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Chapter 6 Flashcards

1
Q

Who are the 3 regulatory bodies?

A
  1. Financial Conduct Authority (FCA)
  2. Prudential Regulation Authority (PRA)
  3. Financial Policy Committee (FPC)
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2
Q

What do the Financial Conduct Authority (FCA) focus on?

A

•Regulators responsible for conduct of business + market issues for firms like insurance brokerages, etc
•Takes care of consumer protection + market regulation
•Reviews product lifecycle from design to distribution, + can ban where necessary

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3
Q

What do the Prudential Regulation Authority (PRA) do?

A

•Responsible for solvency + stability of institutes, such as banks + insurers
•Supervises the external market, business risk, management + governance, risk management + controls, + capital + liquidity

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4
Q

What do the Financial Policy Committee (FPC) do?

A

Watches for systematic risk (risks which can impact the whole industry) - scans for emerging risks to the financial system as a whole + provides strategic direction for the regulatory regime

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5
Q

Who does the PRA provide regulations for?

A

Lloyd’s + managing agents, hence insurance companies

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6
Q

Who does the FCA provide regulation for?

A

Lloyd’s, insurance companies, member’s agents, + brokers

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7
Q

What are the objectives, in relation to the insurance industry, of the PRA?

A

•Contributing to the securing of protection for policyholders
•Protection for the expectations of policyholders as to the distribution of surplus under w/-profits policies

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8
Q

What are with-profits policies?

A

•A share in certain of the profits/losses of the insurer; certain guarantees, which usually increase over lifetime of a policy
•E.g. payment of a guaranteed amount on death

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9
Q

What are the 4 threshold conditions for firms regulated by PRA?

A
  1. A firm’s head office in UK
  2. A firm’s business conducted in a prudent manner
  3. A firm to be fit + proper + appropriately staffed
  4. Firm to be capable of being effectively supervised
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10
Q

For the PRA, what are the 3 elements of the risk assessment framework?

A
  1. Potential impact on policyholders
  2. The macroeconomic + business risk context in which the firm operates
  3. Any mitigating factors including risk management + governance
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11
Q

What does the baseline level of monitoring from the PRA for a firm include?

A

•Ensuring compliance for capital
•Liquidity, asset valuation, provisioning, + reserving
•Annual review of the risks posed by the firms or sectors
•Assessing a firm’s planned recovery actions + how it may exit the market

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12
Q

What will the PRA be constantly assessing of a firm?

A

Their proximity to failure using the supervisory framework

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13
Q

What are the objectives of the FCA?

A

•Ensure that relevant markets function well
•Consumer protection
•Protecting + enhancing the integrity of the UK financial system
•Promoting effective competition in the interests of consumers

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14
Q

What is the FCA approach to regulation?

A

•Is very proactive + will intervene early in product’s life + seeks to address the root cause of the problems for consumers
•Watches for types of innovation that exploit consumers as contrasted w/ those that meet consumer needs

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15
Q

What is the FCA involvement in authorisations?

A

•Focuses on proposed business model, culture, systems put in place over product governance, prevention of financial crime, + sales processes
•Works closely with PRA in approving applications

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16
Q

If a firm is fixed portfolio, what is the FCA approach to supervision?

A

•Represents small proportion of firms regulated by FCA + they’re allocated a individual supervisor + have continuous assessments
•Higher supervisory attention is required based on size, market presence, + customer footprint

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17
Q

If a firm is flexible portfolio, what is the FCA approach to supervision?

A

•Represents majority of firms + they use FCA customer contact centre as their 1st point of contact
•Firms are supervised through market-based thematic work + programmes of communication, engagement, + education aligned w/ the key risks identified

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18
Q

What are the 5 principles of the FCA framework?

A
  1. Forward-looking - to pre-empt poor conduct through assessing business models to identify emerging risks
  2. Outcomes-focused - systematic harm is spotted here, so moving quickly to stop the harm
  3. Proportionate + evidence-led - focuses on key drivers to cause harm
  4. Transparency - engaging directly w/ consumers + their representatives to understand issues faced
  5. Integrated + coordinated - ensuring teams work together across functions
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19
Q

What can the FCA do if it finds problems?

A

•Ban products in retail sector
•Withdrawing misleading financial promotions
•Fining or prosecuting individuals/organisations

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20
Q

What can the FCA do if it finds problems?

A

•Ban products in retail sector
•Withdrawing misleading financial promotions
•Fining or prosecuting individuals/organisations

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21
Q

Who is the FCA answerable to?

A

To government + Parliament annually

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22
Q

How do the FCA + PRA work together?

A

•They work together + coordinate their activities
•PRA has power of veto to prevent FCA doing something, as financial stability takes precedence over consumer protection at times of economic stress

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23
Q

What are the 12 Principles of Businesses (PRIN), as part of the PRA rulebook + FCA handbook?

A
  1. Integrity - firms must conduct business w/ integrity
  2. Skill, care, + diligence
  3. Management + control - firms must organise + control its affairs w/ risk management systems
  4. Financial prudence - firms must maintain financial resources
  5. Market conduct
  6. Customers interests - firms must treat customers fairly
  7. Communications w/ clients - firms must communicate info clearly
  8. Conflicts of interest
  9. Customers: relationships of trust
  10. Clients assets
  11. Relations w/ regulators
  12. Consumer duty - firms must act to deliver good outcomes for retail customers - came into effect July 2023 for new products + July 2024 for existing
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24
Q

Who does fair treatment of customers applied to?

A

Only consumers, not commercial customers

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25
What is fair treatment of customers from FCA?
•Firms should show fair treatment of customers is at the heart of their business model + happens throughout product life-cycle •Firms must explain things in greater detail if customer is less knowledgeable •When developing new products, firms must identify its inherent level of risk - must have controls in place to ensure customers aren’t exposed to unsuitable risks
26
What is consumer duty from the FCA?
Sets out standard of care that regulated firms should give to their retail customers
27
What is the aim of consumer duty?
Protect customers from current + emerging risks that can cause harm w/ engagement w/ insurers + allows insurers to be flexible + innovative in their development of new products
28
What is the ‘consumer principle’ from consumer duty from FCA?
Firms must act to deliver good outcomes for customers
29
What is the ‘cross-cutting rules’ from consumer duty from FCA?
How firms should act to deliver good outcomes
30
What are 4 areas of consumer duty which have more detailed guidance?
1. The governance of products + services 2. Price + value 3. Consumer understanding 4. Consumer support
31
What is FCA expectations of firms for consumer duty?
•Focus on delivery by good outcomes for customers •Provide products/services that are designed to meet customer needs •Don’t exploit customers lack of knowledge + communicate effectively •Monitor + review the outcomes that their customers are experiencing
32
What is ‘senior management arrangements, systems, + controls (SYSC)?
•Firms need to take care to share responsibilities between its directors + senior managers, so it’s clear who has responsibility + business can be monitored •Insurers + intermediaries need to appoint a money laundering reporting officer (MLRO)
33
What is the ‘public interest disclosure act 1998 (PIDA)?
•Concerns whistleblowing, which is a public allegation of a firm’s concealed misconduct •This act makes it unlawful for an employer to punish an employee for whistleblowing as long as the report was in good faith
34
What are the 4 areas that Lloyd’s ESG agenda falls into?
1. Strategy + governance 2. Climate 3. Culture 4. Communities
35
What is the general rule for an insurance company in London which wants to write business in another country?
It must be admitted by the regulator in that country + often has to set up offices, employ staff, + incur capital there
36
What is the home state financial regulation?
If an insurer is authorised in 1 country within the EU, known as its ‘home state’, then it can operate in all other EU countries
37
In home state financial regulation, what is ‘working on an establishment basis’?
If they choose to open offices in another EU state
38
In home state financial regulation, what is ‘working on a service basis’?
If they choose to work only from their home state
39
What are regulation rules for companies writing business in USA?
•Individual states mange insurance regulations •State regulators can grant permission to foreign insurance companies to write business alongside local insurers on an admitted basis (will need regulators to review policy wordings + premiums) •Lloyd’s + other insurance companies write US business in a surplus lines basis (no need for regulators to review)
40
When oversea companies write business in US, what is ‘admitted basis’ vs ‘surplus lines basis’?
•Admitted basis: admitted insurers have the regulators review all policy wordings + premiums •Surplus lines basis: Lloyd’s + other insurance companies write business on this, which removes the need for filing of wordings + premiums w/ regulators
41
What are the rules for Lloyd’s writing business overseas?
•Lloyd’s obtains permission from international regulators + this applies to any syndicate operating within that market •Lloyd’s has representatives + offices in certain countries + some offices have underwriters from various syndicates to accept risks from local brokers
42
What are the rules for Lloyd’s writing business in the USA?
•Lloyd’s has obtained centralised authority for the syndicate to write business •Lloyd’s is authorised in all 50 states to accept reinsurance business w/ no limitations •For direct business, Lloyd’s has surplus lines status, so can only be accessed if the local or admitted market isn’t able to accept the risk
43
How is Lloyd’s regulated in the UK?
•Society of Lloyd’s + managing agents are regulated by FCA + PRA •Brokers + members agents regulated by FCA
44
What is Lloyd’s required to do in terms of market governance?
•Create + maintain controls over the risks the Lloyd’s market is exposed + impacting on funds held + managed centrally •Measure + assess the capital needs of each member or Name
45
What is capital needs?
Member’s involvement in various syndicates across the market + takes into account the types of business the syndicates are engaged in
46
In Lloyd’s market governance, what do managing agents undertake?
•File annual solvency test, showing that their assets exceed liabilities •Assess capital needed to engage in the insurance business planned for each syndicate •Put into place + maintain controls over risks that relate to day-to-day insurance business, such as market + credit risks
47
What is the council of Lloyd’s?
The governing body of the Lloyd’s market (the society of Lloyd’s)
48
What are the powers of the council of Lloyd’s?
•Rule-making - can create market laws (byelaws) •Management + superintendence of all affairs of Lloyd’s •Right to exercise any powers of the society of Lloyd’s •Poser to direct the insurance business at Lloyd’s
49
What do the council of Lloyd’s make final decisions on?
•Making/changing byelaws •Reviewing budgets + plans •Appointing members + committee of council •Deciding contribution levels to Lloyd’s central fund •Setting long-term strategic development of the market •Deciding the amounts of members annual subscriptions
50
Lloyd’s creates laws that govern the operation of the marketplace, coming in what 2 forms?
1. Byelaws + regulations - primary rules + sets out fundamental concept 2. Requirements known as secondary rules + contains detail of what needs to be undertaken to comply with the primary rules
51
What is ‘enforcement jurisdiction’ in Lloyd’s?
•Lloyd’s can take enforcement proceedings in relation to behaviour that’s regarded as a breach of rules of bringing discredit to the market •Penalties include fines to lifetime bans from the market •Examples: faking documents, dishonesty, etc
52
How does a UK company wishing to transact insurance be authorised by the PRA?
Firms must submit forms to show they’re financially sound, has fit key personnel, + premium structure, admin, + markets is sound
53
What are 3 options for corporate newcomers to the Lloyd’s market?
1. New corporate member / name in an existing syndicate 2. New corporate member / name in a new syndicate 3. New corporate member / name, new syndicate, + its own managing agent to run the syndicate - aka setting up new insurance company
54
How do you set up a new business within Lloyd’s?
•Will need a briefing covering the main elements of people, plan, capital, reputation, + value •Needs evidence of solvency + capital adequacy (ensuring assets exceed liabilities) •If Lloyd’s sees potential for entry requirements, then they’ll move to the 1st formal stage of the process
55
What is capital adequacy + a solvency margin?
•The amount that assets must exceed liabilities •Companies must maintain a balance between its assets + how much it knows it has to pay in liabilities •More volatile types of insurance require more weight on the assets
56
What must every authorised insurer submit to regulators every financial year?
1. Revenue account - showing UW profit or loss 2. Profit + loss account 3. Balance sheet - showing assets + liabilities of the organisation
57
What is the 3 pillar system that the FCA uses for analysis of risks that the businesses conduct presents?
1. Proactive firm supervision 2. Event driven work 3. Issues + products
58
Within regards to regulations, what is ‘winding up’?
If an insurance company fails to meet its requirements, regulators can intervene + the company can be wound up - i.e. the form cessation of the company
59
What is the Financial Ombudsman Service (FOS) and who does it apply to?
•Free + independent service that deals with unresolved disputes from eligible complainants, such as consumers, guarantors, charities w/ annual income less that £6.5m, small business w/ turnover up to £6.5m + less than 50 employees •All authorised companies must cooperate w/ FOS + they must investigate + aim to answer complaint within 3 months
60
When can a complainant refer to the Financial Ombudsman Service (FOS) within?
•6 months of firms letter advising claimant of its final decision regarding complaint •6 years after the event complained about •3 years after complainant knew that they cause for complaint
61
What is the aim of the Financial Ombudsman Service (FOS)?
Ensure customers are treated fairly + that law isn’t used as an excuse to avoid paying fair claims
62
Redress can be awarded in which 2 ways in the Financial Ombudsman Service (FOS)?
1. Money award - telling the firm what sum of money it should pay the customer to cover financial losses 2. Directions award - telling the firm what actions it should take to put things right for its customer
63
What is the Financial Services Compensation Scheme (FSCS)?
•Provides compensation for customers of deposit-taking companies + investment firms, + those of authorised insurance companies + intermediaries •So, covers claims against firms when they’re unable to pay claims, usually when they’ve gone out of business
64
Who was the Financial Services Compensation Scheme (FSCS) assist?
•Policyholders from authorised insurance company under contracts issued in UK - covering compulsory, general, + life insurance •There’s no protection for insurance such as goods in transit, marine, aviation, + credit insurance
65
What is the process of the Financial Services Compensation Scheme (FSCS)?
•They review the company concerned + when it’s satisfied it’s unable to pay claims, it’ll declare the company to be ‘in default’ •Then, the process of allowing claims to be made against the FCSC compensation pot starts
66
What is Lloyd’s position with the Financial Services Compensation Scheme (FSCS)?
Lloyd’s maintains its own central pot of money in case the members that undertook the risk aren’t in position to pay claims - know as the central fund

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