On 19 October 2010, Ken Hogg, the director of the FSA’s insurance sector, delivered a speech to the Association of Financial Mutuals regarding a strategic assessment of the FSA’s future approach to the regulation of mutuals.
The speech set out to discuss the evolving environment that mutuals need to respond to and how mutuals can continue to operate in the best interests of their members. Ken Hogg noted most insurance mutuals had successfully navigated the recent wider financial challenges to the financial sector and that they appear to have grown relative to their peers.
Ken Hogg stated that “I believe in the mutual proposition – existing solely to benefit customers, rather than shareholders, theoretically offers an in-built advantage. The absence of dividend payments to external parties allows you to concentrate on running the business in a way that best meets the needs of your members.” However, the speech then highlighted the following specific challenges faced by insurance mutuals:
1. With-profits mutuals – the history of the recent FSA consultation on this issue was set out and how the FSA is in the process of writing to firms on their individual positions. As part of this process, the FSA is setting out its expectations for distributing surplus in a with-profits mutual and treating with-profits policyholders fairly. Ken Hogg stressed that it was not an attempt to regulate the mutual sector away;
2. With-profits – it was noted that treating with-profits policyholders fairly is arguably the key conduct issue facing not just mutuals but the life sector today. The FSA released its finding of its review into the with-profits regime in June and noted that a significant number of firms are “not adequately demonstrating the practices we expect from a well-run with profits business.” The speech went on to discuss what is expected of firms and the steps the FSA is exploring to strengthen rules in this area;
3. Solvency II – the speech highlighted that Solvency II will affect all insurers, including smaller firms, and that the FSA has formed a specialist Smaller Insurers Team to aid firms find the right approach to implement the regime. Ken Hogg then discussed the Quantitive Impact Study Number 5 (“QIS5”) and noted that the QIS5 exercise submissions are due at the end of the month for solo entities, while group submissions are due by 15 November. The importance of this feedback in determining the successful negotiation of the regime as a whole was stressed and firms were encouraged to participate on a full and realistic basis; and
4. Retail Distribution Review (“RDR”) – significant changes regarding conduct, charging and professionalism will be introduced by the new rules on the RDR in 2012. The FSA takes the view that all investments (with very limited exemptions) should be subject to the RDR rules. All insurers will need to consider the impact of these changes on their business models.
Lastly, recognising that the FSA will be replaced by a new subsidiary of the Bank of England and a new Consumer Protection and Markets Authority in 2012, it was stated that the FSA “aims to begin phasing into a shadow structure during quarter one next year, but the FSA’s objectives will continue as they stand today until the new regulatory bodies take over. Which means you still have the same responsibilities to the FSA, and you should carry on dealing with your current contacts until otherwise notified.”
To view the full text of Ken Hogg’s speech, please click here.