Chapter 6 - legal and regulatory requirement

Question 1

What is the FCA?

Answer 1

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

Question 2

What is the PRA?

Answer 2

Prudential Regulation Authority - within the Bank of England and is responsible for the stability and resolvability of systemically important financial institutions

Question 3

What is the FPC?

Answer 3

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

Question 4

What is the primary objective and secondary objectives of the PRA?

Answer 4

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.

Question 5

What is a with-profits policy?

Answer 5

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

Question 6

What is the criteria to be regulated by the PRA?

Answer 6

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

Question 7

What is the PRA’s assessment framework?

Answer 7

Involves 3 elements:
Potential policyholder impacts
Macroeconomic and business risk context in which the firm operates
Any mitigating factors including risk management and governance

Question 8

What is the FCA’s objectives?

Answer 8

Primary - ensure that the relevant markets function well
Operational objectives:
Consumer protection
Integrity
Competition

Question 9

What is the FCA’s approach to regulation and supervision like?

Answer 9

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

Question 10

What is in the FCA’s three pillar risk framework?

Answer 10

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

Question 11

What are the principles for business (PRIN) which is part of both the PRA and FCA handbooks?

Answer 11

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

Question 12

What does the product life cycle look like?

Answer 12

Product design and governance, identifying target market, marketing and promoting the product, sales and advice process, after-sales info, complaint handling CYCLE REPEATS ITSELF

Question 13

What is the difference between a consumer and commercial customer?

Answer 13

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

Question 14

What does Lloyd’s set of principles on conduct risk cover?

Answer 14

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

Question 15

What did the FCA commence a consultation on in 2021?

Answer 15

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.

Question 16

What are Senior Management Arrangements, Systems and Controls (SYSC)?

Answer 16

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.

Question 17

What are the FCA and Lloyd’s themes for ESG?

Answer 17

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

Question 18

What can a firm do if authorised in one country?

Answer 18

Country known as home state and can operate freely in all other EU countries without needing individual country regulatory body approval

Question 19

What is an admitted basis (USA)?

Answer 19

When state regulators grant permission to foreign insurance companies to write business alongside local insurers

Question 20

What US locations is Lloyd’s permitted in?

Answer 20

Kentucky, Illinois and US Virgin Islands
In worldwide jurisdictions, Lloyd’s companies are represented by the market to gain authority

Question 21

How can overseas regulators needs differ?

Answer 21

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

Question 22

How is Lloyd’s market regulated?

Answer 22

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

Question 23

What are the powers of the Council of Lloyd’s

Answer 23

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

Question 24

What are the 2 forms of laws for operating in Lloyd’s

Answer 24

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

Question 25

What are some behaviours Lloyd’s finds unacceptable?

Answer 25

Dishonesty
Forging/faking documents
Failure to organise and/or control business
Failure to look after money held on trust
Any act or omission which is capable of damaging the Lloyd’s brand

Question 26

What are the 3 main options for participation available to corporate newcomers of Lloyd’s ?

Answer 26

Set up a new corporate member or Name to participate in syndicates that already exist
Set up a new corporate member or Name and a new syndicate
Set up a new corporate member or Name, a new syndicate and its own managing agent

Question 27

How does a newcomer join Lloyd’s ?

Answer 27

Lloyd’s will want a meeting with a briefing which will cover:
The opportunity
the applicant’s strategy and background
The structure of the proposed new business
classes of insurance and territories to be involved
UW and management resources
Details of their proposed managing agent
Sources of capital
Their value to Lloyd’s

Question 28

What does capital adequacy entail?

Answer 28

Solvency margin - the amount by which assets must exceed liabilities
Also has risk elements factored in, such as type of insurance written

Question 29

What must every authorised insurer submit to the regulator each year?

Answer 29

Revenue account
Profit and loss account
Balance sheet

Question 30

What is the 3 pillar system used by the FCA to analyse risks?

Answer 30

Pillar 1 - Proactive Firm Supervision
Pillar 2 - Event driven work
Pillar 3 - Issues and products

Question 31

What does run-off mean?

Answer 31

A Lloyd’s syndicate can be put into run-off which prevents it from taking on any further business. Can also be used for insurance companies, policies already in place will be allowed to run to their expected expiry

Question 32

What is the Financial Ombudsman Service (FOS)?

Answer 32

A free, independent and impartial service that deals with certain disputes between individual consumers or small businesses and financial organisations, membership is compulsory.

Question 33

What does the FOS class as an eligible complaint?

Answer 33

Consumer
Micro-enterprise with fewer than ten employees and a turnover or balance sheet total of no more than EUR 2mn
Charity with an annual income of less than GBP 6.5mn
Trustee of a trust with a net asset value of less than GBP 5mn
Consumer buy-to-let consumer
Small business with an annual turnover of less than GBP 6.5mn and fewer than 50 employees or a balance sheet total of less than GBP 5mn
Guarantor

Question 34

What are the maximum awards the FOS can require a firm to make to a complainant?

Answer 34

£375,000 for complaints made on or after 1 April 2022 about actions by firms that occurred on or after 1 april 2019
£355,000 for complaints about actions by firms on or after 1 april 2019, and which were referred to the FOS between 1 april 2020 and 31 march 2022
£350,000 for complaints about actions by firms on or after 1 april 2019 and referred to the FOS between 1 April 2019 and 31 March 2020
£170,000 for complaints made on or after 1 April 2022 about acts by firms before 1 April 2019, but referred to FOS after that date

Question 35

What is the Financial Services Compensation Scheme (FSCS)?

Answer 35

Under control of FCA, provides compensation for customers of deposit-taking companies and investment firms, covers claims against firms where they are unable, or likely to be unable, to pay claims against them. Usually when a firm is insolvent or gone out of business.
Protection is 100% for:
Compulsory insurance
PI insurance
Long-term insurance

Protection is 90% of the claim for other types of policy