the FCA’s Handbook, or both, in line with each new regulator’s set of responsibilities and objectives.

For example, the ICOBS and Training and Competence (TC) Sourcebooks have been transferred to the FCA Handbook. The Systems and Control (SYSC) and Controlled Functions (SUP) Sourcebooks now appear in both the FCA and PRA Handbooks with their individual rules moved over as appropriate to the new regulators. Thus SYSC nos 11 and 15-17 appear only in the PRA Handbook as they are concerned with liquidity, credit, market and insurance risk management and controls.

See Appendix 5 for an overview of the contents of the new Handbooks.

The new Handbooks reflect the new regulatory regime (for example, references to the FSA replaced with the appropriate regulator), and in some areas more substantive changes have been needed to reflect the existence of the two regulators, their roles and powers.

ActivityYou should familiarise yourself with the contents of the new Handbooks which can both be found at: www.fca.org.uk

FCA has said that overtime the way its principles, rules and guidance are presented will inevitably change, and once established it will review the way it presents material to make it more ‘user-friendly and accessible’. FCA and PRA will need to co-operate, co-ordinate and consult over proposed changes to rules and requirements. FCA has also said that it wants to issue more concise and clearer guidance than previously.

4. Co-ordination Given the potential for regulatory overlap between the FCA and PRA, the legislation provides a number of general co-ordination mechanisms:

• A statutory duty on the PRA and the FCA to coordinate their activities (including consulting with one another to gather views where necessary).

• An obligation to prepare a Memorandum of Understanding (including setting out the role of each regulator and how they are interlinked).

• Cross-membership of boards.

• A veto mechanism for the PRA to reduce the risk of regulatory actions threatening financial stability or the disorderly failure of a firm. See below ‘in focus’ box for more details.

• A requirement that the PRA and FCA include in their annual reports an account of how they have co-ordinated during the year.

• The regulators have also set out a MOU on with-profits business between the PRA and FCA as outlined above (see section 2.2 above).


In focus: the PRA’s veto powerThe PRA’s power of veto ensures that the new regulatory regime can, at certain times of stress, prioritise financial stability over consumer protection. According to the Financial Services Act 2012, the PRA can direct the FCA to refrain from particular action if it believes that action might threaten financial stability or result in the failure of a PRA-authorised person.

In ‘normal times’, free of serious economic stress, there is arguably little risk of the veto being invoked. But it is far from certain how it will be used during episodes such as the recent financial crisis. Questions remain about when the PRA will decide to invoke this power and what effect this will have on customers.

5. Financial Policy Committee (FPC)Chair: Sir Mervyn King until May 2013, then Mark Carney – incoming Governor

5.1 Scope and objectivesRun by the Bank of England, the FPC has responsibility for macro-prudential supervision. It is responsible for spotting the systemic risks ‘attributable to structural features of financial markets or to the distribution of risk within the financial sector’. It is also responsible for identifying unsustainable levels of leverage, debt or credit growth.

Having identified the risks, the FPC will have the power to take various policy measures to counteract them. Examples of so-called macro-prudential tools include:

• Setting countercyclical capital buffers: ensuring that banks increase their capital in the ‘good times’ so they have protection for the bad. This should also have the effect of tempering lending during a boom and so dampening the effect of the credit cycle.

• Variable risk weights: enforcing targeted capital requirements on specific sectors or asset classes. This could include requiring banks to hold greater levels of capital against asset exposures that represent substantial risk.

• Leverage Limits: limiting excessive build up of on and off balance sheet leverage. Since measures of risk can be unreliable, a leverage ratio could act as a back-stop to risk-weighted requirements (such as a capital buffer).

As well as these financial stability considerations, the FPC also has a statutory obligation to limit the impact of its policies on economic growth.

5.2 Governance The FPC has a total membership of 12, comprising six executives of the Bank of England, and five members from outside the Bank. In addition, the FPC includes a non-voting Treasury member. It is chaired by the Governor, and includes the existing Deputy Governors for monetary policy and financial stability, and the newly created Deputy Governor for prudential regulation.

The Chief Executive of the FCA will also sits on the FPC, as will a further four independent external members, appointed by the Chancellor and recruited in a similar manner to the current external membership of the Monetary Policy Committee (MPC).

5.3 Members of the FPC • The Governor of the Bank (acting as Chair of Committee).

• The Deputy Governors for financial stability and monetary policy.

• The newly created Deputy Governor for prudential regulation (who will also be the Chief Executive of the PRA).

• Two senior Bank executives, responsible for financial stability and for markets.

• The Chief Executive of the FCA.

• Four independent members appointed by the Chancellor.

• A non-voting Treasury representative.

The Government has noted the importance of external members having direct market expertise in areas such as insurance.


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5.4 Accountability The Treasury is able to provide the FPC with guidance in the form of a remit alongside its statutory objectives, to help shape its pursuit of financial stability. The FPC will be required to respond to the Treasury’s recommendations, setting out to what extent it agrees with the remit and what action it intends to take in response. However, according to the legislation, the FPC may reject any recommendations from the Treasury which it does not agree with.

The Government has legislated to require the FPC to publish a Financial Stability Report twice a year. Once the FPC has completed and agreed its reports, it will send them to the Treasury, which will, in turn, lay copies before Parliament. The Government requires the FPC to publish a record of each FPC meeting within six weeks. These meeting records describe the FPC’s discussions in broad terms, but without identifying the contributions of individual members.

In focus: the world’s most powerful central bank?With the Bank of England having independent responsibility for monetary policy, ‘macro-prudential regulation’ and ‘micro-prudential regulation’, many argue that the Governor of the Bank of England will be the world’s most powerful central banker.

Not surprisingly, given this level of responsibility, Parliament and the Treasury Select Committee (TSC) in particular have raised their concerns about the level of power vested in a few hands. They have also raised concerns about the accountability of what some argue is a rather antiquated and centralised institution.

In response to the Committee’s and others’ concerns, the TSC has been given the power of veto over any prospective candidate for Governor at the Bank. The Committee is also undertaking an inquiry into the Bank’s flagship policy of Quantitative Easing. But serious questions remain about the accountability and transparency of the Central Bank and their ability to take on such significant responsibilities. Expect more political wrangling on this theme in the year ahead even if in broad terms the Bank’s future role is now set.

6. European Representation The FSA 2012 legislation touches on how the new regulatory structure will engage with Europe. With regards to representation within the various European bodies the following has been decided:

• The Bank of England will sit on the European Systemic Risk Board.

• The PRA, as a regulator of banks and insurers, will hold the UK seat on both the European Banking Authority and the European Insurance and Occupational Pensions Authority.

• The FCA will represent the UK at the European Securities and Markets Authority.

• The Treasury will continue to represent the UK in political-level negotiations on European directives and regulations.

In order to ensure a consistent strategic view across the different regulatory bodies there will be a memorandum of understanding covering:

• the process for discussing and agreeing strategic objectives;

• which authority represents the UK in each European body;

• how the authorities will coordinate their engagement in international bodies;

• how each authority will consult the others in advance;

• how authorities will seek views from interested parties in advance of meetings.

7. Useful websitesFCA: www.fca.org.uk

To read about FCA’s approach to regulation see: www.fsa.gov.uk/pubs/other/journey-to-the-fca-standard.pdf and for the FCA Risk Outlook published 25 March 2013, see www.fca.org.uk/your-fca/documents/fca-risk-outlook-2013

PRA: www.bankofengland.co.uk/pra, for example see the PRA’s ‘Approach to Insurance Supervision’ dated April 2013

FPC: www.bankofengland.co.uk/financialstability/Pages/fpc/default.aspx


8. Update on EU Solvency II DirectiveThe UK is well advanced in its preparations for the changeover to Solvency II. This has been due to its active participation in the Directive’s development, and the similarity of the existing UK regime to Basel II. Although UK firms still have a substantial amount of work to do, it is less than those in other member states who have previously relied solely on the mechanistic Solvency I formula.

The FSA and its successors since April 2013 (PRA and FCA) have been preparing guidelines to firms with a view to completing the final rules in time for the implementation deadline for Solvency II. (This was originally expected to be 1 January 2014 but has subsequently been delayed and is not expected to be until January 2016 at the earliest). Meanwhile, UK regulated firms technically are still subject to the ICAS rules, and some industry observers believe that this situation could remain for the foreseeable future such is the confusion within the EU.

The UK regulators had originally hoped that firms using approved models could be regulated under Solvency II as early as 2013 and not therefore have to report under the ICAS regime. However, because of the delays this is no longer possible, so the UK regulators have asked the affected firms to adapt their Solvency II models as a proxy for their ICAS models.

Although the shift from Solvency I to II is beset by significant short term challenges, it presents a number of opportunities to those insurers capable of carefully designed and implemented application, according to a report by Timetric (see below). However, continuous delays and uncertainties over the final framework have created doubts over the credibility of the new regulation. This is a view bolstered by the fact that most European countries are not prepared to fully adopt it. Whilst Western Europe, led by the UK and Spain, has made progress towards readiness, the generally poor state of preparedness across Europe has led some market experts to label the project as overambitious in nature.

The short-term impact on life and general insurance business is likely to be negative. Significant capital charges for risky and volatile assets with high yields are expected to drive changes in investment policies. Sovereign bonds will gain more exposure and replace high capital charge assets, rendering some products obsolete and unviable.

The structural overhaul of Solvency II poses significant challenges for insurance industries and regulators, in terms of resources, time and money. The complex nature of calculating solvency capital requirements, marketing consistent treatment of balance sheet items and integrating risk management in central business processes will exert immense pressure on the current structure, and will increase the cost of specialists required to handle business models efficiently and in compliance with the new norms. It will also require reliable data and IT infrastructure, adding further pressure on company resources and budgets.

Useful website‘Assessing Solvency II: Challenges and Opportunities for the Insurance Industry’ is available at: http://timetric.com/research/report/IS0251MR/


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Part 1 Changes to UK financial services regulation in 2013 19 Part 1Part 1

2013�© The Chartered Insurance Institute 2013

990

Insurance corporate management

PurposeAt the end of this unit, candidates should be able to evaluate the following issues and concepts in relation to the management of an insurance organisation:

• Capital, capital adequacy and solvency rules, and their impact on insurance enterprises;

• Management structures and organisational issues;

• Corporate finance concepts in insurance;

• Planning and control processes in insurance;

• Roles of investment management and insurance regulation;

• Challenges to insurance management.

Assumed knowledgeIt is assumed that the candidate already has the knowledge gained from a study of insurance organisations, finance and regulations as typically covered in IF1 Insurance, legal and regulatory or P92 Insurance business & finance or equivalent examinations.

Summary of learning outcomes1.� Understand�the�need�for�capital�and�its�influence�on�the�organisation.

2.� Understand�the�management�structures�of�insurance�organisations.

3.� Understand�the�organisational�issues�of�insurance�organisations.

4.� Evaluate�and�apply�corporate�finance�concepts�in�insurance.

5.� Evaluate�and�apply�planning�processes�in�insurance.

6.� Evaluate�and�apply�control�processes�in�insurance.

7.� Understand�the�role�of�investment�management�in�insurance�organisations.

8.� Understand�the�role�and�impact�of�insurance�regulation.

9.� Evaluate�the�purpose�and�impact�of�capital�adequacy�and�solvency�rules�on�insurers.

10.� Understand�the�current�and�future�challenges�to�the�management�of�insurance�organisations.

Important notes•� Method�of�assessment:�Part�I�1�compulsory�question�(case�study)�(80�marks).�Part�II�2�questions�

selected�from�3�(scenarios)�(80�marks).�Total�of�160�marks.�Three�hours�are�allowed�for�this�exam.

•� The�syllabus�is�examined�on�the�basis�of�English�law�and�practice�unless�otherwise�stated.

•� The�general�rule�is�that�the�exams�are�based�on�the�English�legislative�position�six�months�before�the�date�of�the�exams.

•� Candidates�should�refer�to�the�CII�website�for�the�latest�information�on�changes�to�law�and�practice�and�when�they�will�be�examined:

� 1)�Visit�www.cii.co.uk/qualifications

� 2)�Select�the�appropriate�qualification

� 3)�Select�your�unit�on�the�right�hand�side�of�the�page

Appendix 1: October 2013 examination syllabus for unit 990


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Part

1

2013� 2�of�4© The Chartered Insurance Institute 2013

6.� Evaluate�and�apply�control�processes�in�insurance

6.1� Budgeting�process;

6.2� Non-financial�measures�of�performance;

6.3� Balanced�scorecard�and�benchmarking;

6.4� Internal�auditing.

7.� Understand�the�role�of�investment�management�in�insurance�organisations

7.1� Financial�markets;

7.2� Objective�of�investment;

7.3� Main�types�of�investments;

7.4� Choice�of�investments�and�investment�strategies;

7.5� Asset/liability�management.

8.� Understand�the�role�and�impact�of�insurance�regulation

8.1� Purpose�of�regulation�and�its�effectiveness�in�insurance;

8.2� International�convergence:�Basel�II,�IAIS,�EU;

8.3� Distinction�between�prudential�and�conduct�of�business�regulation;

8.4� Outline�of�Financial�Services�regulatory�handbooks�and�any�current�initiatives;

8.5� Impact�of�systems�and�control�(SYSC),�and�controlled�functions�(SUP)�on�insurers;

8.6� Impact�of�Data�Protection�Act,�Anti�Money�Laundering�Rules�and�Bribery�Act�2010.

9.� Evaluate�the�purpose�and�impact�of�capital�adequacy�and�solvency�rules�on�insurers

9.1� UK�capital�adequacy�regime;

9.2� EU�Solvency�II�Directive;

9.3� Capital�management�techniques;

9.4� Financial�modelling;

9.5� Credit�rating�agencies.

10.� Understand�the�current�and�future�challenges�to�the�management�of�insurance�organisations

10.1� Information�Technology;

10.2� Data�management;

10.3� Change�management;

10.4� Run�off�issues;

10.5� Ethical�practices�and�Treating�Customers�Fairly.

1.� Understand�the�need�for�capital�and�its�influence�on�the�organisation

1.1� Need�for�capital;

1.2� Ownership�models�and�their�application�in�insurance;

1.3� Sources�of�capital;

1.4� Nature�of�holding�companies,�groups,�subsidiary�companies,�associate�companies,�joint�ventures.

2.� Understand�the�management�structures�of�insurance�organisations

2.1� Role�of�the�board;

2.2� Role�of�the�key�management�positions�in�insurance;

2.3� Corporate�governance;

2.4� Corporate�risk�management�–�obligations�and�approach;

2.5� The�stakeholder�model�and�its�influence�on�management�in�insurance.

3.� Understand�the�organisational�issues�of�insurance�organisations

3.1� Principles�of�organisation;

3.2� Centralisation�v�decentralisation;

3.3� The�aims�and�challenges�of�outsourcing�–�effective�management�of�service�level�agreements.

4.� Evaluate�and�apply�corporate�finance�concepts�in�insurance

4.1� Role�of�the�finance�function;

4.2� Principles�of�financial�reporting;

4.3� International�accounting�standards;

4.4� Ratio�analysis;

4.5� Cashflow�analysis;

4.6� Interpreting�insurance�accounts;

4.7� Financial�and�tax�planning;

4.8� Investment/project�appraisal;

4.9� Raising�capital;

4.10� Acquisition�and�disposal�of�businesses;

4.11� Managing�credit;

4.12� Managing�liquidity.

5.� Evaluate�and�apply�the�planning�process�in�insurance

5.1� Levels�of�planning�corporate�v�business;

5.2� Strategic�and�operational�planning;

5.3� Basic�planning�process�–�PEST/PESTLE,�SWOT,�objective�setting,�gap�analysis,�option�development,�option�selection,�implementation,�monitoring.


Part 1 Changes to UK financial services regulation in 2013 21 Part 1Part 1


Accounting for non-accountants: a manual for managers and students. Graham Mott. Kogan Page, 2008. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Frank Wood’s business accounting, Vol 1 and Vol 2. 10th ed. Ft Prentice Hall Financial Times, 2005. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

FT guide to using and interpreting company accounts. 4th

ed. FT Prentice Hall, 2010. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Audit and accountancy pitfalls: a casebook for practising accountants, lawyers and insurers Emile Woolf and Moira Hindson. Wiley, 2011. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Forensic accounting for dummies. Frimette Kass-Shraibman and Vijay S. Sampath. Wiley, 2011. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

International financial reporting standards: a practical guide Hennie Van Greuning, Darrel Scott and Simonet Terblanche. World Bank Publications, 2011. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Corporate finance law: principles and policy. Louise Gullifer, Jennifer Payne. Oxford: Hart Publishing, 2011.

Bank and insurance capital management. Frans De Weert. Chichester: Wiley, 2011.

Solvency II: stakeholder communications and change.

Capital structure and corporate financing decisions: theory, evidence, and practice H. Kent Baker and Gerald S. Martin. Wiley, 2011. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Executive’s guide to solvency II. David Buckham, Jason Wahl and Stuart Rose. Wiley, 2011. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

The law of insolvency. Ian Fletcher and Letitia Crabb. 4th ed. London: Sweet & Maxwell, 2009.

The Financial Times guide to using the financial pages. Romesh Vaitilingam. Prentice Hall/Financial Times, 2006. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

The FT guide to mastering operational risk. Toy Blunden & John Thirlwell. Harlow: FT/Prentice Hall, 2010.

Holistic risk management in practice. P Hopkin. London: Witherby, 2002.

Corporate risk management. Tony Merna and Faisal F. Al-Thani. Wiley, 2005. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Global financial regulation: the essential guide. H Davies and D Green. Cambridge, UK: Polity, 2008.

Smarter outsourcing: an executive guide to managing successful relationships. Harlow: FT/Prentice Hall, 2006.

Reading listThe following list provides details of various publications which may assist with your studies.

These will help candidates keep up-to-date with developments and will provide a wider coverage of syllabus topics.

Note:�The�examination�will�test�the�syllabus�alone.�However,�it�is�important�to�read�additional�sources�as�10%�of�the�exam�mark�is�allocated�for�evidence�of�further�reading�and�the�use�of�relevant�examples.�

The reading list is provided for guidance only and is not in itself the subject of the examination.

CII/Personal Finance Society members can borrow most of the additional study materials below from Knowledge Services.

CII study texts can be consulted from within the library. For further information on the lending service, please go to www.cii.co.uk/knowledge/resources.

CII study textsInsurance corporate management. London: CII. Study text 990

Insurance business & finance. London: CII. Study text P92.

Insurance, legal and regulatory. London: CII. Study text IF1.

Additional reading Additional reading materials are available through the library or on the Knowledge Services website.

New materials are added frequently – for information about new books and articles in your area of interest, please visit www.cii.co.uk/knowledge or email [email protected].

Books (and ebooks)Global perspectives on insurance today: a look at national interests versus globalisation. C Kempler et al. London: Palgrave Macmillan, 2010.

A guide to insurance: combining governance, compliance and regulation. Nigel Feetham. London: Spiramus Press, 2012.

Corporate governance. R A G Monks, N Minow. 4th ed. Chichester, West Sussex: John Wiley & Sons, 2008.

Corporate governance. Christine A Mallin. 3rd ed. Oxford: Oxford University Press, 2010.

The FT guide to strategy. Richard Koch. Harlow: FT/Prentice Hall, 2006.

Management: an introduction. D Boddy. 4th ed. Harlow, Essex: Pearson Education, 2008.

Strategic management. R Lynch. 5th ed. Harlow, Essex: Pearson Education, 2009.

Accounting for non-accounting students. J R Dyson. 7th ed. Harlow, England: Pearson Education, 2007.

The Financial Times guide to using and interpreting company accounts. W McKenzie. 4th ed. Harlow, Essex: Pearson Education, 2010.



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Part

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Reference materialsDictionary of insurance. C Bennett. 2nd ed. London: Pearson Education, 2004. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Code of ethics. London: CII, 2009. Available online at www.cii.co.uk/cii/about/stand/code_of_ethics.aspx

International Financial Reporting Standards. IFRS Foundation. London: IFRS Foundation. Annual.

Lamont’s financial glossary: the definitive plain English money and investment dictionary. Barclay W Lamont. 10th ed. London: Taxbriefs, 2009. Also available as an ebook via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Manual of accounting. 4v. PriceWaterhouseCoopers. Haywards Heath: Bloomsbury Professional. Annual.

Examination guidesGuides are produced for each sitting of written answer examinations. These include the exam questions, examiners’ comments on candidates’ performance and key points for inclusion in answers.

You are strongly advised to study guides for the last two sittings. Please visit www.cii.co.uk to buy online or contact CII Customer Service for further information on +44 (0)20 8989 8464.

Older examination guides are available (for members only) via www.cii.co.uk/knowledge. Alternatively, if you have a current study text enrolment, the latest exam guides are available via www.revisionmate.com.

Exam technique/study skills There are many modestly priced guides available in bookshops. You should choose one which suits your requirements.

The Insurance Institute of London holds a lecture on revision techniques for CII exams approximately three times a year. The slides from their most recent lectures can be found at www.cii.co.uk/knowledge/iilrevision (CII/Personal Finance Society members only).

Essentials of business process outsourcing. Thomas Duening and Rick Click. Chichester: Wiley, 2005.

Bowstead and Reynolds on agency. Peter Watts & FMB Reynolds. 19th ed. London: Thomson Reuters, 2010.

The role of agents in insurance business. Chapter – MacGillivray on insurance law: relating to all risks other than marine. 11th ed. London: Sweet & Maxwell, 2008.

Factfiles and other online resourcesCII factfiles are written by subject matter experts within the insurance and financial services industry. They are updated annually, and interim update bulletins are included where necessary to take into account any major changes during the year. All are available online via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

• Alternative risk transfer. David Kaye; updated by Ian Searle.

• Risk control. Ian Searle.

• Risk identification. Ian Searle.

• Enterprise risk management. Ian Searle.

• Recent developments to Solvency II. Brad Baker.

• Insurance accounting (general business). Ian Hutchinson.

• Insurance in the single market. Paul Clarke.

• The business of insurance broking. Ian Youngman

• Factors leading to a “hard” or “soft” insurance market. Ian Searle.

• Efficiency tactics within the insurance industry. Ian Searle.

Association of Insurance and Risk Managers www.airmic.com

Bank of England’s Financial Stability Role http://www.bankofengland.co.uk/financialstability/ Pages/default.aspx (accessed 10 January 2013).

Institute of Risk Management www.theirm.org

Further articles and technical bulletins are available at www.cii.co.uk/knowledge (CII and Personal Finance Society members only).

Journals and magazinesThe Journal. London: CII. Six issues a year. Also available via www.cii.co.uk/knowledge (CII/Personal Finance society members only).

Post magazine. London: Incisive Financial Publishing. Weekly.

The Economist. London: Economist Newspaper. Weekly.

Financial times. London: Financial Times. Daily. Also available online at www.ft.com.



Appendix 2: Amendments to revision questions and scenario 8

1. Amendments to Chapter 8 revision questions nos 2 and 5 (page 8/33) Replace question no 2 with the following:

What are the FCA’s three operational objectives?

Replace question no 5 with the following:

What is the PRA’s additional insurance objective?

2. Amendments to Chapter 8 revision question answers nos 2 and 5 (page 8/34) Replace with the following:

No 2: the FCA’s three operational objectives are:

(i) Consumer protection – securing an appropriate degree of protection for consumers

(ii) Integrity – protecting and enhancing the integrity of the UK financial system

(iii) Competition – promoting effective competition in the interests of consumers in the markets for regulated financial services and services provided by a recognised investment exchange.

No 5: PRA’s insurance objective is contributing to the securing of an appropriate degree of protection for those who are or may become policyholders.

3. Scenario 8, UK insurance regulation, Question, page 8/33 Replace question (d) with the following:

d) How do the new regulatory bodies intend to go about improving the regulatory regime post April 13?

How to approach your answer, page 8/34

1st bullet point: Amend the second sentence to:

• Specific FCA/PRA objectives including PRA’s new insurance objective.

4th bullet point: Replace with:

• FCA: early action, thematic reviews and market wide analysis, able to ban products.

• PRA: ‘judgment-based’ approach, seeking to ensure failure without bringing down system.

• FPC: watching for emerging risks and providing strategic direction.


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Appendix 3.1: Replacement Appendix 9.1 (page 9/30)

Adequacy of capital resources – GENPRU extracts

Extracts from PRA/GENPRU 1.2: Adequacy of financial resources

1.2.26R Requirement to have adequate financial resources (The overall Financial Adequacy rule)

A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

1.2.30R Systems, strategies, processes and reviews (The overall Basel Pillar 2 rule – this together with all the remaining rules in this extract are referred to as the ICAAP rules)

A firm must have in place sound, effective and complete processes, strategies and systems:

(1) to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the:

(a) the nature and level of the risks to which it is or might be exposed;

(b) the risk in the overall financial adequacy rule; and

(c) the risk that the firm might not be able to meet its CRR in the future; and

(2) that enable it to identify and manage the major sources of risks referred to in (1), including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:

(a) credit risk;

(b) market risk;

(c) liquidity risk;

(d) operational risk;

(e) insurance risk;

(f) concentration risk;

(g) residual risk;

(h) securitisation risk;

(i) business risk;

(j) interest rate risk (including, in the case of a BiPRU firm, interest rate risk in the non-trading book;

(k) pension obligation risk;

(l) group risk.

1.2.35R The processes, strategies and systems required by the overall Pillar 2 rule must be comprehensive proportionate to the nature, scale and complexities of the firm’s activities.

1.2.37RThe processes and systems required by the overall Pillar 2 rule must:

(1) include an assessment of how it intends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R(2); and

(2) take into account the impact of diversification and how such effects are factored into the firm’s systems for measuring risks.

(3) 6include an assessment of the firm-wide impact of the risks identified in accordance with GENPRU 1.2.30R (2), to which end a firm must aggregate the risks across its various business lines and units, making appropriate allowance for the correlation between risks.


1.2.42R Stress and scenario tests (The general stress and scenario testing rule)

As part of its obligation under the overall Pillar 2 rule, a firm must, for each of the major sources of risk identified in accordance with GENPRU 1.2.30R(2), carry out stress tests and scenario analyses that are appropriate to the nature of those major sources of risk, as part of which the firm must:

(a) take reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which the risk identified crystallises; and

(b) estimate the financial resources the firm would need in each of the circumstances and events considered in order:

(i) to be able to meet its liabilities as they fall due;

(ii) to be able to meet the CRR;

(iii) to carry out the plans referred to in GENPRU 1.2.37R(1); and

(iv) otherwise to meet, to the extent that it considers necessary, that major source of risk.

1.2.60R Documentation of risk assessmentsA firm must make a written record of the assessments required under this section. These assessments include assessments carried out on a consolidated basis and on a solo basis*. In particular it must make a written record of:

(1) the major sources of risk identified in accordance with GENPRU 1.2.30R(2);

(2) how it intends to deal with those risks; and

(3) details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required in accordance with the general stress and scenario-testing rule.

1.2.61RA firm must retain the records of its assessments referred to in GENPRU 1.2.60R for at least three years.

(*As part of a wider group and as an individual insurance company)

26 990/April 2013 Update bulletin

Appendix 3.2: Replacement Appendix 9.2 (page 9/31)

ICAs – INSPRU extracts

ICAs: Extract from PRA/ INSPRU7.1 Application

7.1.15R Methodology of capital resources assessmentWhere a firm is carrying out an assessment in accordance with GENPRU 1.2 of the adequacy of its overall financial resources, to cover the risk in the overall financial adequacy rule, that is, the risk of its being unable to meet its liabilities as they fall due, the assessment of the adequacy of the firm’s capital resources must:

1) reflect the firm’s assets, liabilities, intra-group arrangements and future plans;

2) be consistent with the firm’s management practice, systems and controls;

3) consider all material risks that may have an impact on the firm’s ability to meet its liabilities to policyholders; and

4) use a valuation basis that is consistent throughout the assessment.

7.1.49R Documenting ICAs submitted to the appropriate regulatorThe written record of a firm’s individual capital assessments carried out in accordance with INSPRU 7.1.15R submitted by the firm to the appropriate regulator must:

1) in relation to the assessment comparable to a 99.5% confidence level over a one year timeframe that the value of assets exceeds the value of liabilities, document the reasoning and judgements underlying that assessment and, in particular, justify:

a) the assumptions used;

b) the appropriateness of the methodology used; and

c) the results of the assessment; and

2) identify the major differences between that assessment and any other assessments carried out by the firm using a different confidence level.

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Appendix 4: Types of firms and their respective regulatory bodies post 1 April 2013

FCA regulated firms – conduct and prudential • Personal investment firms

• Insurance intermediaries

• Mortgage intermediaries

• Investment managers

• Non-deposit taking lenders

• Corporate finance

• Wholesale firms

• Custodians

• Professional firms

• Markets (exchanges and infrastructure providers)

• Collective investment schemes

• Other (including travel insurance only and media firms)

• Other brokers

• Managing agents

• Investment firms

FCA regulated firms – conduct of business only /PRA prudential supervision• Banks

• Building societies

• Investment banks

• Credit unions

• Friendly societies

• Life insurers

• General insurers

• Wholesale insurers, commercial insurers and reinsurers

• Lloyd’s & Lloyds Agents

Source: FSA (June 2011) The Financial Conduct Authority: Approach to Regulation

28 990/April 2013 Update bulletin

Appendix 5: Summary of contents of FCA and PRA Handbooks from 1 April 2013

(See www.fca.org.uk for full Handbooks and Guides).

Sourcebook or manual FCA PRA

Glossary • •

High level standards

PRIN • •

SYSC • •

FIT • •

FINMAR • •

TC • n/a

GEN • •

FEES • •

Prudential standards

GENPRU • •

BIPRU • •

INSPRU • •

MIPRU • •

UPRU • n/a

IPRU-FSOC • •

IPRU-INS • •

IPRU-INV • •

Business standards

COBS • •

ICOBS • n/a

MCOB • n/a

BCOBS • n/a

CASS • n/a

MAR • n/a

Regulatory processes

SUP • •

Redress

DISP • n/a

CONRED • n/a

COMP • •

Part

1


Specialist sourcebooks

COLL • n/a

CREDS • •

PROF • n/a

RCB • n/a

BSOCS n/a •

Listing, Prospectus and Disclosure

LR • n/a

PR • n/a

DTR • n/a

Handbook guides

EMPS • n/a

OMPS • n/a

SERV • n/a

Regulatory guides

BSOG • •

COLLG • n/a

FC • n/a

PERG • n/a

RPPD • n/a

UNFCOG • n/a

Part 1Part 2

Part 2: The Consumer Insurance (Disclosure and Representations) Act 2012

Contents2.1 The Consumer Insurance (Disclosure and Representations) Act 2012 32


rt 2

2.1. The Consumer Insurance (Disclosure and Representations) Act 2012

As part of the Law Commission’s ongoing review of insurance contract law, this Act came into effect on 6 April 2013. Note that it covers only consumer insurance which it defines as insurance bought by individuals ‘wholly or mainly for purposes unrelated to their trade, business or profession’.

Text reference: chapter 10, section F2, page 10/30In summary the Act does the following:

• It abolishes the previous duty on consumers to volunteer all material facts and consumers are instead required to take reasonable care not to make a misrepresentation before the contract is entered into or varied. (In the case of a variation, the duty would apply only to information relating to the variation.)

Insurers will still be able to ask general or open-ended questions but the clarity and scope of the questions would be taken into account in assessing whether or not the consumer’s response was reasonable.

• The Act provides different remedies for the insurer when faced with a claim that reveals mispresentation on the part of the consumer:

– If the misrepresentation was honest and reasonable: the insurer must pay the claim. The consumer is expected to exercise the standard of care of a reasonable consumer, taking into account a range of factors, including the type of insurance policy and the clarity of the insurer’s question(s).

– If the misrepresentation was careless: the insurer has a compensatory remedy based upon what it would have done had the consumer taken care to answer the question accurately. If, for example, the insurer would have applied an exclusion it would not be required to meet claims which would fall within the exclusion, but must meet other claims falling within the policy scope. If the insurer would have applied an increased premium the proportionality approach* would apply. If it would not have accepted the risk it would be entitled to avoid the contract and decline all claims and would be required to refund the premium.

* proportionality approach – the insurer’s liability is reduced in line with the reduction in premium which the proposer achieved through their misrepresentation or non-disclosure.

– If the misrepresentation was deliberate or reckless: the insurer is entitled to treat the policy as void and may decline all claims. It would also be entitled to retain the premium, unless there was a good reason why it should be returned.

• The Act establishes a statutory code to determine for whom an intermediary (an ‘agent’ or ‘broker’) acts during the pre-contract stage. This code is based largely on the existing law, as supplemented by FOS practice and industry understanding. The Act features rules together with examples of factors that may tend to confirm that the agent is acting for the consumer or show that it is acting for the insurer.

• It abolishes ‘basis of the contract’ clauses which have historically enabled the insurer to avoid the policy for any breach of the insured’s warranting the truth of the information provided, however trivial or material the breach might be to the risk. This codifies modern practice for consumer insurance, which has featured in the industry Statements of Practice over the years. The Act closely reflects current Financial Ombudsman and market practice, the difference is that it now imposes a statutory duty on insurers to follow that practice.

Future consultations and developmentsConsultations were undertaken in 2011 and 2012 addressing the subjects of misrepresentation and non-disclosure from the perspective of commercial/business insurance, together with post-contract duty of good faith, breach of warranty, the law on insurable interest and other areas. Further legislation is likely to emerge during 2013.

ActivityRefer to CII Fact Files (available to CII members/subscribers only) for recent developments in insurance contract law and to the Law Commission’s website to monitor progress of the reform project for business insurance: www.lawcom.gov.uk/insurance_contract.htm

part 1 990€¦ · please note the following update to your october 2012 edition of the 990 study...

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