Hogan Lovells Corporate Insurance Newsletter June 2014 UK PRA publishes PS5/14: PRA Rulebook PRA publishes statement of policy on the financial stability information power The PRA’s approach document to insurance supervision updated PRA publishes SS7/14: Reports by skilled persons PRA publishes statement of policy on the use of PRA powers to address serious failings in the culture of firms PRA publishes its annual report and accounts 2014 FCA publishes a market study into retirement income: revised terms of reference FCA publishes FG14/6 - Annuity comparison websites: financial promotions review and guidance for firms FCA general insurance conference: speeches published PRA publishes CP10/14: Valuation risk for insurers PRA publishes CP9/14: Subordinated guarantees and the quality of capital for insurers PRA modification by consent of INSPRU 2.1.22R: Lloyd’s syndicates Law Commissions publish draft Insurance Contracts Bill INTERNATIONAL IAIS consults on draft application paper on supervisory colleges Presidency publishes compromise proposal on IMD2 EIOPA publishes updated materials on the insurance stress test EIOPA’s opinion on PPI: report on feedback EIOPA annual report 2013 EIOPA risk dashboard updated SOLVENCY II EIOPA updates Q&As on submission of information to NCAs EIOPA consults on first set of guidelines PRA publishes letters to life and general insurance firms
UK
PRA publishes PS5/14: PRA Rulebook
On 19 June 2014, the Prudential Regulation Authority (PRA) published a policy statement, PS5/14, which contains the final statement of policy, rules and supervisory statement on the changes to the PRA Handbook as proposed in consultation paper CP2/14, which was published in January 2014.- 2 - Hogan Lovells This is the first in a series of publications over two years which will reshape the Handbook inherited from the Financial Services Authority (FSA) to create a rulebook containing PRA rules only. In particular, this policy statement publishes the final set of Fundamental Rules which replace the six Principles for Businesses inherited from the FSA at legal cutover. The Fundamental Rules, which apply proportionately to all firms, align more closely with the PRA’s statutory objectives and are more consistent with the PRA’s underlying detailed rules than the Principles. The Rules came into force on 19 June 2014. The policy statement contains the following final instruments: Fundamental Rules instrument (see chapter 2 and appendix 2); Information Gathering instrument (see chapter 3 and appendix 3); Auditors instrument (see chapter 4 and appendix 4); Lloyd’s (Actuaries and Auditors) instrument (see chapter 4 and appendix 5); Permissions and Waivers instrument (see appendix 6); Use of Skilled Persons instrument (see chapter 5, appendix 1 (supervisory statement) and appendix 7); Notifications instrument (see chapter 6 and appendix 8). The statement of policy on the financial stability information power has been published separately, see below. PRA publishes statement of policy on the financial stability information power On 19 June 2014, the PRA published a statement of policy which is relevant to all PRA regulated firms and publishes the PRA’s policy with respect to the exercise of the financial stability information power conferred by section 165A of the Financial Services and Markets Act 2000 (FSMA). The statement took effect on 19 June 2014. Under section 165A of FSMA, the PRA may exercise the power to require certain persons to provide: specified information or information of a specified description; or specified documents or documents of a specified description, that it considers are, or might be, relevant to the stability of one or more aspects of the UK financial system (the financial stability information power). The PRA’s approach document to insurance supervision updated On 19 June 2014, the PRA published a revised version of the document that details its approach to insurance supervision together with a letter to firms from Andrew Bailey, the PRA’s Chief Executive Officer. This letter gives an overview of the main changes made to the documents. Further details of the key changes are given in the annex to the document. The PRA’s approach document, originally published in April 2013, describes the PRA’s statutory objectives, the approach the PRA takes to advancing them, the expectations that the PRA has of the firms it regulates, and how the PRA assesses firms against them. It has now been updated to clarify the PRA’s approach and to take into account legal changes and other developments. Mr Bailey says that the main changes highlight: the introduction of the PRA’s secondary objective to facilitate competition; the introduction of the Fundamental Rules replacing the Principles for Businesses: these set out the PRA’s high-level expectations of PRA-regulated firms and underpin the new PRA Rulebook; and the use of PRA powers to address serious failings in the culture of PRA-regulated firms.- 3 - Hogan Lovells Mr Bailey’s letter states that the approach document will continue to be updated at least annually. PRA publishes SS7/14: Reports by skilled persons On 19 June 2014, the PRA published a supervisory statement, SS7/14, on reports by skilled persons. The supervisory statement is addressed to all firms regulated by the PRA. Its purpose is to set out the PRA’s policy on and expectations for the use of the following powers as supervisory tools: section 166 (Reports by skilled persons) of the Financial Services and Markets Act 2000 (FSMA); and section 166A (Appointment of skilled person to collect and update information) FSMA. This statement is intended to be read together with the Use of Skilled Persons Part of the PRA Rulebook which sets out rules on the contract with the skilled person, and associated delivery and costs. Firms are also advised to read sections 166 and 166A of FSMA. The PRA consulted on this supervisory statement in CP2/14 and says that none of the feedback received led to the need for any substantive amendment of it. The statement took effect from 19 June 2014. PRA publishes statement of policy on the use of PRA powers to address serious failings in the culture of firms On 19 June 2014, the PRA published a statement of policy on the use of its powers to address serious failings in the culture of firms. The statement of policy applies to all firms. The culture of a firm has a significant impact on the PRA’s objectives of promoting safety and soundness of firms and, for insurers, an appropriate degree of protection for policyholders. The culture of a firm includes its standards of behaviour. The PRA says that this statement is consistent with its current approach to supervision and does not place any additional requirements or expectations on firms. It should be read alongside the PRA’s approach documents which provide a full description of the PRA’s supervisory approach. The PRA contributed to development of the Financial Stability Board’s guidance on supervisory interaction with financial institutions on risk culture, which it says may inform future development of the PRA’s supervisory approach. PRA publishes its annual report and accounts 2014 On 17 June 2014, the PRA issued its annual report and accounts 2014, covering the year ended 28 February 2014. The PRA has also published the footnotes and website links used in the report. The annual report includes: a review of 2013-14; the PRA strategy; the Business Plan for 2014-15, which includes 2014/15 key initiatives (see page 29), upcoming policy consultations and key deliverables (see page 30); and the Directors’ Report. The PRA’s audited accounts for the reporting year ended 28 February 2014 are included in the financial statements. Comments are requested by 17 September 2014 on:- 4 - Hogan Lovells the annual report; the way in which the PRA has discharged, or failed to discharge, its functions during the period to which the report relates; and the extent to which the PRA’s objectives have been advanced and the PRA has considered the regulatory principles to which it must have regard when carrying out certain of its functions (contained in section 3B of the Financial Services and Markets Act 2000) and the need to minimise any adverse effect on competition in the relevant markets that may result from the manner in which the PRA discharges those functions. FCA publishes a market study into retirement income: revised terms of reference On 14 February 2014, the FCA published a report on the results of its thematic review of annuities and, based on the findings of this, said that it had decided to undertake a competition market study on products for retirement income. On 9 June 2014, the FCA announced the publication of revised terms of reference for the market study in order to give it a more forward looking focus. This is because, on 19 March 2014, as part of the Budget proposals, the Government announced significant changes to pension and retirement income. The market study will now look at: competitive conditions in the current market landscape; the new market landscape; value for money of retirement income products in the existing and new market landscape; how consumers, providers and intermediaries are likely to behave in the new market landscape. A supervisory review into sales practices of annuities was originally going to form part of the market study into retirement income. The FCA says that the focus of this work remains unchanged but it will now be conducted as a standalone thematic review, to report by the end of the year. Good and poor practice identified through this review will feed into the market study and will also form part of the evidence-base for the development of the guidance guarantee. It will also feed into the consultation on the implementation of the guidance guarantee. Originally the FCA had planned to issue interim findings from the market study in the summer of 2014 but says that it will now publish this later in the year. The FCA invites views or evidence on the matters covered by the study, in light of its revised scope, by 18 July 2014. FCA publishes FG14/6 - Annuity comparison websites: financial promotions review and guidance for firms On 20 June 2014, the FCA published finalised guidance following its February 2014 guidance consultation on annuity comparison websites. The FCA says that it received 12 responses to the guidance consultation and that respondents were mainly supportive of the guidance and welcomed the FCA making clearer its expectations of what constitutes a fair, clear and not misleading annuity comparison website. The FCA is therefore not making any significant changes to the guidance but where relevant, has added some additional text to the guidance to clarify its views and expectations. The FCA has also published a webpage giving a summary of the feedback received and its responses to this feedback. The points raised by the respondents covered the issues of prominence, the scope of the FCA’s review, guaranteed annuities and guaranteed rates/periods, Financial Services Compensation Scheme/Financial Ombudsman Service coverage, restricted panels, commission and charges, tax and the purchasing context/alternative options.- 5 - Hogan Lovells FCA general insurance conference: speeches published The FCA held its first general insurance conference on 2 June 2014, at which it discussed its strategy for general insurance and key conduct issues for the sector. The FCA has published a webpage on the conference, which includes webcasts of the various sessions. The FCA has also published the following speeches: the speech by Martin Wheatley, the FCA’s CEO, on good conduct and market integrity; the speech by Clive Adamson, the FCA’s Director of Supervision, on the FCA’s supervision review; and the speech by Christopher Woolard, the FCA’s Director of Policy, Risk and Research, on competition and insurance. PRA publishes CP10/14: Valuation risk for insurers On 30 May 2014, the PRA published a consultation paper, CP10/14, seeking views on a draft supervisory statement which sets out its expectations of firms in relation to existing rules on the valuation of financial assets. The statement seeks to reduce the risk to the PRA’s objectives caused by intended or unintended misstatement of values and therefore misstatement of capital resources, by clarifying the PRA’s existing expectations. The PRA says that the draft supervisory statement is intended to apply to all PRA-authorised insurers (firms) and may also be relevant to insurance holding companies and other entities in the same group, together with their advisors. The statement is intended to be equally relevant for life and general insurers, whether they are mutuals or proprietary companies. Comments are requested by 11 July 2014. PRA publishes CP9/14: Subordinated guarantees and the quality of capital for insurers On 30 May 2014, the PRA published a consultation paper, CP9/14 seeking views on a draft supervisory statement which sets out its expectations of PRA-authorised insurers (firms) in relation to: the use of subordinated guarantees in connection with capital instruments issued by a company, whereby the payment of coupons and repayment of principal are guaranteed by a firm (the guarantor); how subordinated guarantees should not undermine the quality of capital held by firms to meet capital requirements (this expectation applies regardless of both the motivation for using a subordinated guarantee and the structure in which a guarantee is used); and how the guarantor’s regulatory capital position should be reported if the liability created by the guarantee serves to undermine the guarantor’s quality of capital. The draft supervisory statement is intended to apply to all firms and may also be relevant to insurance holding companies and other entities in the same group, together with their advisors. The statement also looks ahead to Solvency II, and is aimed at firms and groups within the scope of the Directive. It is intended to be equally relevant for life insurers, general insurers and mutuals. Comments are requested by 11 July 2014.- 6 - Hogan Lovells PRA modification by consent of INSPRU 2.1.22R: Lloyd’s syndicates On 4 June 2014, the PRA issued a modification by consent available to managing agents of Lloyd's syndicates writing general insurance business. This modification relates to the counterparty exposure limits, as set out in Prudential sourcebook for Insurers (INSPRU) 2.1.22(3)(c)(i). Members of the Society of Lloyd's who write business in certain overseas jurisdictions through Lloyd's syndicates are required to have funds deposited in those jurisdictions. This is so they meet the regulatory requirements of those jurisdictions. These funds are deposited in overseas jurisdictions by Additional Securities Limited (ASL), a wholly owned subsidiary of Lloyd's. This is because individual members are not permitted by those jurisdictions to make the deposits themselves. The managing agents of syndicates through which the relevant overseas business is carried on arrange these deposits by loaning syndicate assets to ASL. The exposure to ASL is a counterparty exposure for the purposes of the INSPRU rules. The modification amends INSPRU 2.1.22R to increase the limit on counterparty exposure to ASL in order to increase the amount a syndicate's managing agent can count towards the syndicate's total capital. The modification is set out in a direction and replaces the current direction that is due to expire on 30 June 2014. It is valid until 30 June 2016 or the date the relevant rule is amended or no longer applies to the firm (in whole or in part). The PRA states that if a firm is interested in requesting this modification, it should read the direction and submit a request to the PRA’s Assessment and Monitoring Team. The PRA will confirm whether the request has been granted and will be publish the approved modifications on its website. Law Commissions publish draft Insurance Contracts Bill In January and March 2014, the Law Commission and Scottish Law Commission published draft clauses of the Insurance Contracts Bill for consultation. The Law Commissions made changes to the draft Bill in response to comments made and on 17 June 2014, announced the publication of a full draft of the Bill, together with draft explanatory notes. The Law Commissions say that they believe that much of the draft Bill should now be regarded as settled. However, there are two clauses, currently in italics, which are still the subject of discussion with some stakeholders. They are: Clause 11 (Terms relevant to particular descriptions of loss); Clause 14 (Implied term about payment). HM Treasury, which would be the sponsoring department, is consulting on whether the draft Bill has a broad consensus of support, to determine whether it may be suitable for consideration under the procedure for Law Commission Bills. It is consulting on whether reform in this area is desirable and whether respondents agree with the general approach of the draft Bill. HM Treasury is consulting separately on whether consensus can also be reached on the clauses 11 and 14 (the two italicised clauses). Responses to these questions will be important in determining whether or not there is sufficient consensus to include these clauses within the Bill. Comments are requested by 2 July 2014 and should be sent to: Isobel.McIntosh@hmtreasury.gsi.gov.uk and Ruth.Hopkinson@hmtreasury.gsi.gov.uk.- 7 - Hogan Lovells INTERNATIONAL IAIS consults on draft application paper on supervisory colleges On 25 June 2014, the International Association of Insurance Supervisors (IAIS) published for consultation a draft application paper, dated 19 June 2014, on supervisory colleges. The IAIS says that supervisory colleges are becoming increasingly important in the supervision of insurance groups that operate cross-border including internally active insurance groups. Insurance supervisors have different perspectives on the activities of supervisory colleges and their contribution to colleges as a supervisory authority. An effective college acknowledges these differences and tries to achieve the optimal form of cooperation considering the different perspectives. The aim of the paper is to: help supervisors to learn from each other by explaining relevant experience in/with colleges; present good practices and examples that will help promote a common understanding for participants of global supervisory colleges. The IAIS says that the paper is not intended to set standards, offer binding guidance to these standards, or provide interpretations of standards. The annexes are for illustrative purposes only and should not be construed as providing formal guidance or expectations. Comments are requested by 25 July 2014. Presidency publishes compromise proposal on IMD2 On 23 June 2014, the Presidency of the Council of the European Union published its second compromise proposal relating to the European Commission's proposed Directive amending the Insurance Mediation Directive (IMD) (known as IMD2). Additions to the text of the first compromise proposal (published in May 2014) are marked in underlined bold and deletions are indicated in strikethrough. EIOPA publishes updated materials on the insurance stress test On 25 June 2014, EIOPA published the following updated versions of materials relating to its 2014 insurance stress test, all of which are dated 25 June 2014: an updated version of the reporting template for the 2014 stress test (version 6) and an updated version of the automatic updater tool for completed templates (version 6); the sixth set of questions and answers (Q&As) on the 2014 stress test; the sixth set of Q&As on the technical specifications for the Solvency II preparatory phase. EIOPA’s opinion on PPI: report on feedback EIOPA published an opinion on payment protection insurance (PPI) in June 2013 and recommended that national competent authorities (NCAs) should analyse their national PPI markets based on the findings of the opinion and decide whether PPI merited (further) investigation and any possible (further) supervisory and/or regulatory action at national level, based on the findings of this opinion. The NCAs were asked to provide feedback to EIOPA. On 25 June 2014, EIOPA published a report on the feedback it received. The report says that over half of the responding NCAs indicated that they are taking (or have taken /are planning to take)- 8 - Hogan Lovells regulatory/supervisory action in their respective national markets. These include starting new investigations and adopting or consulting on regulatory measures. Some NCAs have chosen not to take any specific action on the grounds that they see no consumer protection issues in this market or would like to address potential problems in a more general framework examining sales practices. EIOPA concludes that the opinion triggered significant developments in a number of national markets while in others new actions follow previous initiatives. Although many of these developments are at their early stages, most of the recent developments focus on information provision, crossselling/commission issues and selling practices in general. EIOPA will therefore continue to monitor national developments, and will decide on any potential follow-up action at a later stage. EIOPA annual report 2013 On 13 June 2014, EIOPA published its annual report for 2013. The report sets out EIOPA’s main achievements of meeting its strategic objectives related to the enhanced consumer protection, development of sound regulation, improved supervision and timely identification and management of risks to financial stability. The report also describes the work EIOPA has undertaken to ensure efficiency and effectiveness of its operation. EIOPA risk dashboard updated On 17 June 2014, EIOPA published an updated version of its risk dashboard for June 2014, for which data was submitted by 32 large insurance groups. The risk dashboard shows that, based on indicators for the first quarter of 2014: market risk is still a concern; liquidity and funding risks remain; credit risk has not reduced since the last review; Solvency II implementation will be in place in 2016; insurance risks are not a major concern. SOLVENCY II EIOPA updates Q&As on submission of information to NCAs On 12 June 2014, EIOPA updated the questions and answers (Q&As) on its guidelines on submission of information to national competent authorities (NCAs) relating to the Solvency II Directive, by adding questions 74 to 81. EIOPA consults on first set of guidelines On 2 June 2014, EIOPA published consultation papers on its first set of guidelines on Solvency II, together with a cover note giving key features of the guidelines being consulted on. The consultation papers are as follows: consultation paper on Pillar 1 guidelines, including guidelines on technical provisions, own funds, the standard formula SCR and group solvency; consultation paper on guidelines on internal models: a note on the front of this consultation paper states that these guidelines have already been extensively consulted for the purpose of the preparatory phase. The preparatory guidelines have only undergone limited changes. The- 9 - Hogan Lovells current document highlights (in yellow) the elements that have not been subject to the preparatory guidelines issued in 2013 and which are therefore new; consultation paper on the guidelines on system of governance and own risks and solvency assessment: this has the same note on the front as the previous consultation paper; consultation paper on the guidelines on the supervisory review process; consultation paper on guidelines on the methodology for equivalence assessment of national supervisory authorities under Solvency II; consultation paper on the impact assessments of the EIOPA Solvency II guidelines; EIOPA has also published an annex which is a non-official reference to the draft delegated act articles implementing the Solvency II Directive. Comments are requested by 29 August 2014 using this template. PRA publishes letters to life and general insurance firms On 23 June 2014, the PRA published the text of three letters sent to life and general insurance firms on 13 June 2014. The letters are as follows: a letter to insurance directors giving an update on Solvency II. The letter says that the PRA is making preparations to build the IT infrastructure to enable firms to submit Solvency II data for the first time in July 2015 and that it expects this will be tested with firms in the first quarter of 2015. The letter also says that in July 2014, the PRA intends to consult on the final changes it expects to make to the PRA rule-book in order to transpose Solvency II. The consultation paper will include feedback on the comments it received on its last consultation in July 2012, a number of supervisory statements and most of the proposed national specific templates. The PRA says that there are likely to be further changes before the rules are finally made. The results of the consultation process will be made available in the fourth quarter of 2014. The letter also includes a timetable of activity over the next five months as at 10 June 2014; a letter inviting firms to take part in a trial submission to apply to use the matching adjustment (MA): firms that intend to use the MA following Solvency II implementation will need to apply for prior supervisory approval (under Article 77b of Solvency II). The letter says that the PRA is currently testing the process and materials needed to assess MA applications and would appreciate firms' input to help inform this work. The PRA is therefore inviting all firms intending to apply for the MA to make a trial submission (details of which are given in the letter) of the evidence required by the draft MA implementing technical standards published by EIOPA on 1 April 2014. The PRA says that this is important as this will help ensure that when firms do formally apply for the matching adjustment they are able to follow a clear procedure and that the application proceeds as smoothly as possible. Putting a trial submission together will also help firms in their preparations for the MA and will, in particular, indicate areas where supplying the information required may be challenging. Trial submissions should be made by 19 July 2014. The PRA will review all the submissions received. Although the PRA does not expect to request any further information from firms, for the purpose of this exercise, this may be needed if additional clarification on the content of the submission is required. The PRA says that it is anticipated that it will share the details of the application process with firms at the industry conference on 10 November 2014; a letter giving firms additional clarification on the asset eligibility criteria for the MA; the eligibility criteria for using the MA are set out in Article 77b of the Directive. The PRA says that it is aware that firms have questions about the interpretation of these criteria, particularly those relating to the assigned portfolio of assets. This letter addresses some of the questions that firms have already raised. It aims to provide additional clarity on asset eligibility, both to help firms prepare for Solvency II and to ensure that firms can take any necessary steps towards compliance in an orderly way. The PRA also says that it is aware that firms will have several other questions relating to the MA, not all of which can be answered now. The PRA plans to- 10 - Hogan Lovells release further material on the MA approval process later in 2014. In the meantime firms should continue to raise any questions they have with their usual supervisory contacts. www.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 Miami Milan Moscow Munich New York Northern Virginia Paris Philadelphia Prague Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore 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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