chapter 6 Flashcards
3 parts of the UK regulatory framework for financial services
financial conduct authority
Prudential regulation authority
financial policy committee
Financial Conduct Authority (FCA)
- separate independent regulator
- conduct market issues for all firms & Prudential regulation of small firms eg. insurance brokerages
- focus on taking action early
- shift towards thematic reviews and market wide analysis
- Reviews the full product lifecycle from design to distribution with the power to ban products where necessary.
Prudential Regulation Authority (PRA)
- sits within the bank of England
- responsibility for stability for important financial institutions such as banks, building societys and insurers
- seek to ensure that firms can fail without bringing down the entire financial system
- place emphasis on judgement based approach external environment, business risk, management and governance, risk management
Financial Policy Committee (FPC)
- committee within the Bank of England
- scanning for emerging
risks to the financial system - providing strategic direction for the entire regulatory regime.
Objectives of the PRA
primary - ‘promote the safety and soundness of PRA
regulated persons’.
secondary:
- ensure people behave in a way which avoids adverse effect on
the stability of the UK financial system.
- Facilitating competition
- securing of an appropriate degree of protection for those who are or may become policyholder
PRA threshold conditions
every firm must meet minimum conditions before it can carry out regulated activities
eg.
- head office needs to be in UK
- firm maintains
appropriate financial and non-financial resources - The firm itself to be fit and proper and be appropriately staffed.
- The firm and its group to be capable of being effectively supervised
PRA risk assessment frameworks
- potential impact on policy holders
- macroeconomic and business risk context in which the firm operates
- Any mitigating factors including risk management and governance
PRA baseline monitoring
- ensuring compliance with prudential standards
- asset valuation and reserving
- annual review
- assess firms planned recovery actions and how it might exit the market
FCA objectives
- Consumer protection: appropriate degree of protection for consumers.
- Integrity: protecting and enhancing the integrity of the UK financial system.
- Competition: promoting effective competition in the interests of consumers in the
markets for Regulated financial services & Services provided by a recognized investment exchange
FCA over arching strategy
‘ensure that the relevant markets function
well’
FCA approach to regulation
- more proactive
- intervene earlier to address root causes
- wants to produce new products
FCA approach to supervision
fixed portfolio firms = - small proportion
- require highest level of supervision attention
- continuous assessment approach with allocated individual supervisor
flexible portfolio firm
- majority of firms fall into this category
- proactively supervised through market based thematic work + communication
- FCA costumer contact center is first point of contact
- staff should have expertise to deal with majority of queries
FCA risk framework
- 3 pillar approach
- firm systematic framework - asking if customers are at the heart of the business
- event driven work - flexible supervisory activity driven by issues
- issues and products - allows FCA to look at reviews as issues take place
what can the FCA do if they find problems?
- banning products in the retail sector
- withdrawing misleading financial promotions
- fining or prosecuting individuals and organizations
who do the FCA report to?
the government and parliament annually
what are the 2 reference documents?
FCA handbook & PRA rulebook
contain material from previous regulators and additional material which reflects more recent change
eg. UK leaving the EU
what do the PRA have the power to do to the FCA?
to veto or prevent the FCA doing something because the financial stability takes precedent over customer protection
statutory duty for them both to work together
Principles of business
- integrity
- skill, care and dilligence
- management & control
- financial prudence
- market conduct
- customer interests
- client communication
- conflicts of interest
- customer relationships of trust - client assets
- relations with regulators
- consumer duty
principles are now in FCA handbook & PRA rulebook
fair treatment of customers
(life-cycle)
product design and governance
identifying target market
promoting the product
sales and advice process
after sakes info
complaint handling
what are the 3 elements of consumer duty?
- consumer principle - firm must act to deliver good outcomes for retail customers’
- cross cutting rules
- FCA expectations in how firms should act to deliver good outcomes - four outcomes
- The governance of products and services.
– Price and value.
– Consumer understanding.
– Consumer support.
FCA expectation of firms
- put consumers at heart of business
- communicate
- not exploit customers
- continuously learn
- monitor and review outcomes
Public Interest Disclosure Act 1998 (PIDA)
- encourage a culture of openness within an organisation
- individuals who make disclosures of information in the public interest have the right not to suffer detriment by any act or omission of their employer
companies writing business overseas (non EU)
if companies want to write business in other countries it must be admitted by the regulator in that country.
this often means they have to open up local offices and employ staff
If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries
companies writing business overseas (EU)
If an insurer is authorised in one country within the EU, known as its ‘home state’, then it
can operate freely in all other EU countries
companies operating in the EU can make
business decisions about whether to open offices in other EU countries or operate from their home location
Companies writing business in the USA
- insurance regulations is determined by individual states
state regulators can grant permission to foreign insurance
companies to write business alongside local insurers on what is known as an admitted basis
lloyds write US business on what is known as a ‘surplus lines basis’ which removes the need for all the filing of wordings and premium rates with the regulators
Lloyd’s writing business overseas
Lloyd’s Market enjoys an unusual position as Lloyd’s itself undertakes to obtain
permission from international regulator
lloyds do not have permission to write all types of business in every country
in some countries they can only do reinsurance business and not direct
Lloyd’s has representatives and offices in certain countries around the world
Lloyd’s writing business in the USA
A, Lloyd’s has obtained centralised authority for the syndicates to write
business
lloyds has surplus lines status
if the placement
in the surplus lines market is challenged, the regulator will need to see that the risk was offered to the local market first, unless the risk falls within any exemptions to the rules.
Lloyd’s is fully authorised in all 50 states to accept reinsurance business with no limitations
Satisfying overseas regulators
some countries are only intrested in the category of risk whereas other care about risk location, broker location, tax ect
most regulators impose a number of requirements, generally centred around reporting and the payment of various taxes
role of managing agents
- File an annual solvency test return
- Assess the capital needed for syndicate business planned
- Put into place and maintain controls over risks
Lloyd’s governance structure
two key bodies
Council of Lloyd’s
and the Executive Committee.
Council of Lloyd’s
- governing body
- rule making powers - managment of all affairs
- deciding contribution levels to Lloyd’s Central Fund
- appointing members of Council and members of the committee of the Council
- reviewing budgets and plans
members of lloyds council
15 members
strategic decision-makers
Byelaws and regulations
primary rules
set out the fundamental concepts
Requirements
secondary rules
detail what to do to comply with the primary rules.
always allow efficient updating and amendment if required, even if the actual byelaw remains the same
Authorisation of new insurers
must be authorised by PRA
must be satisfied that the company complies with its requirements.
only companies operated by
‘fit and proper’ persons should be authorised to transact business
solvency margin
must maintain a minimum balance between its assets and how much it knows it has to pay or would be likely to pay in liabilities
monitoring
every financial year
insurer must prepare and submit to the regulator…
- revenue account – shows the underwriting profit or loss
- profit and loss account – (also known as an income statement) shows the total profit
and loss made
- balance sheet – shows the assets and liabilities of the organisation
“run off “
insurer cannot write or accept any more new risks
Financial Ombudsman Service (FOS)
a free, independent and impartial service that deals with certain disputes
The complainant must give the insurers eight weeks
to respond before referring the matter to the FOS
Financial Services Compensation Scheme (FSCS)
falls under the control of the FCA
provides compensation for customers of investment firms and authorised insurance companies
covers claims against firms where they are
unable to pay claims against them.
this is when a firm
has become insolvent or has gone out of business.
protection is 100% for:
- compulsory insurance
– professional indemnity insurance;
– long-term insurance
– certain claims for injury, sickness
lloyds position
maintains its own central pot of money as a contingency in case the members not in a position to pay claims.
known as the Central Fund and forms part of the Lloyd’s chain
of security.
This security allows Lloyd’s to state correctly that no valid insurance claim has
ever gone unpaid in its long history
