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LM1 > Chapter 6: Legal and Regulatory Environment > Flashcards

Chapter 6: Legal and Regulatory Environment Flashcards

1
Q

3 Regulatory bodies in the UK

A

FCA (financial conduct authority)
PRA (Prudential Regulation Authority)
FPC (Financial Policy Committee)

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2
Q

Responsiblities of the FCA

A
  • Conduct of business and market issues for all firms
  • Prudential regulation of small firms (Brokers/financial advisors)
  • Take action before consumer detriment
  • Thematic revew and market-wide analysis to identify problems
  • Power to ban products
  • End to end review of a products lifecycle in its entirety
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3
Q

Responsibilities of the PRA

A
  • Rests within the BoE
  • Focuses on stability/resolvability of financial institutions
  • Will not seek to prevent firms from failing but ensure they fail without ruining the financial system
  • Judgement based approach of supervision
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4
Q

Categories of the Judgement based supervision by the PRA

A
  • External environment
  • Business risk
  • Management and governance
  • Risk management
  • Controls
  • Capital
  • Liquidity
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5
Q

Responsibilities of the FPC

A
  • Financial Policy Committee
  • Within the BoE
  • Horizon scanning for emerging risks to the financial system as a whole
  • Provide strategic direction for entire regulatory regime
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6
Q

Objectives of the PRA

A
  • Promote safety and soudness of PRA regulated persons
  • Ensure authorised individuals behave in a way which avoids adverse effects on UK stability
  • Minimise adverse effects from failure of authorised persons on financial system
  • Facilitate competition
  • Contribute to ensuring protection of coverholders to an appropriate degree
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7
Q

Threshold required to carry on regulated activities under the PRA

A
  • Firms head office, mind and management are in the UK
  • Conduct in a prudent manner (maintain appropriate financial/non-financial asset levels)
  • Firm is fit, proper and appropriately staffed
  • Capable of effective supervision
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8
Q

PRA risk assessment framework

A
  • Potential impact on policyholders
  • Macroeconomic and business risk context
  • Mitigating factors including risk management and governance
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9
Q

PRA PIF

A
  • Proactive Intervention Framework
  • 5 stages under each of the focuses
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10
Q

FCA Objectives (CICF)

A
  • Ensure that the relevant market functions well
  • Consumer protection
  • Integrity of the financial system
  • Promote effective competition for regulated financial services
  • Responsible for the Financial Ombudsman Scheme and FSCS
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11
Q

FCA authorisations and approvals

A
  • Product governance
  • end to end sales processes
  • prevention of financial crime
  • Works with the PRA closely to consider which applications to approve when concerning roles that could greatly impact a firms activities
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12
Q

FCA Approach to regulation

A
  • Wants firms to innovate but monitor any avenues which may exploit consumers
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13
Q

FCA approach to Supervision

A
  • Firms considered either fixed or flexible portfolio
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14
Q

FCA regulation of fixed portfolio firms

A
  • Small portion of FCA regulated firms based on size, market presence, consumer footprint that require the highest level of supervisory attention
  • Nominated an indivdual supervisor and proactively monitored through continuous assessment
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15
Q

FCA regulation of flexible portfolio firms

A
  • Market based thematic work and programmes of communication, engagement and education
  • No individual supervisor, may contact FCA customer contact centre as first point
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15
Q

FCA Risk framework

A
  • Centred around flexibility
  • Are customers the sole focus?
  • Event driven (issues emerging/recently occured)
  • Issues and products (reviews of issues and products as they take place)
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16
Q

FCA Powers of response

A
  • Banning products in the retail sector
  • Withdrawing misleading financial promotions
  • Fining or prosecution
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17
Q

Who do the FCA report in to?

A
  • The Government and Parliament annually
  • Customers directly
  • 4 statutory panels representing views of consumers, regulated firms, smaller regulated firms and market practicioners
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18
Q

PRIN

(ISMFMCCCCCR)

A
  1. Intergrity (PRA)
  2. Skill,Care and Diligence
  3. Management and control
  4. Financial prudence (PRA)
  5. Market Conduct
  6. Customer interest
  7. Communication with clients
  8. Conflict of interest
  9. Customer relations (PRA)
  10. Client Assets
  11. Relationship with regulators (PRA)
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19
Q

Treat customers fairly

A
  • Principle six of the PRIN
  • ## A firm must pay due regard to the interest of its customers and treat them fairly
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20
Q

Treat customers fairly Cycle

A
  • Product design and governance
  • Identify the market
  • Marketing and promoting the product
  • Sales and advice process
  • after sales information
  • complain handling
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21
Q

Developing a new product under FCA

A
  • Requires firm to identify the inherent level of risk
  • Customers should not be exposed to unsuitable/unidentified risks from a new product
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22
Q

SYSC

A
  • Senior Managment Arrangements, Systems and Controls
  • Relate to Principle 3 of PRIN (Management and Control)
  • Responsibilities between senior management should be clear so that:
  • It is clear where the responsibility lies
  • ## business of the firm can be adequately monitored and controlled by the directors/senior managers/board
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23
Q

MLRO

A

Money laundering reporting officer
- responsible for establishing and maintaining effective anti-money laundering systems in a firm

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24
Q

PIDA 1998

A
  • Public Interest Disclosure Act
  • Whistle blower act
  • Public allegations of firms misconduct
  • Encourage culture of openness (especially with FCA matters)
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25
Q

Foreign regulation for companies

A
  • Must be permitted by the regulator of that country
  • Often a company will have set up offices (including hiring staff)
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26
Q

Home State financial regulation (EU)

A
  • If already authorised in one EU country as its “home state” they can operate in all other EU nations
  • Works on the basis regulators respect their neighbouring colleagues
  • freedom basis
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27
Q

Writing business in the UK after brexit

A
  • UK insurers lost right to write business in EEA after Dec 31st 2020
  • UK insurers write through EEA subsidiaries now (normally LBS)
  • EEA companies continue to write in the UK
27
Q

Memorandum of Understanding

A
  • Negotiations for equivalence between UK/EU began Mar-21
27
Q

Companies writing business in USA

A
  • Regulation left to individual state
  • Must obtain permission multiple times to access business emanating across the US
  • State regulators grant permission on an admitted basis
27
Q

Lloyd’s writing in USA

A
  • Only admitted business in Illnois, Kentucky and US VI
  • Lloyd’s has obtained centralised authority for syndicates
28
Q

Lloyds writing business overseas

A
  • Lloyd’s themselves obtain permission for individual regulators
  • this permission applies to any syndicated operating within that market
  • Does not have permission to write all types of business in every country (some may be restricted to reinsurance only)
29
Q

Satisfying overseas regulators

A
  • reporting varies country to country as some want category of risk and others want more information
30
Q

Types of insurance required by overseas regulators for reporting

A
  • Direct
  • Facultative reinsurance
  • XoL reinsurance
  • Proportional treaty reinsurance
31
Q

Additional information requested by regulators (LLCOST)

A
  • Location of risk
  • Location of Broker
  • Services/establishment business
  • Tax Payable
  • Other charges payable
  • Category of risk
32
Q

Regulation reporting and data collection

A
  • most reporting is done on a premium and claims data held in centralised databases
  • regular reporting is done from extracting the information from the databases and providing to individual regulators
33
Q

Governance of Lloyd’s Market members

A
  • Regulated by both the FCA and the PRA
  • Brokers only regulated by the FCA
  • Rules that apply to regulated insurers applies to Lloyd’s
34
Q

Lloyd’s Managing agents regulatory requirements

A
  • File annual solvency test return
  • Assess the capital needed in order to engage in the insurance business planned for the syndicates under their control
  • Establish/maintain controls over risks that relate to day-to-day business
35
Q

Lloyd’s Market regulatory requirements

A
  • Ensure market are aware of their obligations
  • Create/maintain controls for risks written in the lloyd’s market
  • Measure/assess capital needs of each member or Name
36
Q

Lloyds Governance structure

A

Lloyd’s Act 2008
- 2 key bodies:
- Council of lloyd’s
- Executive committee

37
Q

Council of Lloyd’s powers

A
  • rule-making (can create market laws)
  • Management and superintendence of all affairs of Lloyd’s
  • Right to exercise any of the powers of the Society of Lloyd’s
  • Power to direct insurance business at Lloyd’s
38
Q

Activities only the Council of Lloyd’s can undertake

A
  • making/changing Byelaws
  • Setting long term strategic development of the market
  • Deciding contribution levels of the Lloyd’s Central Fund
  • Deciding the amount of members’ (Names’) subscription
  • Appointing members of the Council and members of the committee of the council
  • Reviewing budgets and plans
39
Q

Member structure of the Council

A
  • 15 members
  • Working, External and nominated members
  • Chairman of the council is always chairman of Lloyd’s
40
Q

Primary rules in Lloyd’s

A

Byelaws and regulations

Fundamentals

41
Q

Secondary rules in Lloyd’s

A

Requirements

What needs to be undertaken to comply with primary rules

42
Q
A
43
Q

Explanatory notes

A
  • Additional guidance for Lloyd’s members to help with intepretation (may include but is not limited to codes of practice)
44
Q

Lloyd’s Enforcement jurisdiction

A
  • Lloyds can take action against any behaviour that is in breach of rules or discredits the market
  • FCA has their own disciplinary functions in the event their rules are breached
  • Anyone working within the market is covered
  • Penalties can range from fine to lifetime bans
45
Q

Authorisation of new insurers

A
  • Must be authorised by the PRA
  • Must comply with regulators requirements
  • i.e. Only companies operated by fit and proper individuals will be authorised to transact business
  • Regulator has the authority to limit CoBs
  • Companies outside the UK must also satisfy PRA now that the UK is outside the EU
46
Q

3 Options for newcomers to the Lloyd’s market

A
  • Set up new corporate member (name) to participate in already established syndicates
  • Set up new name and new syndicate
  • Set up new name, new syndicate and own managing agent to run syndicate
47
Q

Lloyd’s required outline for new entrants

A
  • People
  • Plan
  • Capital
  • Reputation
  • Value
48
Q

First requirement for Lloyds to agree new insurers

A
  • First stage is to satisfy evidence of solvency and capital adequacy
49
Q

Capital adequacy

A

Solvency margin where assets > liabilities

50
Q

Accounts provided to regulator

A

every year insurer must provide
1. Revenue account
2. Profit and loss account
3. balance sheet

51
Q

Revenue account

A

Underwriting profit/loss

52
Q

Profit and Loss account (income statement)

A

Total profit and loss made

53
Q

Balance sheet

A

Assets and liabilities of an organisation at any point in time

54
Q

FCA 3 pillar risk analysis system

A
  • Proactive firm supervision
  • Event driven work
  • Issues and products
55
Q

Winding up

A
  • When company fails to meet regulation requirements
  • Regulator intervene to begin cessation of the company
  • Lloyd’s syndicates would be put into run-off
  • Policies already in force will usually be allowed to see out their duration
  • Still liable for claims
56
Q

Financial Ombudsman Service

A
  • Free, independent and impartial service focused on conflict resolution between consumers and financial organisations
  • Membership is compulsory for all authorised firms including brokers
  • A consumer must exhaust the companies internal complaints procedure before referring to the FOS
  • Maintained by the FCA
57
Q

Aim of the Financial Ombudsman Service (FOS)

A

Provide impartial and independent resolution from an eligble complainant

58
Q

Eligible complaint for the FOS

A
  • Consumer
  • Micro-enterprise consisting of less than 10 employees and who’s turnover is less than 2 million Euros (micro-enterprise is an EU term)
  • Charity with income of less than 6.5 million
  • Trustee of a trust with net asset value of less than 5 million
  • Consumer buy to let (CBTL) consumer
  • Small business with less than 50 employees whos turn over is less than 6.5 million or balance sheet of less than 5 million
  • Guarantor
59
Q

Max award from Financial Ombudsman Service

A
  • 355,000 to complaints made after April 20
  • 350,000 complaints made after April 2019 which were referred to FOS between April 19 and Mar 20
  • 160,000 Complaints made before April 2019 but referred after
  • Can recommend a higher figure but will not be binding on the firm
  • Complainant can accept or reject the decision in the time specified. If rejected, the complainant can pursue in court
60
Q

100% FSCS protection

A
  • Compulsory insurance
  • PI insurance
  • Long term insurance (pensions)
  • Certain claims for injury/sickness/infirmity
61
Q

90% FSCS protection

A
  • No upper limit for other types of policies including general insurance advice and arrange
62
Q

No FSCS protection

A
  • GIT
  • Marine
  • Aviation
  • Credit
63
Q

Who funds the FSCS compensation pot?

A

Levy on all authorised firms

64
Q

Lloyd’s Central Fund

A
  • Maintained in the case members have written a risk they are not in a position to pay claims for
  • acts as reserve

LM1 (9 decks)

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