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London Markets 1 > CHAPTER 6: Legal and Regulatory Environment > Flashcards

CHAPTER 6: Legal and Regulatory Environment Flashcards

1
Q

What regulatory bodies were created by the Financial Services Act 2012?

A
  • The Financial Conduct Authority (FCA)
  • The Prudential Regulation Authority (PRA)
  • The Financial Policy Committee (FPC)
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2
Q

Who are the FCA and what do they do?

A

The Financial Conduct Authority. They are responsible for the conduct of business (consumer protection) and market regulation.

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3
Q

Who are the PRA and what do they do?

A

The Prudential Regulation Authority. They sit within the Bank of England and are responsible for the stability and resolvability of financial institutions.

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4
Q

Who are the FPC?

A

The Financial Policy Committee. A committee within the Bank of England, responsible for scanning for emerging risks and providing strategic direction for the entire regulatory regime.

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5
Q

What are the objectives of the PRA?

A

Their primary objective is to promote the safety and soundness of PRA regulated persons.

Their secondary objectives include:

  • Ensure PRA authorised persons behave correctly which avoids adverse effects on the stability of the UK financial system.
  • Minimise the adverse affects of a failure of a PRA-authorised person
  • Facilitating competitions

In relation to the insurance industry their objectives/responsibilities are to:

  • Secure a degree of protection for policyholders
  • Provide a degree of protection for policyholders of with-profits policies
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6
Q

What is a with-profits policy?

A

A policy with certain characteristics such as:

  • A share in certain of profits/losses of the insurer
  • Certain guarantees (retirement money)
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7
Q

What are the PRAs requirements of the firms regulated by them?

A
  • A firm’s head office should be in the UK
  • A firm’s business should be conducted in a prudent manner; the firm should maintain the appropriate financial and non-financial resources
  • A firm should be properly staffed
  • A firm should be capable of being effectively supervised
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8
Q

What is the PRA’s risk assessment and how is supervision determined and the minimum supervision?

A

The risk assessment criteria is:

  • Potential impact on policyholders
  • The macroeconomic and business’ risks
  • Any mitigating factors i.e a firms risk management.

The intensity of supervision correlates with the firms level of risk, however there is a baseline of:

  • Compliance with prudential standards
  • Liquidity, asset valuation, provisioning and reserving
  • Atleast an annual review of risks
  • Assessing a firms planned recovery actions and how they might exit the market
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9
Q

What are the FCA’s objectives?

A

It has three main objectives:

  • Consumer Protection
  • Maintain market integrity
  • Promote effective competition
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10
Q

What is the FCA’s involvement with authorised individuals?

A
  • Product governance
  • End-to-end sales processes
  • Prevention of financial crime

Act in a proactive manner

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11
Q

What are the FCA’s risk framework?

A
  • Are the customers best interests at the heart of the businesses operations
  • Supervisory activity as a result of emerging or recent issues
  • Review of issues and products
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12
Q

What can the FCA do if it finds problems?

A
  • Ban products in the retail sector

- Withdraw misleading information

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13
Q

Which regulatory body has the ability to veto another?

A

The PRA can veto the FCA as financial stability takes precedence over consumer protection at times.

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14
Q

What are the principles for businesses (PRIN)?

A
  • Integrity
  • Skill, care and diligence
  • Management and control
  • Financial prudence
  • Market conduct
  • Customers’ interests
  • Communications with clients
  • Conflicts of interest
  • Customers: relationships of trust
  • Clients’ Assets
  • Relationship with regulators
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15
Q

What is the product Life-cycle?

A

Product design and governance -> Identify target market -> marketing and promotion -> sales and advice process -> after-sales info -> complaint handling ->[back to start]

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16
Q

What are the FCAs definitions of a consumer and a commercial customer?

A

A consumer is a natural person acting for purposes outside their trade or profession.
A commercial customer is one who doesn’t fall under the above definition.

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17
Q

Does the FCA have any expectations of consumers?

A

Yes, they are expected to take responsibility for their decisions where they have the understanding and info to do so.

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18
Q

What is a apportionment and oversight officer responsible for?

A

Responsible for the firms allocation and monitoring of regulated activities within the firm.

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19
Q

What does SYSC stand for?

A

Senior Management Arrangements, systems and controls

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20
Q

What does PIDA stand for and what is it?

A

It stands for Public Interest Disclosure Act and concerns whistle blowing. Protects the rights of whistle blowers to not suffer an detriment following a qualifying disclosure.

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21
Q

What regulatory requirements are their for an insurance company to write business overseas?

A

The insurer must e admitted by the regulator in that country, and must have an office, staff and incur capital expenditure.

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22
Q

What is home state financial regulation?

A

If an insurer is authorised in one country within the EU (it’s home state), then it can freely operate in all other EU countries too.

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23
Q

How does regulation work in the USA?

A

Each state manages it’s own insurance regulation, meaning that insurers from outside the USA must get permission multiple times from different states to access the business, this would be on an admitted basis - where the insurer has to submit their wordings and premiums to the regulators.

24
Q

How does Lloyd’s write business overseas?

A

Lloyd’s market obtains permission from international regulators, and this then applies to any syndicates in the market.

Lloyd’s also set up small offices and have representatives around the world.

25
Q

What does a surplus-lines status means?

A

If an insurer has this status it means that it can only be accessed if the local market is unable to accept the risk.

26
Q

What is an admitted insurer?

A

An insurer that has the same rights as local insurers.

Lloyd’s is an admitted insurer in Kentucky, US Virgin Islands and Illinois.

27
Q

How does Lloyd’s satisfy overseas regulators?

A

By reporting all to the regulators centrally. The reporting is done based on premium and claims info held centrally.

28
Q

Do the rules that apply to regulated insurers apply to Lloyd’s?

A

Yes they do, the regulations from both the FCA and PRA.

29
Q

Who are the key bodies in the Lloyd’s governance?

A

The council of Lloyd’s and the Franchise Board.

30
Q

What powers do the council of Lloyd’s have?

A
  • Rule-making
  • Management of all Lloyd’s affairs
  • Right to exercise society of Lloyd’s powers
  • power to direct the insurance business
    Only the Council:
  • make or change byelaws
  • setting long-term strategic development
  • Deciding contribution levels to Lloyd’s central fund
  • Deciding member’s annual subscriptions
  • Appointing members of the council and Franchise Board
31
Q

How many members are on the Council of Lloyd’s?

A

18, comprised of working, external and nominated members.

32
Q

What does the Franchise Board do?

A

Responsible for the day to day management of the Lloyd’s marketplace.

33
Q

What are the responsibilities of the franchise board?

A
  • Set the framework for market supervision
  • admit and remove participants in the market
  • Determine guidelines for participants in the market
  • approving the annual plan and budget for Lloyd’s
  • executive appointments, roles and compensation
34
Q

How does the franchise board achieve its goals?

A

Using a performance framework of minimum standards.

35
Q

What are Byelaws and Regulations?

A

These are primary rules and set out fundamental concepts.

36
Q

What are Requirements?

A

These are secondary rules, containing details of how to comply with the primary rules. Easy to update.

37
Q

What are codes of practice?

A

Provide operational information as to how to comply with the rules

38
Q

What is enforcement jurisdiction? Who does Lloyd’s have this over?

A

Lloyd’s can take enforcement proceedings against anyone working within the market, companies and individuals.

39
Q

Who needs to authorise a UK domiciled insurer to transact business in the EU?

A

The PRA (UK regulator) must authorise them.

40
Q

What are the options for corporate newcomers to the Lloyd’s Market?

A

In all cases they must set up a new corporate member or name, then:

  • participate in pre-existing syndicates
  • Create a new syndicate
  • Create a new syndicate and their own managing agent to run the syndicate.
41
Q

What is a solvency margin?

A

The amount by which assets must exceed liabilities.

42
Q

What is capital adequacy?

A

Ensuring a firm has a good solvency margin.

43
Q

What monitoring is in place to regulate insurers?

A

Each financial year insurers must submit:

  • Revenue Account
  • Profit and loss account
  • Balance sheet
44
Q

What is a revenue account?

A

Shows the underwriting profit or loss

45
Q

What is a profit and loss account?

A

(AKA income statement) - shows the total profit or loss made

46
Q

What is a balance sheet?

A

Shows the assets and liabilities of the organisation.

47
Q

What does it mean if a company is wound-up?

A

If an insurance company fails to meet regulatory requirements, the regulator will intervene and the company is wound-up. They will then be put into run-off.

48
Q

What is run-off?

A

When a firm no longer accepts or writes any new risks. the policies in force will run their natural course and this covers the insurance company for any liabilities they may have after.

49
Q

What is the FOS?

A

The Financial Ombudsman Service. Deals with disputes between consumers/small businesses and financial organisations. Membership is compulsory for all authorised firms and intermediaries.

Eligible complainants are:
Consumers, micro-enterprises (< 10 employees and t/o no more than 2m euros,

50
Q

What happens if a Lloyd’s policy has a complaint?

A

It first goes to the Lloyd’s complaint department, then if not resolved goes to FOS.

51
Q

What are the maximum FOS awards?

A
  • £350k plus interest, costs and interest on costs from complaints on actions after 1 April 2019.
  • £160k plus interest, costs and interest on costs from complaints on actions pre 1 April 2019 but referred to FOS after aforementioned date
  • £150k plus interest, costs and interest on costs for complaints referred to FOS before 1 April 2019.
52
Q

Who are the FSCS?

A

The Financial Services Compensation Scheme, they are under the control of the FCA.

They provide compensation for deposit-taking companies and investment firms. Also covers claims where the firm may have gone out of business or be unable to pay the claim.

53
Q

How much compensation can policyholders get and what factors effect this?

A 
100% compensation for:
- compulsory insurance
- PII
- Long-term insurance
90% with no limit for other types of policy
54
Q

How is the FSCS pot funded?

A

By a levy on all authorised firms

55
Q

What is a levy?

A

A tax

56
Q

What happens to a Lloyd’s claim if the insurer cannot pay?

A

It is paid from the Lloyd’s “Central Fund”, which comes from payments from syndicates operating in Lloyd’s

London Markets 1 (9 decks)

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