Corporate insurance newsletter – October 2015
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Hogan Lovells Corporate Insurance Newsletter October 2015 UK • HM Treasury publishes policy paper on senior managers and certification regime: extension to all FSMA authorised persons • FCA and PRA publish joint consultation paper on strengthening accountability in banking and insurance: regulatory references • PRA publishes PS24/15 and the FCA publishes PS15/24: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers • FCA publishes statement on PPI • ABI publishes statement of good practice for providers of cluster policies INTERNATIONAL • IAIS publishes report on ICPs 9, 10 and 11 • IAIS and IFSB final draft guidance on issues in regulation and supervision of microtakaful • IAIS publishes revised draft issues paper on conduct of business in inclusive insurance • IAIS publishes first version of HLA requirements for G-SIIs SOLVENCY II • EIOPA publishes update on data point model and XBRL taxonomy design • EIOPA publishes corrected versions of some of the second set of ITS and guidelines • EIOPA modifies the methodology for calculating the relevant risk-free interest rate term structures • European Commission requests further advice from EIOPA regarding the treatment of insurers' investments in infrastructure corporates • EIOPA review of methodology to derive the ultimate forward rates UK HM Treasury publishes policy paper on senior managers and certification regime: extension to all FSMA authorised persons On 15 October 2015, HM Treasury published a policy paper detailing the measures in the Bank of England and Financial Services Bill to extend and reform the senior managers and certification regime - 2 - Hogan Lovells (SM&CR) to all Financial Services and Markets Act 2000 authorised persons, replacing the approved persons regime. The overall approach to the extension of the SM&CR and the implications for those firms that will be brought within scope, are discussed in more detail in chapter 2 of the policy paper. The key features of the extended regime are: • an approval regime focused on senior management, with requirements on firms to submit robust documentation on the scope of these individuals' responsibilities; • a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This statutory duty of responsibility will supersede the "reverse burden of proof" in the existing SM&CR proposals for the banking sector. These changes (and other mainly technical changes to the SM&CR) are discussed in chapter 3 of the policy paper; • a requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both on recruitment and annually thereafter; • a power for the regulators to apply enforceable rules of conduct to any individual who can impact their respective statutory objectives. The Government intends that implementation of the extended SM&CR should come into operation during 2018. FCA and PRA publish joint consultation paper on strengthening accountability in banking and insurance: regulatory references On 6 October 2015, the Financial Services Authority (FCA) and the Prudential Regulation Authority (PRA) published a joint consultation paper, FCA CP15/31 and PRA CP36/15, which sets out proposals for regulatory references as part of the wider package of reforms that aim to improve accountability in banks and insurers. The FCA and the PRA originally consulted on regulatory references proposals for banks, building societies, credit unions and PRA investment firms in FCA CP14/13 and PRA CP14/14, and for Solvency II insurers in PRA CP26/14. Both regulators delayed making rules in order to reflect on the recommendations of the Fair and Effective Markets Review. The proposals set out in this consultation paper take into account these recommendations. The consultation paper sets out proposals for regulatory references for candidates applying for: • senior management functions (SMFs) under the senior managers regime; • significant harm functions under the certification regime; • PRA senior insurance management functions (SIMF) under the senior insurance managers regime; • FCA insurance controlled functions; • notified non-executive director (NED) roles within a relevant authorised person (RAP) or Solvency II firm; • NED roles in credit unions; • key function holders (KFH) and notified NED roles within an insurer. In this paper the regulators set out combined proposals for RAPs and insurers. The main proposals are: • requiring these firms to request regulatory references from former employers of candidates applying for SMFs, and certification functions in RAPs, along with SIMFs at insurers, going back six years; - 3 - Hogan Lovells • the PRA proposes a similar requirement for RAPs and insurers in respect of candidates applying for a KFH, notified NED, or credit union NED role; • modifying certain prescribed responsibilities for senior managers in RAPs and insurers to include compliance with the regulatory reference rules; • mandating the inclusion of concluded breaches of the conduct requirements of FCA Conduct Rules, PRA Conduct Rules or Conduct Standards, and Statements of Principle and Code of Practice for Approved Persons going back six years; • requiring disclosures by RAPs and insurers in a standard format, including the need to confirm where there is no relevant information to disclose; • requiring RAPs and insurers to update previous references given in the past six years, where they become aware of matters that would cause them to draft that reference differently if they were drafting it now. The proposals applicable to all authorised firms can be summarised as: • clarifying that a firm must not enter into any arrangements or agreements that limit their ability to disclose relevant information; • enhancing systems and control requirements relating to the retention of records and the policies and procedures for both requesting and providing regulatory references. The existing requirement for firms to disclose all relevant information in references remains. Currently, the requirement to provide a reference on request under chapter 10A of the Supervision manual is actionable for damages. Consistent with that approach, the FCA proposes that the requirement to provide a reference and the new requirement to obtain a reference under the FCA's rules should be actionable for damages. The PRA is also consulting on proposals for all KFHs at Solvency II insurers and large non-directive insurers (NDFs) to have an up-to-date and agreed document setting out their scope of responsibilities, and for these insurers to retain these documents along with the associated governance map for ten years for Solvency II insurers, and six years for NDFs. Comments are requested by 7 December 2015. The FCA and PRA will consider the feedback and publish their rules in a policy statement early in 2016, ahead of the start of the new accountability regime on 7 March 2016. The FCA and the PRA will consider in due course, alongside any wider reform of the approved persons regime, whether the specific proposals for RAPs and insurers should be extended to all authorised firms. This will include consideration of specific, mandatory disclosures and the use of a template. Subsequent reforms will be consulted upon as normal. PRA publishes PS24/15 and the FCA publishes PS15/24: Whistleblowing in deposittakers, PRA-designated investment firms and insurers On 6 October 2015, the PRA published a policy statement, PS24/15, which provides feedback on the responses to the joint PRA and FCA February 2015 consultation paper, FCA CP15/4 and PRA CP6/15, on whistleblowing in UK deposit-takers, PRA-designated investment firms and insurers, and contains the final rules to implement the proposals made in the consultation paper. The policy statement will be of interest to the relevant firms (deposit-takers with assets greater than £250 million, PRA-designated investment firms and insurers, meaning insurance and reinsurance firms within the scope of Solvency II, and to the Society of Lloyd’s and managing agents), but also to individuals working in the financial services sector. It will also be of interest to a wider range of firms that may wish to comply voluntarily. The PRA says that most of the proposals in CP6/15 were broadly supported by respondents, and as such, the changes are relatively minor and mainly seek to offer clarifications as to the intent of the policy. The PRA will, therefore, take forward requirements that: - 4 - Hogan Lovells • firms establish internal whistleblowing channels and inform their staff about these arrangements; • firms inform their staff about the whistleblowing services of the PRA and the FCA, as well as informing them of the legal protections offered under the Public Interest Disclosure Act 1998; and • wording in employment contracts and settlement agreements should not deter staff from whistleblowing. Details of the proposals that have changed due to consultation responses are given in chapter 2 (the scope of the rules), chapter 3 (internal whistleblowing procedures), chapter 4 (employment contracts and settlement agreements) and chapter 5 (the whistleblowers’ champion). The appendices to the policy statement contain the following instruments, all of which come into force on 7 September 2016: • appendix 1: the Handbook (Whistleblowing) Instrument 2015, PRA 2015/81; • appendix 2: the PRA Rulebook: CRR Firms: Whistleblowing Instrument 2015, PRA 2015/80; and • appendix 3: the PRA Rulebook: Solvency II Firms: Whistleblowing Instrument 2015, PRA 2015/79. Both the senior managers regime and the senior insurance managers regime come into force on 7 March 2016. By this point, firms will need to have allocated the prescribed responsibility relating to whistleblowing to a senior manager but some firms may not have internal whistleblowing procedures in place, or existing procedures may not meet the new rules fully. The whistleblowers’ champion should oversee the creation of these procedures, or updates to them. The PRA will give firms an additional six months to put procedures in place so that they comply with these requirements. The rules will then come into force on 7 September 2016. The PRA has also published a Supervisory Statement, SS39/15, alongside the policy statement. This statement sets out the expectations of the PRA for firms in relation to the: whistleblowing procedures, training, settlement agreements and the whistleblowers’ champion. The FCA has also published a policy statement, PS15/24, setting out new rules. These rules aim to encourage a culture where individuals feel able to raise concerns and challenge poor practice and behaviour. The rules on whistleblowing, which take full effect in September 2016, apply to deposittakers (banks, building societies, credit unions) with over £250m in assets, and to insurers subject to the Solvency II Directive, they are non-binding guidance for all other firms the FCA supervises. The new key rules on whistleblowing require a firm to: • appoint a senior manager as their whistleblowers’ champion; • put in place internal whistleblowing arrangements able to handle all types of disclosure from all types of person; • put text in settlement agreements explaining that workers have a legal right to blow the whistle; • tell UK-based employees about the FCA and PRA whistleblowing services; • present a report on whistleblowing to the board at least annually; • inform the FCA if it loses an employment tribunal with a whistleblower; • require its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service. The new rules are set out in the Accountability and Whistleblowing Instrument 2015, FCA 2015/46. Relevant firms have until 7 September 2016 to comply with these requirements. The requirement to assign responsibilities to a whistleblowers’ champion will take effect on the same date as the rest of the senior managers regime, that is, 7 March 2016. Between 7 March 2016 and 7 September 2016, - 5 - Hogan Lovells the whistleblowers’ champion will be responsible for overseeing the steps the firm takes to prepare for the new regime. The FCA will consult soon on application of these rules to UK branches of overseas banks. Once the rules introduced by PS15/24 have been in effect long enough to assess their effectiveness, the FCA will consider whether similar requirements should be applied more widely to other firms it regulates, such as stockbrokers, mortgage brokers, insurance brokers, investment firms and consumer credit firms. FCA publishes statement on PPI On 30 January 2015, the FCA announced that it would be assessing whether there was a need for further intervention in payment protection insurance (PPI) complaints handling generally, and it also issued a further statement on 27 May 2015, in light of the Supreme Court judgment in Plevin v Paragon Personal Finance Ltd specifically, and said that it would set out its views and any next steps in the summer. On 2 October 2015, the FCA issued a statement which says that it has decided to consult, by the end of 2015, on the introduction of a deadline by which consumers would need to make their PPI complaints or else lose their right to have them assessed by firms or by the Financial Ombudsman Service. The FCA will consult on a deadline falling two years from the date the proposed rule comes into force, which is not expected to be before spring 2016. The consultation will also set out the FCA's plans for a proposed FCA-led communications campaign designed to prompt consumers to complain in advance of that deadline. This will include a proposed fee rule concerning the funding of the proposed communications campaign. The FCA has also decided to consult on proposed rules and guidance concerning the handling of PPI complaints in light of the Plevin decision. Such complaints would also be subject to the proposed deadline outlined above. The FCA says that the consultation paper will set out the full detail of these proposed rules and guidance, the evidence it has, its reasons for proposing them, and its assessment of their costs and benefits. The proposed rules and guidance would only apply to PPI complaints where a claim could be made against a lender under section 140A of the Consumer Credit Act 1974 (CCA). The proposed rules and guidance would say that a firm should presume, when assessing a relevant complaint in respect of a PPI policy covering a credit agreement under section 140A of the CCA, that a failure to disclose a commission of 50% or more gave rise to an unfair relationship under the section 140A.The proposed rules and guidance would require a firm to pay redress where it concludes that an unfair relationship under section 140A of the CCA has arisen. ABI publishes statement of good practice for providers of cluster policies On 14 October 2015, the Association of British Insurers (ABI) published a statement of good practice for providers of cluster policies. Many insurers offer policyholders the ability to split an investment (typically, an investment into a single premium investment bond) equally between a number of identical life insurance policies or "segments". These are commonly known as cluster policies. A policyholder who wishes to withdraw a sum of money from a cluster policy may do so by either a full or part surrender of policies within the cluster, or a combination of the two methods. However, depending on the chosen method, and the circumstances of the policyholder, the tax consequences can be very different in each case and, once a withdrawal has been validly completed, those consequences cannot be reversed. The ABI says that there have been a number of cases, some of which have been discussed in the courts, where policyholders have been faced with significant tax bills, which could have been avoided - 6 - Hogan Lovells had they withdrawn their money differently. The purpose of the ABI's statement of good practice is to suggest to providers how they can help policyholders avoid making a choice which leads to an unnecessary tax bill. However, the ABI says that the precise tax consequences will depend on an individual policyholder's circumstances. The document assumes that the taxable person is an individual and UK resident for income tax purposes. INTERNATIONAL IAIS publishes report on ICPs 9, 10 and 11 On 23 October 2015, the International Association of Insurance Supervisors (IAIS) published a report on the findings from an expert team conducting a self-assessment and peer review of insurance core principles (ICPs) 9 (supervisory review and reporting), 10 (preventative and corrective measures) and 11 (enforcement) and the standards linked to those ICPs. It also sets out recommendations on the steps that the IAIS and its members could take to enhance observance and understanding of the assessed ICPs. The IAIS found that the some of the most common challenges to observance include: • legislative frameworks do not provide the powers needed to meet the requirements of the standards or do not provide the supervisory flexibility to ensure appropriate actions are taken to achieve the objectives identified in the standards; • expectations are only set out in supervisory guidelines (which do not have the force of law), resulting in less effective enforcement and corrective actions; • directors and senior management are made aware of supervisory concerns only when the supervisor considers appropriate actions have not been taken; • supervisory frameworks do not include a comprehensive supervisory plan and do not consider the nature, scale, and complexity of the insurers being supervised; • supervisory concerns are not resolved in a timely fashion or to the satisfaction of the supervisor; • institutional arrangements in some jurisdictions may impede the ability of some supervisory authorities to achieve their objectives under ICP 10 and ICP 11. IAIS and IFSB final draft guidance on issues in regulation and supervision of microtakaful On 19 June 2015, the IAIS and the Islamic Financial Services Board (IFSB) published a consultation paper on issues in the regulation and supervision of microtakaful (Islamic microinsurance). On 21 October 2015, the IAIS and the IFSB published a joint final draft paper, which is dated 2 November 2015, together with a document containing consultation feedback and a tracked changes version showing the changes made to the consultation paper. The purpose of the final draft paper is to provide guidance and understanding to regulatory and supervisory authorities on how effective supervision may be accomplished for the microtakaful sector specifically. The paper looks at the various types of microtakaful model, the supervisory framework, and key issues faced by microtakaful providers and regulatory and supervisory authorities. It also includes practical illustrations. Further work will be done by both the IFSB and the IAIS in promoting the development of a prudent and transparent Islamic financial services industry. This may include the introduction of standards and guidelines for microtakaful that are consistent with Shari’ah principles, and recommending them for adoption. - 7 - Hogan Lovells IAIS publishes revised draft issues paper on conduct of business in inclusive insurance On 19 June 2015, the IAIS published a draft issues paper on conduct of business in inclusive insurance. The issues paper provided an overview of the issues in respect of conduct of business in inclusive insurance markets that affect the extent to which customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied. The objective of the paper was to promote the understanding of these particular issues among regulators and supervisors and other organisations and parties with an interest in this area. The IAIS says that this understanding can inform further initiatives to address these issues in the area of conduct of business as a follow-up to this paper, possibly by developing application guidance on proportionate regulation and supervision. On 13 October 2015, the IAIS published a revised issues paper, together with a tracked changes version showing the changes made to the June 2015 version. The IAIS has also published a document containing the comments it received to the June 2015 paper, together with its response to these. The webpage for these papers says that the IAIS is to hold a public discussion session on them on 26 October 2015 and a revised draft will be made available at a later stage. IAIS publishes first version of HLA requirements for G-SIIs On 25 June 2015, the IAIS published a consultation paper on the higher loss absorbency (HLA) requirement for global systemically important insurers (G-SIIs). The IAIS sought feedback on several options relating to the design, development and calibration of the HLA. On 5 October 2015, the IAIS published a document containing the first version of the HLA requirements for G-SIIs that it has developed. This version was endorsed by the Financial Stability Board in September 2015 and the IAIS is expected to formally adopt it at its general meeting on 12 November 2015. It will be then delivered to the G20 for endorsement at the G20 November 2015 summit. The HLA requirement will be a globally comparable group capital requirement that applies to all GSIIs. The primary purpose of the HLA is to assist to reduce the probability and impact on the financial system of the distress or failure of a G-SII. When the HLA is implemented in 2019, all G-SIIs will be expected to hold regulatory capital that is not less than the sum of the required capital amounts from the basic capital requirements (BCR), which was published in October 2014, and the HLA. The HLA will be privately reported by G-SIIs to group-wide supervisors commencing in 2016. This is in addition to private reporting of the BCR to group-wide supervisors, which commenced in 2015. The HLA will initially be based on BCR as a foundation, but later will be based on the risk based groupwide global insurance capital standard (ICS) as a foundation. When the ICS is developed, the calibration and structure of the HLA will be reviewed and may need to be revised. The first version of the ICS is due to be completed by the middle of 2017 and is scheduled to apply to internationally active insurance groups (IAIGs) from 2020 after refinement and final calibration in 2018 and 2019. For ICS purposes all G-SIIs are considered to be IAIGs. The development of the ICS will be informed by, among other things, monitoring the results from the application of the HLA and the BCR. The IAIS has also published a factsheet on the BCR and the HLA, together with a version of its frequently asked questions on IAIS financial stability and macroprudential policy and surveillance activities. - 8 - Hogan Lovells SOLVENCY II EIOPA publishes update on data point model and XBRL taxonomy design On 22 October 2015, the European Insurance and Occupational Pensions Authority (EIOPA) updated its Solvency II Directive reporting format webpage to include links to the following documents relating to version 2.0.1 of the data point model (DPM) and XBRL taxonomy: • release notes; • list of known issues of 2.0.1; • DPM dictionary and annotated templates; • the detailed change log between version 2.0.1 and 2.0.1CR; • EIOPA DPM documentation; • list of validations and supporting syntax documentation; • XBRL taxonomy version 2.0.1 (zip file); • XBRL taxonomy documentation; • filing rules for Solvency II reporting; • XBRL test instance documents (zip file); • the DPM database 2.0.1 (zip file). EIOPA says that the official 2.0.1 release will be the basis for reports submission in 2016 for financial first and second quarter. EIOPA will publish the taxonomy release plan for 2016 before the end of 2015, and planning is currently based on the assumption that up to two releases per year will be scheduled. The webpage now includes a new section on European Central Bank (ECB) add-ons, and EIOPA says that a limited set of ECB add-ons are integrated in version 2.0.1. The application of these addons will be decided on national level. For information purposes, the ECB has published unofficial reporting templates which include ECB add-ons. The templates consist of, firstly, those quantitative reporting templates contained in the draft implementing technical standards for which there are ECB add-ons and, secondly, newly introduced templates for statistical purposes. EIOPA publishes corrected versions of some of the second set of ITS and guidelines On 23 October 2015, EIOPA published corrected versions of a number of its second set of Solvency II final implementing technical standards (ITS) and guidelines, which were published in July 2015, as mistakes have been found in the original versions. EIOPA has identified the necessary amendments and republished the relevant final reports and related documents on this webpage. It has also published the following notes, all dated 22 October 2015, which explain the mistakes identified and corrected: • note on mistakes identified in the final reports on the public consultation on the ITS on regular supervisory reporting and on the public consultation on the ITS on public disclosure: procedures, formats and templates. EIOPA says that the amendments have been submitted to the European Commission and will be incorporated in the final ITS; • note on mistakes identified in the final report on the public consultation on guidelines on reporting for financial stability purposes, together with a corrected version of the guidelines; • note on mistakes identified in the final report on the public consultation on guidelines on the supervision of branches of third-country insurance undertakings, together with a corrected version of the guidelines. EIOPA modifies the methodology for calculating the relevant risk-free interest rate term structures Since February 2015, EIOPA has been publishing on a monthly basis relevant risk-free interest rate term structures that are based on the Solvency II Directive. - 9 - Hogan Lovells On 27 October 2015, EIOPA announced the publication of an updated version of the technical document on the methodology used for calculating the term structures. EIOPA says that as part of an ongoing review of the methodology, it has decided on the following modifications: • the selection of financial instruments used to derive the basic risk-free interest rate term structures will be aligned to recent market developments in order to ensure that the term structures are based on information from deep, liquid and transparent markets; • the treatment of government bonds issued by countries of the EEA that are not Member States of the EU in the calculation of the volatility adjustment and the fundamental spread will be aligned to the treatment of government bonds issued by Member States. The modifications will be implemented for the derivation of the term structures of end-October 2015, which will be published in November 2015. The technical documentation has also been revised and supplemented with two Excel tools illustrating complex parts of the term structure calculations in order to improve the transparency of the calculations and facilitate their replication. These tools are the Smith-Wilson risk-free interest rate extrapolation tool and the CoD & PD calculation tool. European Commission requests further advice from EIOPA regarding the treatment of insurers' investments in infrastructure corporates On 16 October 2015, the European Commission published a letter, dated 14 October 2015, requesting EIOPA to provide further technical advice on the identification and calibration of infrastructure corporates. In September 2015, EIOPA provided technical advice to the Commission on the identification and calibration of infrastructure risk categories in the Solvency II Delegated Regulation and on 30 September 2015, the Commission adopted a Delegated Regulation amending the Solvency II Delegated Regulation based on EIOPA's advice. The Commission has asked EIOPA to consider an extension of the infrastructure risk class to other safe, long-term infrastructure investments and provide technical advice on the appropriate calibrations for risk factors to be applied towards equity and debt investments by insurers in infrastructure corporates. EIOPA is requested to: • provide one or several criteria or classifications that could be used to define infrastructure corporates; • define criteria or classifications to identify safer debt and/or equity investments among infrastructure corporates with or without an external credit assessment institution (ECAI) rating; • advise whether the range of calibrations for equity and debt investment in the amending Delegated Regulation can be used for safer infrastructure corporates and, if not, to advise on alternative calibrations for the new categories or classifications, in line with the 99.5% valueat-risk measure provided for by Article 101 of Solvency II; • provide a rigorous framework for insurers performing due diligence on infrastructure corporates, with or without an ECAI rating; • recommend the calibration for new debt and equity finance raised by existing safer infrastructure corporates for a variety of purposes including, among other things, expansion projects. EIOPA is asked to provide its final technical advice to the Commission before the Board of Supervisors meeting on 28 and 29 January 2016. - 10 - Hogan Lovells EIOPA review of methodology to derive the ultimate forward rates On 9 October 2015, EIOPA announced that the ultimate forward rates (UFRs) to calculate the risk-free interest rate term structures for Solvency II, in particular the UFR of 4.2% for the term structure for obligations denominated in euro, will remain unchanged until the end of 2016. EIOPA is currently reviewing the methodology to derive the UFRs and the review will include a public consultation in 2016. It intends to decide on the outcome of the review and on how and when to implement it in September 2016. However, EIOPA does not intend to change the currently used UFRs before the end of 2016 in order to ensure the stability of the framework for the implementation of Solvency II by insurance and reinsurance undertakings and supervisory authorities. ww.hoganlovells.com Hogan Lovells has offices in: Alicante Amsterdam Baltimore Beijing Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* Johannesburg London Los Angeles Luxembourg Madrid Mexico City Miami Milan Moscow Munich New York Northern Virginia Paris Perth Philadelphia Prague Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore Sydney Tokyo Ulaanbaatar Warsaw Washington DC Zagreb* "Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. 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