Day One - expected to be 1 April 2013 - will be the start of the new regulatory system for financial services firms in the United Kingdom. Under the new regime insurers and reinsurers will become “dual regulated” firms supervised by both the new Prudential Regulatory Authority (the PRA) and the Financial Conduct Authority (or FCA); each regulator has responsibility for oversight of specific objectives; they will have different cultures and different priorities. Insurance intermediaries (brokers, agents and Independent Financial Advisers) will be regulated by the Financial Conduct Authority alone.
Insurers will need to prepare now for the new set-up so that they understand how some of the familiar FSA procedures will operate in the future. Although not all of the detail of how the two bodies will function is available, there is considerable value in advance preparation before Day One - not least in respect of understanding the distinct objectives of the PRA and FCA.
The Prudential Regulatory Authority, established under the auspices of the Bank of England, has been given responsibility for promoting the safety and soundness of PRA authorised persons. This means the PRA has responsibility for ensuring that insurers do not pose a threat to the stability of the UK financial system and that any insurer failure has a minimum impact on other firms and on consumers. Importantly, insurer failure can happen but its impact must be managed and minimised.
In addition, the PRA has a specific “insurance objective” - on an equal footing with the other objectives. This is to secure an appropriate degree of protection for those who are, or who may become, policyholders. This requirement comes from the Solvency II Directive and reflects the different risks that insurers face as opposed to other financial services firms.
The Financial Conduct Authority has been given distinct objectives to the PRA. Its strategic objective is to ensure that relevant markets work well - perhaps too vague to be insightful but wide enough to catch a number of issues under their supervisory remit. In terms of operational objectives the FCA will:
- ensure that consumers are given products that meet their needs;
- protect and enhance the integrity of the financial sector;
- Make sure that competition brings customer choice.
For insurers, the tougher and more intrusive approach planned for the FCA is already apparent in the work currently being undertaken by the Business Conduct Unit of the FSA who will be transferred into the new authority in the spring. In particular, the FCA is going to pay much greater attention to firms’ business models to ensure that they do not undermine the operational objectives. What this will mean for insurers is much closer scrutiny of product design to ensure that customers get value for money - for example, if a large proportion of target customers are not going to be able to claim under a policy then design will be flawed and the FCA will expect firms to go back to the drawing board before the product goes on the market. At the heart of product intervention will be the familiar treating customers fairly (or “TCF”) outcomes.
The FCA will be prepared to intervene throughout the life-cycle of a product not just when it is being designed but also at the sales stage or in relation to after-sales customer care. Where the FCA identifies a problem, they will intervene much earlier than the FSA has done previously in order to prevent harm to customers. The Financial Services Bill provides the FCA with the power to ban products that pose unacceptable risks to consumers. Given the tougher approach firms will therefore need to ensure that:
- products are designed for a specific target market;
- the demands and needs of that target market are taken into account in the product design;
- information given to the customer about the product is clear, fair and not misleading;
- there is sufficient management oversight of the product; including monitoring of complaints, sales processes, customer information and claims data; and
- distribution methods should be appropriate for the product and target market.
Certainly, firms can expect that from Day One, senior management will be subject to much closer scrutiny in terms of their decision-making and oversight of the business. Firms should ensure that management have the appropriate skills for the roles that they are doing. That the right people are doing the right jobs in management will be scrutinised in the applications for approval of individuals in senior roles.
There is a lot for firms to take on board:
- understanding which regulator will deal with which aspects of the business;
- changing processes to fit the new set-up;
- ensuring that senior management are suitable for the roles they undertake and preparing applications for approval of persons to the new authorities;
- stress-testing products to check that they genuinely meet the needs of target customers;
- reviewing customer information for clarity and suitability; and
- ensuring that the different objectives of the new authorities are fully understood and that the business is really ready for Day One of the new regime.
We advise firms to take these matters into account and to start to plan (if you have not already done so) for what is likely to be quite a challenging year in terms of getting to know the new regulators, their priorities and their processes.
I hope this update has been helpful.
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