FCA’s product intervention powers

The Financial Conduct Authority acquired product intervention powers on its creation in April 2013. It can make rules prohibiting authorised firms from entering into “specified agreements”. So in 2014 it restricted firms from distributing contingent convertible securities (CoCos) to the mass retail market.  It has also proposed requirements to apply when certain regulatory share capital instruments issued by mutual societies are distributed in the retail markets, including core capital deferred shares (CCDS).

The regulator was often able to achieve what was in effect a product ban without using formal powers. So in 2011 the FCA’s predecessor, the Financial Services Authority, informed the industry that traded life policies, or “death bonds”, were unsuitable for the retail mass market.

The FCA can exercise product intervention powers when it is necessary to advance its consumer protection objective or its competition objective. If HM Treasury so specifies (which it hasn’t yet) it will also be able to rely on its objective of protecting and enhancing the integrity of the UK financial system.

The territorial extent of the FCA’s powers in the insurance sector is quite wide because an “authorised firm” includes:

  • an insurer authorised in a different member state which has passported into the UK on an establishment or a services basis, in the latter case because it is insuring risks or commitments in the UK without necessarily having any local presence; and
  • an insurance intermediary registered in member state A which has passported on a services basis into the UK because it is seeking to supply policyholders, who are established in the UK, with insurance covering a risk located otherwise than in state A.

 Product intervention under the EIOPA regulation

The EIOPA regulation conferred on the European Insurance and Occupational Pensions Authority (EIOPA) powers for the temporary prohibition or restriction of dealings in “certain financial activities”, defined as covering, among other things, life and non-life (re)insurance and (re)insurance mediation.

The PRIIPs Regulation

The EU Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) will have direct effect in the European Economic Area from 31 December 2016. The primary purpose of the regulation is to provide for a harmonised Key Information Document (KID) to be used for all sales of PRIIPs. This will, for products covered by the regulation, replace, among others, the “key features document” and the “key features illustration” provided for under the FCA’s rules. The format of the KID is being developed by EIOPA.

The PRIIPs regulation provides that intervention powers may be exercised by member state competent authorities, such as the FCA. Alternatively temporary intervention powers may be exercised by EIOPA itself. However, EIOPA can only take action if the member state competent authority has not, so interventions by EIOPA will probably be relatively rare in the UK where the FCA has already shown itself ready to take pre-emptive action.

There are five conditions in article 17(2) of the PRIIPS Regulation which must all be satisfied before the power is exercised by member state supervisors. These include “the action does not have a discriminatory effect on services or activities provided from another Member State”. This expression is likely to be difficult to interpret. An exercise of the power may well have a discriminatory effect on another member state, but that may be justified if products emanating from that state are causing serious problems. The European Court has long struggled with issues such as these.

Whilst the FCA’s powers include requiring a firm to pay compensation or reimbursement of money paid or providing for an agreement, or an obligation within such an agreement, to be unenforceable, this is not provided for in the regulation.  If the regime under the regulation is to replace equivalent domestic regulation it may be that the FCA will lose its extra powers. More likely the UK will argue that these powers are unaffected or are consistent with the regulation. The argument will doubtless be that the regulation does not purport to prevent member states from exercising powers additional to those provided for.

Delegated acts

The regulation also provides for the Commission to adopt delegated acts specifying “criteria and factors to be taken into account by competent authorities in determining when there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or to the stability of the financial system in at least one member state”.

EIOPA has given advice to the Commission on these criteria and factors. Its proposed criteria and factors are, characteristically, extremely lengthy and detailed and run to four pages. They should be read in conjunction with the mandatory requirements applying under article 17(2). The complexity here contrasts with the position in the UK where a threat to the FCA’s consumer protection or competition objectives is sufficient to justify action being taken.

Territorial jurisdiction

The PRIIPS Regulation allows member state competent authorities to apply prohibitions and restrictions “in or from its member state“. This goes beyond the FCA’s current territorial jurisdiction by allowing EEA supervisors such as the FCA to restrict the activities of firms selling products into the EEA from non EEA jurisdictions such as Switzerland and Bermuda. The FCA may also take action (in most cases, no doubt, at the request of another supervisor) against a UK firm selling on a services basis into another EEA member state.

However, the PRIIPS Regulation, unlike the EIOPA regulation and the FCA’s domestic powers, only apply to insurance based investment products. These do not cover general insurance or protection insurance. Nor do they cover non-insurance investment products, which are regulated under the Markets in Financial Instruments Directive.

EIOPA opinion on action taken by member states

The regulation requires member state authorities to notify EIOPA when they have taken action. EIOPA must then issue an opinion as to whether it considers the action to be justified and proportionate. If the member state authority then takes action contrary to the opinion it must publish on its website a notice fully explaining its reasons for so doing. The assumption here seems to be that a member state acting in defiance of the views of EIOPA would suffer public embarrassment. In some cases, however the opposite might be the case.

Comment

It is perhaps surprising that the FCA does not exercise its product intervention powers more often. A possible reason is that it may be able to persuade firms to take corrective action without exercising formal powers other than straightforward enforcement action. This will not necessarily always be the case for foreign firms. So as the European retail insurance market develops, one can expect to see these powers exercised increasingly often.