Chapter 6 - legal and regulatory requirement Flashcards
What is the FCA?
Financial Conduct Authority - responsible for regulating conduct of business and market issues for all firms and prudential regulation of small firms, follows complete product lifecycles and has the power to ban products
What is the PRA?
Prudential Regulation Authority - within the Bank of England and is responsible for the stability and resolvability of systemically important financial institutions
What is the FPC?
Financial Policy Committee - Within the bank of England and responsible for horizon scanning for emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime
What is the primary objective and secondary objectives of the PRA?
Primary - Promote the safety and soundness of PRA regulated persons
Secondary - ensure PRA regulated persons behave in a way which avoids adverse effect on the UK financial system
Minimising adverse effect that the failure of a PRA persons could have on UK financial system stability
Facilitating competition
Insurance specific: Contributing to the securing of an appropriate degree of protection for those who are or may become policyholders
An appropriate degree of protection for the reasonable expectations of policyholders as to the distribution of surplus under with-profits policies.
What is a with-profits policy?
Has certain characteristics such as:
A share in certain of the profits or losses of the insurer
Certain guarantees, which usually increase over the lifetime of the policy
For example the payment of a guaranteed amount at maturity or retirement, or on death
What is the criteria to be regulated by the PRA?
Firm’s head office to be in the UK
Firm maintains appropriate financial and non-financial resources
Firm to be fit and proper and appropriately staffed
Firm and group to be capable of being effectively supervised
What is the PRA’s assessment framework?
Involves 3 elements:
Potential policyholder impacts
Macroeconomic and business risk context in which the firm operates
Any mitigating factors including risk management and governance
What is the FCA’s objectives?
Primary - ensure that the relevant markets function well
Operational objectives:
Consumer protection
Integrity
Competition
What is the FCA’s approach to regulation and supervision like?
Regulation - More proactive, likely to intervene earlier in a product life cycle
Supervision - The FCA splits firms into two categories:
Fixed portfolio - require the highest level of supervisory attention, allocated individual supervisors
Flexible portfolio - proactively supervised through a combination of market-based thematic work and programmes of communication, engagement and education activity
What is in the FCA’s three pillar risk framework?
Firm systematic framework - involves asking the question whether interests of customers are at the heart of the business
Event driven work - flexible supervisory activity driven by issues that are emerging
Issues and products - flexible approach allows the FCA to look at reviews of issues and products as they take place
What are the principles for business (PRIN) which is part of both the PRA and FCA handbooks?
Integrity
Skill, care and diligence
Management and control
Financial prudence - must maintain adequate financial resources
Market conduct - must observe proper standards
Customers’ interests
Communication with clients
Conflicts of interest - must be managed fairly
Customers: relationships of trust
Clients’ assets - must arrange adequate client asset protection when responsible for them
Relations with regulators - must deal with regulators in an open and cooperative way
What does the product life cycle look like?
Product design and governance, identifying target market, marketing and promoting the product, sales and advice process, after-sales info, complaint handling CYCLE REPEATS ITSELF
What is the difference between a consumer and commercial customer?
Consumer - defined as a natural person who is acting for purposes which are outside their trade or profession
Commercial customer - any customer that does not fall into the above definition
What does Lloyd’s set of principles on conduct risk cover?
Deal directly with how best to treat customers fairly and they apply to all customers, yet the different level of insurance understanding between a consumer and a business should be recognised, influencing how insurers approach these groups
What did the FCA commence a consultation on in 2021?
a new Consumer Duty which reinforces many of the requirements already in place, aimed at any organisation which is involved in the manufacture or supply of products or services to any retail clients, broadly meaning consumers or SMEs.
What are Senior Management Arrangements, Systems and Controls (SYSC)?
Provide greater definition of management and control principle. Every regulated firm must make it clear who has which responsibility and the business of the firm can be adequately monitored and controlled by the directors, senior managers and the board.
What are the FCA and Lloyd’s themes for ESG?
FCA - promotion of global standards for sustainability reporting
Improved transparency of performance on diversity and inclusion matters
Integration of ESG into financial market decision making
Lloyds:
Strategy and governance
Climate
Culture
Communities
What can a firm do if authorised in one country?
Country known as home state and can operate freely in all other EU countries without needing individual country regulatory body approval
What is an admitted basis (USA)?
When state regulators grant permission to foreign insurance companies to write business alongside local insurers
What US locations is Lloyd’s permitted in?
Kentucky, Illinois and US Virgin Islands
In worldwide jurisdictions, Lloyd’s companies are represented by the market to gain authority
How can overseas regulators needs differ?
Some countries are only interested in the category of risk (e.g. direct, facultative, XoL reinsurance and proportional treaty reinsurance)
Some countries need far more info such as:
risk location, broker location, tax payable etc
How is Lloyd’s market regulated?
Society of Lloyd’s and managing agents are regulated by both the FCA and PRA whereas brokers and members agents are regulated by the FCA. Rules that apply to all other regulated insurers also apply to Lloyd’s
What are the powers of the Council of Lloyd’s
Rule-making
management and superintendence of all Lloyd’s affairs
Right to exercise any of the Society of Lloyd’s powers
Power to direct the insurance business
Set long-term strategic market development
Decide contribution levels to Lloyd’s Central Fund
Deciding the amount of members’ annual subscriptions
Reviewing budgets and plans
Appointing council members and committee members
Council is made up of 15 members, comprise working, external and nominated members
What are the 2 forms of laws for operating in Lloyd’s
Byelaws and regulations - known as primary rules and set out the fundamental concepts
Requirements - Known as secondary rules, contain the detail of what needs to be undertaken to comply with primary rules
