UK PRA publishes letter about transfers of insurance business under Part VII FSMA Regulation and the future of the insurance industry: speech by Paul Fisher FCA publishes Dear CEO letter on retirement reforms and guidance guarantee Lloyd's publishes bulletin on distribution costs, broker remuneration and additional charges Lloyd's publishes international sanctions guidance: compliance, delegated authorities and claims The Financial Services and Markets Act 2000 (Regulation of Auditors and Actuaries) (PRA Specified Powers) Order 2015 Ombudsman News issue 123 SOLVENCY II Commission Delegated Regulation published in the Official Journal PRA publishes CP3/15: Solvency II - transitional measures and the treatment of participants PRA publishes update on Solvency II non-December year end reporting schedules UK PRA publishes letter about transfers of insurance business under Part VII FSMA On 22 January 2015, the Prudential Regulation Authority (PRA) published the text of a letter to firms, dated 21 January 2015, sent by Chris Moulder, the PRA’s Director of General Insurance and Andrew Bulley, the PRA’s Director of Life Insurance, to explain how it will deal with transfers of insurance business under Part VII of the Financial Services and Markets Act 2000 (FSMA) during 2015. The letter has been sent because a significant number of firms are seeking to complete transfers between now and the implementation of Solvency II. During this period, the PRA has a number of other material priorities it needs to deliver and it has a duty to apply its resource appropriately. The letter says that the PRA will continue to progress those insurance transfers notified to it where the fee has been paid (or where a special project fee has been agreed), the firm has indicated its intention to complete the transfer in 2015 and is on track to do so. For those transfers where a fee has not yet been paid (or a special project fee agreed), the PRA will consider, on a case by case basis, the impact of the transfer on its objectives and the likelihood of the- 2 - Hogan Lovells transfer completing by the end of 2015. It will seek to agree a timetable with the firm, based on this assessment. This will have regard to any other constraints on its resource as a result of other transfers in progress and other existing priorities such as the implementation of Solvency II. The PRA says for all transfers, timetables should be credible and realistic in terms of what needs to be submitted to it and by when in order to allow the PRA sufficient time to complete its review and file its reports with the court. In relation to the directions hearing, all relevant documentation, including the Independent Expert’s report, should be in final draft form and submitted to the PRA as soon as practicable and at least six weeks prior to the hearing date (or in accordance with the timetable the firm has agreed with the PRA, if different). If these requirements are not followed the PRA may ask for the hearing to be deferred. The PRA is proposing not to review any accompanying documentation, for example, policyholder communications or requests for waivers, until it is in receipt of a final draft of the Independent Expert’s report. If firms submit any documents for review before the final draft of the Independent Expert’s report has been provided to the PRA they should explain why an early review is necessary. Regulation and the future of the insurance industry: speech by Paul Fisher On 22 January 2015, Paul Fisher, Deputy Head of the PRA and Executive Director, Insurance Supervision, spoke at the Westminster Business Forum conference. In his speech Mr Fisher focused on the new Solvency II regime. Among other things he said: the PRA believes the UK insurance industry is in a good position, having had the UK riskbased individual capital adequacy standards regime for around ten years. It is therefore not looking to use Solvency II as an opportunity to raise capital requirements across the board; the PRA recognises that Solvency II is a maximum harmonisation Directive with a key objective of promoting supervisory co-operation. The PRA is committed to upholding this valued objective and will implement the Directive as intended. Mr Fisher said the PRA “can’t and won’t gold plate”. Mr Fisher also said that the PRA understands that there has been some uncertainty around its expectations of the non-executive director role for firms that have internal risk models. He said that non-executive board members need not be technical experts in risk modelling. However, each board collectively should understand the key strengths, limitations, and judgements within their model. Overreliance on a single measure can be misleading. Therefore, the PRA wants non-executives to have the right tools and sufficient knowledge to be able to challenge model outputs, rather than follow them slavishly. FCA publishes Dear CEO letter on retirement reforms and the guidance guarantee On 26 January 2015, the Financial Conduct Authority (FCA) published the text of a "Dear CEO" letter sent by Christopher Woolard, its Director of Strategy and Competition, to the chief executive officers (CEOs) of pension providers, relating to retirement reforms and the guidance guarantee. The letter outlines plans to introduce additional protection for those accessing their defined contribution pension pot from April 2015. Under the new additional protection rules firms will be required to ask consumers about key aspects of the circumstances that relate to the decision they are making about their pension pot. These include issues such as health and lifestyle choices or marital status. The new rules will be introduced on a temporary basis from 6 April 2015. Once the additional questions have been asked individuals will still be able to proceed on an execution only basis. Providers will be required to give relevant risk warnings, such as warning of the tax implications of their decisions, in response to answers from consumers. Firms must also further highlight the availability of the Government’s new Pension Wise scheme or regulated advice. Firms will be required- 3 - Hogan Lovells to deliver these messages in a direct and simple language which will be set out when the new rules are published. The rules, which are additional to those published in policy statement PS14/17, will be brought into force prior to consultation in order to provide to provide important additional protection for consumers. The FCA considers that the delay involved in consulting would probably be prejudicial to consumers. It believes it will be possible for firms to provide the proposed risk warnings without providing regulated advice. The full requirements the FCA is to place on firms will be made clear in the published rules. The content and timing of the rules are subject to a decision by the FCA’s Board. The FCA has published finalised guidance, FG15/1, on retail investment advice which clarifies the boundaries and explores the barriers to market development. Mr Woolard says that this guidance will be helpful to firms. As set out in PS 14/17, the FCA will be undertaking a review of all the current regulatory requirements around the customer’s interaction with providers in the run up to their retirement in the first half of this year, incorporating and building on the Association of British Insurers Code. As part of that consultation the FCA will also consult on whether to retain or modify the temporary rules that it is proposing to introduce in April.2015. Lloyd's publishes bulletin on distribution costs, broker remuneration and additional charges On 22 January 2015, the Society of Lloyd’s published a market bulletin containing consolidated guidance on distribution costs, broker remuneration and additional charges. Lloyd's published guidance in this area on 22 February 2012 and further updated it on 26 April 2012. However placement structures and remuneration arrangements in the London market continue to evolve and increase. Whilst Lloyd’s says it does not seek to interfere with the agreement of commercial arrangements in the market nevertheless, it is important that managing agents continue to properly consider the structure and terms of such arrangements to ensure their compatibility with relevant laws and regulations and to meet the very highest standards in their dealings with brokers for the benefit of Lloyd’s policyholders. In view of developments, Lloyd’s has decided to: refresh and reissue Lloyd’s consolidated guidance (see annex 1 to the bulletin); remind managing agents of the advice on broker remuneration obtained by the Lloyd’s Market Association for its members from Reynolds Porter Chamberlain, a summary of which can be found at this link; require that each managing agent reconsiders the application of the guidance to its business arrangements with brokers at a board meeting; and reissue Lloyd’s reporting requirements for managing agents in connection with additional payments (see annex 2) and inform the market that it will carry out sample audits of such audit returns from the first quarter of 2015 to ensure that Lloyd’s is accurately capturing both the type and quantum of these payments. Lloyd's says that it will continue to engage with the FCA in monitoring of the issue. Lloyd’s publishes international sanctions guidance: compliance, delegated authorities and claims On 12 January 2015, the Society of Lloyd's published a market bulletin to provide the market with guidance on developing appropriate and risk based systems and controls to comply with international- 4 - Hogan Lovells sanctions covering the compliance, delegated authorities and claims handling business areas. The guidance follows on from Lloyd’s market-wide review during 2013 and 2014. The guidance is split into three parts: Part 1: compliance. This guidance is intended for Lloyd’s managing agents in assessing the adequacy of their own sanctions systems and controls. It may also be of interest to Lloyd’s brokers. Its purpose is to assist managing agents in establishing appropriate systems and controls in respect of international financial and trade sanctions, and it sets out considerations that should form the basis of an effective sanctions compliance framework. The guidance covers risk assessment, governance, policies and procedures, sanctions screening, other screening and due diligence considerations, monitoring and reporting, record keeping, and communications and training; Part 2: delegated authorities. This guidance is intended for all managing agents who underwrite business using delegated authorities, in addition to Lloyd’s brokers, who play an important role in the relationship between managing agent and coverholder. The purpose of this guidance is to assist managing agents in establishing appropriate systems and controls relating to their coverholders, to ensure compliance with applicable sanctions and regulatory requirements connected to sanctions. The guidance focuses on governance, risk assessment of coverholders, due diligence of new coverholders, sanctions screening by coverholders, sanctions clauses, training and audits; Part 3: claims. This guidance is intended primarily for compliance managers who, working in consultation with senior claims personnel, will need to ensure their claims team has in place appropriate sanctions procedures. This guidance is intended to be complementary to, and read in conjunction with, parts 1 and 2 of the guidance. The Financial Services and Markets Act 2000 (Regulation of Auditors and Actuaries) (PRA Specified Powers) Order 2015 The above Order, SI 2015/61, which comes into force on 20 February 2015, gives effect to the enforcement powers of the PRA over the auditors and actuaries of large financial companies which it authorises. The Order will allow the PRA to apply dissuasive sanctions for non-compliance with relevant PRA rules or statutory duties. These rules and duties exist to facilitate the exchange of information and opinions between the PRA and the auditors and actuaries of entities it authorises. The PRA was given enforcement powers over auditors and actuaries under the Financial Services Act 2012, but is not able to use them until an order of HM Treasury so provides. A related explanatory memorandum has also been published. Ombudsman News issue 123 On 27 January 2015, the Financial Ombudsman Service (FOS) published issue 123 of Ombudsman News. Among other things, this issue contains an article which looks at situations where, because of their customers’ particular needs, businesses have additional responsibilities under the Equality Act 2010. The issue also includes case studies relating to winter sports travel insurance, FOS complaints date for the third quarter of the 2014/15 financial year and questions and answers raised with the FOS’ free expert helpline for businesses and advice workers. SOLVENCY II Commission Delegated Regulation published in the Official Journal- 5 - Hogan Lovells On 17 January 2015, the text of the Commission Delegated Regulation (Regulation 2015/35), which supplements the Solvency II Directive, was published in the Official Journal of the European Union. The Delegated Regulation entered into force on the day following that of its publication in the Official Journal. PRA publishes CP3/15: Solvency II - transitional measures and the treatment of participants On 23 January 2015, the PRA published a consultation paper, CP3/15, that sets out draft rules (see appendix 1) on transitional measures for risk-free interest rates and for technical provisions, necessary to implement the Solvency II Directive. CP3/15 also includes two draft supervisory statements: the first on the PRA’s expectations regarding the calculation and application process for these transitional measures (see appendix 2.1) and the second on the internal model treatment of participations (see appendix 2.2). The PRA says that CP3/15 should be read alongside the relevant European legislation, previous PRA consultations on Solvency II, and relevant parts of the PRA Rulebook. The proposed rules in the consultation paper are designed to ensure a smooth transition towards the full requirements of the new regime. The Solvency II Directive specifies a transitional on risk-free rates, which firms must apply to the PRA for approval to use, and which is designed to enable firms to transition from their current discount rate requirements to the corresponding Solvency II requirements. The Directive also specifies a transitional on technical provisions, which firms must apply to the PRA for approval to use, and which is applied as a deduction from a firm’s Solvency II technical provisions. The draft supervisory statements in the consultation paper set out the PRA’s expectations regarding the calculation and application process to be used for these transitional measures. They also set out the PRA’s expectations of firms in relation to how participations in (re)insurance firms are reflected in the Solvency Capital Requirement at the solo level. Comments are requested by 20 February 2015. The PRA has adopted a short consultation period in order that the final rules and supervisory statements may be published ahead of the EU deadline of 31 March 2015 for transposing the Solvency II Directive into UK law. The Solvency II regime will apply to all affected firms from 1 January 2016. PRA publishes update on Solvency II non-December year end reporting schedules On 16 January 2015, the PRA published an updated list of reporting schedules for firms with nonDecember year ends under the Solvency II Directive. The PRA’s Solvency II updates webpage says that the updated version has been published to correct a number of inaccuracies, primarily related to submission dates in 2017 and 2018. The updated schedules are also available on the PRA's webpage on regulatory reporting.