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.