Chapter 9 - Legal & Regulatory Environment Flashcards
What insurance is compulsory for private individuals?
- Third-party motor insurance
- Public Liability in respect of ownership of dangerous wild animals/dogs
What insurance is compulsory for professionals/businesses?
- Motor insurance for all businesses
- EL is compulsory for businesses with employees
- PL for specific trades and professions
- PI for certain professions - e.g. solicitors & insurance intermediaries
- Marine pollution liability
What are the two main reasons why some insurance is compulsory?
- Provide funds for compensation 2. In response to national concerns
What changes were made to the road traffic act of 1988 following the Deregulation Act (2015)
- Insurance certs must be delivered to PH but is not required for policy to be effective
- If policy is cancelled mid-term, PH does not have to return Cert or any statement acknowledging policy has been cancelled.
What did the Employers’ Liability (Compulsory Insurance) Act of 1969 do?
Made it compulsory for all employers to have EL insurance up to £5m. Exemptions include family members & for govt. agencies. Do not have to retain previous certs either.
Why is there a growing need for PI cover?
More litigious society.
1. Rising cost of legal services
2. Retrospective legislation
3. Adverse judicial decisions
Explain the concept of privity of contract
Means a person can only enforce a contract if they are a party to it. So if a contract is made for the purpose of benefitting someone who is not a party to it, they cannot sue for breach of contract.
What was the impact of the Third Parties (Rights against Insurers) Act of 2010?
= Set out to protect insurance proceeds from the effects of insolvency. So permits a third party to bring claim against an insurer even if the business is insolvent.
- Did this as before money would go to the credits of the insolvency and not the people who needed the money. e.g. an asbestos claim.
- Also with the 1930 Act the business would have to restored for the claim to be made but this new act bypasses.
To apply an insured must:
- incur a liability to a third party which they have insurance
- and be insolvent.
Only brought into act in 2016 due to changing solvency legislation but bits are included in IA 2015
Explain the effect of Contracts (Rights of Third Parties) Act of 1999 on the concept of privity of contract
= Reformed the rule & sets out circumstances where third party can enforce a term of the contract. but must be identified in the contract by NAME, CLASS OR DESCRIPTION e.g. ‘drivers’ in a motor policy. But, often is excluded and contracted out as insurers do not want to extend liability
Which 3 regulatory bodies make up the financial services regulatory framework?
- FCA
- Prudential Regulation Authority (PRA)
- Financial Policy Committee (FPC)
Match the following descriptions with a financial services regulatory body.
1. Sits in BOE & responsible for stability & resolvability of systemically important financial institutions. More of a supervisory role focusing on risk management, governance, controls, capital, liquidity.
- Independent regulator responsible for conduct of business and market issues for all firms and prudential regulation of small firms. Take action early before detriment occurs. Reviews product lifecycle from design to distribution & power to ban products.
- Committee within the Bank of England responsible for minoring emerging risks to the financial system and providing strategic direction for entire regulatory regime
- PRA
- FCA
- FPC
What are the two main objectives of the PRA?
- Promote safety & soundness of the firms it regulates
- To contribute to ensuring PH are appropriately protected
What are the threshold conditions (minimum requirements firms must meet) in order to carry on regulated activities by the PRA?
- Firms head office (mind & management) in the UK
- business to be conducted in a prudent manner maintaining appropriate financial resources
- firm to be fit and proper and appropriately staffed
- capable of being effectively supervised.
Must meet the conditions at all times
What is the PRAs approach to supervision?
Judgement-based, forward looking and focused on key risks. Particular focus on assessment of future risks, how a firm would be resolved if it were to fail and the impact this would have on the system as a whole.
What is the PRAs risk assessment framework?
- Consideration of potential impact on PH and financial system if a firm were to fail
- Risk mitigation by the firm (management, governance & risk management and controls)
- Financial mitigation (reserves, capital and liquidity)
- Structural mitigation and firms resolvability
Firms then categorised 1-5, 1 being riskiest
What is the intensity of supervision of the PRA? (5 points)
‘baseline level of mintoring’ =
- ensuring compliance with capital standards
- liquidity, reserving, asset valuation etc.
- annual review of the firm
- examining firm if a risk crystalises
- assessing firms planned actions
Explain what a PIF is and what it relates to
Proactive Intervention Framework = the PRAs judgement about a firms proximity to failure and are derived from the risk assessment framework
Explain the PRAs approach to a firms culture and prudential supervision
While there is no correct firm culture, the firm must show whether boards/management understand the circumstances in which the insurers solvency and viability come into question and action is addressed on a timely basis
What are the 3 operating objectives of the FCA?
- Consumer protection
- Integrity
- Competition
What is the FCAs approach to regulation? (3 approaches) and explain them
- Product intervention and governance - intervenes to stop harm
- Super-complaints - systemic problems in particular markets to the CMA
- Competition powers - promote effective competition in interest of consumers e.g. better prices, products & services
What is the FCA’s general approach to supervision?
= Fair treatment of customers & FCA requires all firms to meet its Principles for Businesses (PRIN)
How are firms supervised by the FCA?
Some firms supervised by a dedicated supervision team while others are supervised as part of a portfolio
What are the 3 components of the FCA’s supervision model?
- Proactive - pre-emptive identification of harm through analysis
- Reactive - deal with the issues
- Thematic - remedy work across a number of firms if potential harm
What is the FCAs approach to supervising small firms?
Depends on the firms practice to customers but is less than big firms - must show good strategy, training, systems & controls like the big firms.
How can the FCA intervene?
- Ban products (only in relation to retail customers)
- Take action in relation to misleading promotions
- Change permissions granted to firms
- Can disclose enforcement against a firm has commenced
-> has to alert firm of proposed action against them first.
Can the FCA publish warning notices & summarys about a firm/individual?
Yes - (and the PRA can too) but has to decide if is unfair to the person who the warning relates.
Who/how does the FCA gather its data?
= Policy, Risk & Research division of the FCA - shows what the FCA is looking at and what is on their radar. Analysis consumer groups, the markets & media.
How does a firm become authorised by the FCA?
= By showing good business model, governance, culture & controls especially over:
- products
- end to end sales process
- prevention of financial crime
Can do the same with individuals who are promoted to positions of importance in a firm.
Who is the FCA accountable to?
Government and parliament - annual report
What are the 11 principles for businesses according to the FCA handbook and PRA rule book?
- Integrity
- Skill and care
- Management & control
- Financial prudence
- Market conduct
- Customers’ interest
- Communication with clients
- Conflicts of interest
- Customers: Relationships of trust
- Clients’ assets
- Relationship with regulator
- Consumer duty.
What principle does the FCA expect all firms to embed in their strategy and culture and day to day ops? Also explain why (6 points)
Fair treatment of customers. Gives 6 positive outcomes
- Confidence for consumers
- Products/services are designed to meet needs
- Clear information
- Suitable advise
- Expected performance of products
- No unreasonable post-sales barriers
Firms need to record they are doing this for FCA e.g. compliance checks, . So need to look at their business and make sure which are relevant to them and then measure whether they are delivering.
What other category of people must financial services firms have a DUTY to protect?
Vulnerable customers. These people can also be temporarily vulnerable.
What is the consumer duty? What is its aim? What are the 3 elements?
Sets out standard of care that regulated firms give to retail customers
Aims to protect customers from risks than case cause them harm.
3 elements:
1. The consumer principle - must act to deliver good outcomes for retail customers
2. Cross-cutting rules - how firms should deliver good outcomes
3. 4 outcomes - detailed rules and guidance
What are the 5 new government issued principles to FCA and PRA to ensure safe and ethical practice of AI?
- Safety, security & robustness (risks identified assessed & managed)
- Appropriate transparency & explainability
- Fairness (not be illegal e.g. discriminate)
- Accountability and governance
- Contestability and redress
What are the 3 ESG themes the FCA is promoting and will continue to promote?
- Promotion of global standards of sustainability reporting
- Encouraging transparency of performance of diversity & inclusion
- Integrations of ESG into financial markets decision making
What does SYSC mean in the FCA handbook?
Senior management arrangements, systems and controls.
What does SM&CR mean? What is its importance and what are firms required to do for it? What 3 pillars is a split into
Senior Managers and Certification Regime - new regulatory framework for individual accountability. (brings insurance into line with new banking supervision rules)
Each firm must:
- Ensure senior managers have a Statement of Responsibilities (personally accountable areas)
- Produce a ‘responsibilities map’
- Ensure all senior managers are pre-approved by regulators before carrying out their roles
= Govt. also introduced ‘duty of responsibility’ as part of Bank of England and Financial Services Act 2016
Split into: (self-explanatory)
- Senior managers regime (SMR)
- Certification regime
- Conduct rules (1. Individuals (apply to all employees) & 2.SMCR (only apply to SM))
What are the 3 categories are firms split into for the SM&CR?
Core - applies to majority of firms
Enhanced - carries significant obligations and applies to larger/complex firms
Limited scope - light touch, fewer obligations than core & enhanced
What is the Senior Management Regime (SMR)? Give examples of roles included.
= applies to persons performing senior roles -> also called Senior Management Functions. When new SM appointment or material change, must be approved by regulator.
SMR roles include:
- Head of key business areas
- Significant responsibility function
- CEOs, CFOs, CROs, Chairmans, Executive directors, Compliance,
Explain who the Certification Regime (CR) applies to:
= Individuals who are not carrying out SMFs but whole roles can cause harm to firm of customers. The roles are not subject to prior approval by regulators but they must be specified annually.
What is the Fit and Proper test for employees and senior personnel?
= Individuals in SM or under the category of SM&CR must be tested with regard to their:
- Honesty, integrity and reputation
- Competence and capability
- Financial soundness
What is the Public Interest Disclosures Act (1998)? What does it concern? What does it cover? What is the purpose behind it?
= Concerns ‘whistle-blowing’ which is a public allegation of a firms concealed misconduct, usually within the same organisation.
- Covers wide range of possible illegal or criminal activities known as ‘protected disclosures’ e.g. environmental damage, miscarriage of justice, h&safety, concealment of any of the above.
- PIDA makes it unlawful for an employer to punish an employee for whistle-blowing if the report was made in good faith.
- Purpose is to encourage culture of openness
- Firms encouraged by FCA to adopt appropriate internal measures for workers to whistle-blow internally and could include a statement of intent for larger firms
If a firm fails to meet requirement of the Financial Services Act 2012, what measures and sanctions do the FCA have against firms?
- Public censure - issue public statement of misconduct (damages rep)
- Financial penalties - (lots of factors taken into account e.g. profit accrued
- Prosecution for criminal offenders - (for carrying on regulated activity without authorisation, misleading or providing false information to regulators)
- Civil & less formal remedies: e.g. injunctions, cancellations of permission, withdrawal of authorisation, formal cautions which can be private
When a UK based business decides it wishes to transact insurance, what must it do?
Complete and submit forms to the PRA - then PRA decides if company is financially sound, market admin and premium structure are sound and all key personnel are fit and proper
What does capital act as a buffer for?
= Provides capacity to absorb unexpected losses. High quality capital reduces risk of firm being unable to meet unexpected claims. Also crucial for maintaining confidence of creditors
What is a solvency margin? (for insurers)
Amount by which assets must exceed liabilities. Each company must maintain a minimum.
What is Solvency II for Insurers?
When was it implemented?
What is its purpose
What are the pillars?
For PRA supervised firms
Implemented Jan 2016, EU-wide requirement on capital adequacy aiming to increase protection for PH and reduce possibility of market disruption
3 pillars:
1. Financial requirements - SCR/MCR
2. Government and supervision- ORSA
3. Reporting and disclosure: Solvency and Financial Condition Report (SFCR) public report and Regulator Supervisor Report (RSR) private report (contain both qualitative and quantitative reports)
What are the two Solvency II capital requirements? (FOR INSURERS)
What happens to firms that fall below?
- Solvency Capital Requirement (SCR) = level of capital required to give 99.5% confidence that assets will require sufficient cover to liabilities over 12 months
- Minimum Capital Requirement (MCR) = level of capital required to give supervisor 85% confidence assets sufficiently cover liabilities over 12 months
= Trigger ‘ladder of intervention’ = tools aimed at recovering position. If fall below MCR have less time to recover than SCR.
What 3 ways can firms calculate their capital requirements? (for insurers)
- Standard formula - Captures standard risks & requirements for them e.g. market risk, credit risk, UW risk and operational risk
- Undertaking specific parameters - Applied to more specific risks with approval from regulator
- Internal models - for complex firms, bespoke assessment using internal model of a business and its risk profile (with approvement from PRA)
Explain the key features of Pillar 2: Governance and supervision of Solvency II
= Own Risk & Solvency Assessment (ORSA) = set of processes and procedures used to identify, assess, monitor, manage and report risk. Also enables companies to determine level of funds necessary to meet solvency requirements. Very useful for capturing non-quantifiable risks. Reported to supervisor
Now UK has left EU, does Solvency II still apply? (insurers)
= Not directly but is mutually recognised by EU trading partners (called concept of equivalence)
How often do firms authorised by PRA report to them?
Each financial year. However, qualitative reports required once a year but some quantitative reports required quarterly and PRA can request ad hoc reports
How can the PRA intervene? (insurers)
If firms fail to comply with PRA requirements e.q. solvency or departed from business plan, PRA can:
- restrict premium income
- more account submissions
- further info
- prevent acceptance of new business
- require to restore capital position
- withdraw authorisation
= ultimately can wind-up a business where business ceases to operate
What is the only way to carry out insurance mediation activities in the UK?
To be authorised or exempt by the FCA. Only exemption CAN be = Appointed Representatives (ARs)
What can insurance mediation be defined as?
Activities of introducing, proposing or carrying out of work preparatory to the conclusion of contracts, assisting admin and performance of contracts and claims
What does the FCA require insurance intermediaries to record and report? What does the report include?
= Retail Mediation Activities Return (RMAR) - framework for collection of information required by the FCA for supervision activities. Submitted via online system called GABRIEL
Includes:
- Accounting information (frequency depends on type of firm and income)
- Regulatory Capital
- PI insurance
- Threshold Conditions required by FCA
- Training and Competence
- Conduct of Business Data e.g. number of ARs and monitoring of them
- Product Sales Data - data of different types of product e.g. volume, type of policies
- Calculation of fees - details of income
How does the FCA monitor the reporting of complaints to insurance intermediaries?
= Firms must provide details of type of product they have received complaints regarding and nature of the complaints e.g.:
- Advising and selling,
- Information, sums/charges, product performance
- Customer service
Firms need to provide how long it takes handle complaints, details of redress paid, and number of claims upheld compared to received.
What are the 3 key areas of training and competence all firms regulated by FCA need to consider?
- Assessing competence - clear criteria and procedures especially for new starters
- Maintaining competence (skills, knowledge and market changes e.g. legislation) - written manual showing how it is maintained in every stage of employees development
- Record-keeping - record must be kept for at least 3 years from the time the employee ceased to carry out the role.
What is the Insurance: Conduct of Business Sourcebook? Why are there now stricter requirements?
= Rulebook which applies to sales and admin process of general insurance. Stricter due to issues with PPI insurance as well as now sales of GAP products.
What are the 8 chapters of ICOBS
- Application of ICOBS rules
- General Matters
- Distance communications
- Information about firm, services and remuneration
- Identifying clients needs and advertising
- Product information
- Cancellation
- Claims handling
Who does ICOBS apply to?
- Insurance distribution activity
- Effecting and carrying out insurance contracts (inc. claims management)
- Managing UW capacity of Lloyd’s managing agents
- Communicating or approving financial promotions
= if there is a chain it applies to the intermediary in contact w/ customer
For ICOBS do different rules apply depending on the category of customer?
Yes, consumer and commercial customers have different rules, consumers = more protection. If a customer whose capacity is unclear they must be treated as a consumer. But if acting as both, depends on what they are acting for e.g. trade purposes.
What are the FCAs rules for financial promotions through ICOBS? Definition & what firms must show regarding them
= Describes any advertising encouraging a person to buy insurance or make an investment (e.g. brochures, advertising and websites). Must show have taken reasonable steps to ensure promotions are clear, fair and not misleading. Must keep records showing this
Can firms contract out regulatory requirements?
= No - can delegate to 3rd party but are still liable.
Explain the Distance Marketing Directive. What are key elements for consumers?
Protects consumers who have entered into contracts through a distance scale (phone or website). Gives cooling-off period and for sale over telephone with customers explicit permission, can send rest of information by post or email. Information must be supplied in a ‘durable medium’ before conclusion of contract (not an email)
Do intermediaries need to inform customers of the extent it has carried out a search in the market?
Yes, must state if a ‘fair analysis’ has been made. If this claim is made, must provide criteria showing a sufficiently large number of insurance products have been considered. If not, must state is there is a contractual restriction on what services it can provide.
Do insurance intermediaries have to disclose their commission?
Yes, if commercial customer does ask it must be disclosed promptly.
What are the rules concerning the assessment of a customers demand and needs and the suitability of a contract which is recommended?
= Intermediary must provide a statement of the customers demands and needs and give reasons for any advice given in relation to the policy.
What are the rules dealing with product information from insurance intermediaries to consumers/commercial customers.
= Firms must take reasonable steps to ensure customer is given appropriate information, in good time, in a form that customer can make informed decision from. e.g.
- price disclosure
- law
- complaints handling
- cancellation
What are the rules relating to claims handling from ICOBS?
= Must handle claims fairly and promptly giving reasonable guidance. Cannot unreasonably reject a claim and must settle promptly. Also the cannot reject claim where a warranty has been breached where the breach is not connected to the claim or is material to the risk.
What is the Insurance Distribution Directive (IDD)
What are the key provisions?
= Sets out CONSUMER provisions in insurance and scope of regulations include all firms which sell, advise on, conclude insurance contracts and admin and performing the contracts. Is part of UK law, applied since 2018
- Professionalism - appropriate knowledge and ability to perform tasks.
- Commission disclosure - Pre contractual disclosure of their remuneration (doesn’t have to be the amount but just how they are remunerated)
- New product governance requirements
- Ancillary insurance intermediaries
- Insurance Product Information Documents (product summary) - always issued ahead of sale or at renewal - only required for consumers insurance contracts but good gesture for all.
What are the general principles of the IDD?
- Distributors must act honestly, fairly and professionally in the best interest of customers
- Distributors communicate clearly (not misleading)
- Remuneration cannot be a conflict of interest
What is money laundering?
What are the 3 stages?
Process by which criminals and terrorists convert money that has been obtained illegally into legitimate funds.
- Placement - putting it into the financial system
- Layering - concealing through series of complex transactions
- Integration - getting access to it
What are the 3 strands of law applying to money laundering?
- Specific laws
- Money laundering regulations
- Regulatory rules and applications
What specific regulations are there in place relating to money laundering?
- Criminal Justice Act 1993 - makes it criminal offence to launder gains from crimes. Does not have to be the act itself but also that individuals report any suspected money laundering. It also makes ‘tipping off’ a person a crime
- Proceeds of Crime Act 2002 (POCA) - set up Asset Recovery Agency (ARA) to try and recover proceeds of crime. Offences include: concealing/disguising money, acquiring or possessing criminal property, failing disclosure that someone else is engaged in money laundering
- Serious Crime Act 2007 - Extended serious crime prevention and transferred ARA activates to Series Organised Crimes Agency, now called National Crimes Agency (NCA)
- Serious Crime Act 2015 - extended more proposals extending asset recovery and increased prison sentences
What are the EU money laundering regulations?
- The Money Laundering Regulations 1993 - foundation to money laundering prevention in financial system. Applied to all defined organisations operating in UK financial sector but not general insurance activities e.g. mediation activities.
- The Money Laundering Regulations 2017 - Covers wider range of businesses e.g. credit and financial institutions (e.g. financial advisers) and lots more e.g. estate agents, high value dealers etc. focuses on:
1.Customer due diligence
2. Policies and procedures
3. Registration
4. Enforcement
What are the regulatory rules and guidance for money laundering?
- Regulated persons must be aware of the risk their business could be used in connection to money laundering
- Firms must have systems and controls (e.g. training) regarding money laundering
- Firms must have an Money Laundering Reporting Officer (MLRO) who takes overall responsibility for establishing and maintaining effective systems and controls. Must have certain authority and sufficient resources
How are people who report money laundering protected?
No called to give evidence and name is concealed
Do firms have to verify identity of new clients?
Yes, need to take practical measures to ensure they are genuine e.g. bank reference or address, drivers licence, passport, business address, Certification of Incorporation for business. Advise provided by Joint Money Laundering Steering Group
Transactions should not be completed until proof of identity/business is confirmed
What is the impact of the Bribery Act (2010)
Created 4 new criminal offences and is far-reaching relating to improper payments:
1. Giving, promising or offering a bribe
2. Requesting or agreeing to receive a bribe
3. Bribing a foreign public official
4. Failure by a commercial organisation to prevent bribery committed on its behalf
