Chapter 6 - legal and regulatory enviroment Flashcards
What is the FCA responsible for?
Conduct of business and market issues for ALL firms.
Prudential regulation of SMALL firms (insurance brokerages and financial advisory)
What is the PRA? What is its role?
The PRA sits within the Bank of England. It is responsible for the stability and resolvability of financial institutions (banks, building societies, insurers)
Seeks to ensure businesses can fail without bringing down the financial system
Judgement based approach - looks at business risk, environment, management, government, risk management and liquidity/capital controls
What is the Financial Policy Committee?
Part of the Bank of England.
Responsible for anticipating potential systemic risks to the whole financial system and providing strategic direction for the entire regulatory regime
What is the PRA’s main objective?
Promote the safety and soundness of PRA regulated persons
What are the PRA’s secondary objectives?
Ensuring members behave in a way to promote stability of financial system
Minimise effect one member will have on entire UK financial system
Facilitating competition
What are the PRA’s insurance specific objecives?
Appropriate degree of protection to those who might be a policyholder
Appropriate degree of protection for the reasonable expectations of policyholders as to the distribution of surplus under with profit policies (share in profit or losses or insurer or certain g’tees that increase over lifetime)
What are the PRAs 4 minimum threshold conditions?
Head office + senior management in UK
Prudent conduct of business
Fit and proper staff
Effective supervision
What’s the 3 elements of the PRAs risk assessment framework?
- Potential impact on policyholders
- Macroeconomic and business risk context in which firm operates
- Mitigating factors such as risk management and governance
What is the PRA’s Proactive Intervention Framework PIF?
A supervisory framework used to assess a firm’s proximity to failure (such as liquidity, capital etc)
What’s the role of the Financial Conduct Authority FCA?
Ensure good business conduct
What are the three objectives of the FCA?
Consumer protection
Integrity of the UK financial system
Promote competition
What parts of a business does the FCA look over?
product governance
end to end sales process
prevention of financial crime
What’s the FCA’s approach to regulation?
Early action - intervene early in the lifecycle of a product. Watching over products to ensure they’re innovative and not exploiting consumers.
What’s the FCA’s approach to supervision?
All businesses should base their models around treating customers fairly.
Increasing look at how markets work (sector and market-wide analysis)
How does the FCA define fixed/flexible portfolio firms?
Fixed - highest level of scrutiny, will have a delegated FCA supervisor
Flexible - lower level, reports into a central function first.
What’s the FCA’s three pillar approach to risk?
- Firm systematic framework (treating customers fairly).
- Event driven work (reacts to emerging issues)
- Issues and products
What’s the FCA’s authority if it finds problems?
- Banning products in the retail sector
- Withdrawing misleading promotions
Who does the FCA liaise with?
Both the government and customers directly.
It has panels representing 4 views: consumers, regulated firms, smaller regulated firms, market practitioners.
How do the PRA and FCA work together?
Statutory duty to coordinate
PRA has authority to veto FCA decisions, as UK financial system takes precedence over consumer needs
What are the FCA and PRA’s 10 principles for business (PFB)?
- Integrity
- Skill, care and diligence
- Management and Control
- Financial prudence
- Market conduct
- Customers interestes
- Communication with clients
- Conflicts of interest
- Customers and relationship of trust
- Protection of clients’ assets
- Relationship with regulators
What kind of customer protection does the FCA focus on?
Consumers rather than large commercial clients
What kind of customer protection does the FCA focus on?
Consumers rather than large commercial clients
How does FCA regulate new products?
Firm must identify to FCA inherent risks - they don’t want customers to be exposed to unsuitable products due to a lack of knowledge as it is newly developed
What is an Apportionment and Oversight Officer?
responsible for the allocation and monitoring of regulated activities within a firm
What is the Senior Management Arragnements, Systems and Controls SYSC?
a body to promote a principle in the PRA/FCA handbook re management and control
What is a Money Laundering Reporting Officer?
Requirement within the SYSC. Role is responsible for establishing and maintaining effective anti money laundering systems and controls.
What did the Public Interest Disclosure Act 1998 PIDA address?
Safety for whistleblowing as long as it was made in good faith
What does being an admitted insurer mean?
means you are fully admitted by the regulator in that country. usually have to have an office
Difference between establishment basis or service basis
establishment basis - physical presence in that country
service basis - working only from home state and providing services abroad
How does regulation work in the USA?
on a state level
why is writing on an admitted basis in the US restrictive?
insurers have to submit policy wordings/premium
How does Lloyd’s manage writing business overseas?
Obtains permission on behalf of the Market.
What states is Lloyds fully licensed in in the US?
What does that mean?
Kentucky, Illinois and US VI
They have the same rights as local insurers.
What does writing on a surplus lines basis mean?
Lloyds market can only be accessed if there’s no local or admitted market that can accept the risk due to its size/complexity. Regulator may want proof it was offered to local markets beforehand
What’s the difference between Lloyds or company market reporting?
Lloyds reports centrally, company markets individually. Through premium and claims data.
Why do rules that apply to other regulated insurers apply to Lloyds, even if outside of the PRA/FCA?
Idea is that Policyholder will be as protected as it would be if insured elsewhere
What does Lloyds have to do to get flexibility on sharing responsibility from regulators?
required to undertake the following
1. make market aware of obligations
2. maintain controls over risks the market is exposed to
3. measure capital of each member
What tasks are member agents expected to do in order for Lloyds to get approval from regulators?
annual solvency test returns
assess capital
controls to minimise market and credit risks
What’s the role of the council of Lloyds?
What are its powers?
Governing body of the Market.
It can make rules, manages affairs of Lloyds, power to direct the insurance business undertaken in Lloyds
Making/changing byelaws, setting strategic goals, deciding contribution levels to the central fund, appointing members to the council and to franchise board
reviewing budgets
What’s the role of the Franchise Board?
Day to day management of Market
Guidelines for Syndicates
Business planning/monitoring
ULTIMATELY
to improve sustainable profitability and enhancing the financial strength og the Market
Who is in the Franchise Board?
Both members in and outside the market (key for best practice in corp governance)
What’s the Performance Framework of Minimum Standards?
Framework created by the Franchise Board to measure managing agents on their legal/regulatory/capital/operating principles
What are the 2 types of laws that Lloyds can make on the Market?
Primary rules - byelaws and regulations which have to be followed
Secondary rules - requirements which detail what needs to be undertaken to comply with primary rules. These are updated and amended if required.
What does a new insurer have to do in order to transact in the EU?
Must be authorised by the PRA who will ensure it has fit and proper persons. Then it will either authorise a company to transact freely. It also has ability to restrict authorisation in certain classess of business
How do insurers provide solvency and capital adequacy?
Assets MUST exceed liabilities
What is the solvency margin?
How does this change for riskier business?
Amount at which assets must exceed liabilities
Volatile types of insurance require more weight on asset side of the equation
What parts of the balance sheet do regulators monitor of an insurer?
Revenue - showing profit or loss
profit and loss account - shows total profit and total loss made
balance sheet - assets and liabilites at any given time
What’s the three pillar system for monitoring of the FCA?
1 - Proactive Firm Supervision
2 - Event driven work
3 - Issues and products
What is the Financial Ombudsman Service FOS?
Dispute resolution service. Free independent and impartial service that is compulsory for all authorised insurers and other firms including intermediaries. It focuses on individual customers / small businesses and financial organisations.
When can a person use the Financial Ombudsman Service FOS? What about in Lloyds?
after all internal complaint procedures are exhausted to no resolution
In lloyds, you’d first go to the Lloyds complaints team and then the FOS
How does the FOS award complainants?
Either fixed amounts (which have a max limit), or can advise what they think is fair which would be nonbinding
How does the decision process work with Financial Ombudsman Service FOS?
If complainant accepts the decision, it is binding
If complainant rejects the decision, it can take the insurer to court
If complainant does not respond, treated as rejection
What is the role of the Financial Services Compensation Scheme FSCS?
covers Policyholders under contracts issued in the UK if firms are unlikely to be able to pay claims for money made against them. can be insurers, investment firms, deposit-taking companies.
FSCS would declare company in default
what are the terms of the financial services compensation scheme pay out?
who does it not cover?
100% for compulsory insurances, PI, pensions/life assurances
90% (with no upper limit) for other types
it does not cover goods in transit, marine, aviation, credit insurance
What is the Lloyds central fund?
central pot of money as a contingency in case members fail to pay valid claims. forms part of lloyds security chain.
What is the Lloyds central fund?
central pot of money as a contingency in case members fail to pay valid claims. forms part of lloyds security chain.
