Insurance sector update. CMS Cameron McKenna LLP 15 October 2013

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1 Insurance sector update CMS Cameron McKenna LLP 15 October 2013

2 The Financial Conduct Authority s competition powers Caroline Hobson Partner CMS Cameron McKenna LLP 15 October 2013

3 Overview Role of competition within FCA s activities The FCA s competition objective: what is it? how will it work? Concurrency What does this mean for the sector? _1 15 October

4 Competition in the financial services and insurance sectors Area of key interest in recent years Many market/sector studies and competition law investigations But competition law powers confined to competition authorities Limited ability to tackle wider market issues _1 15 October

5 The competition objective what is it? One of the FCA s three statutory operational objectives Promoting effective competition in the interests of consumers Factors FCA may have regard to: needs of different consumers ease of switching access to services ease of market entry innovation PRA secondary competition objective also proposed _1 15 October

6 The competition objective how will it work? Duty to discharge functions in a manner consistent with the objective Provides FCA with wide mandate to consider competitiveness of markets Will shape regulatory interventions Does not give FCA full competition law enforcement powers Only OFT (Competition and Markets Authority) and European Commission can currently investigate competition law infringements and impose fines _1 15 October

7 The practical impact Significant training and development of a competition function within the FCA Market studies (e.g. general insurance add-on market study) Market analysis work Regulatory intervention Referral to the OFT Co-operation with other authorities (OFT, CMA, European Commission) Key issues market structure consumer interests _1 15 October

8 FCA will act to protect consumers, not competitors Consumer based outcomes Consumers: retail consumers retail investors wholesale consumers FCA will prioritise actions according to: greatest consumer harm ability of FCA to intervene and help consumers _1 15 October

9 Concurrency: the FCA gets teeth Concurrency: the power to investigate and fine anti-competitive agreements and abuses of a dominant position Proposed to be introduced in 2015 FCA will be expected to use competition powers over regulatory powers What will happen before 2015? close working relationship with the OFT (CMA) memorandum of understanding significant amount of market analysis work _1 15 October

10 What does this mean for the sector? Increased scrutiny By a well-informed (competition) regulator Market studies: requests for information caution: fishing expeditions? Emphasis on consumer outcomes Focus on competition law compliance _1 15 October

11 Regulatory Issues facing the Insurance Sector Maxine Cupitt Partner CMS Cameron McKenna LLP 15 October 2013

12 Current Issues FCA Thematic review process: General insurance personal lines claims processing Mobile phone insurance Motor legal expense Insurance brokers conflicts of interest Concerns about renewal premium pricing Client money Packaged bank accounts and tracing employers historic liability insurers Transfer of consumer credit regulation EU IMD II Disaster Insurance EIOPA professional requirements and training Consumer Rights Directive _1 15 October

13 Thematic Reviews FCA regulates c 27,000 firms by event driven activity, issues and product work, including thematic reviews. "to assess a current or emerging risk relating to an issue or product across a number of firms within a sector or market" how FCA tackles this the potential outcomes expectation of engagement/change of culture possible rule changes S.166 Skilled Person appointments enforcement actions: firms/individuals _1 15 October

14 This Thematic Review The 3 Rs: Restoring trust and confidence in the insurance sector Brokers must show value What is the insurance brokers role in the financial system? Re-evaluating how you do business The aim is that the market works well Profits for good firms/exits for bad ones Resolving to work in the interests of customers _1 15 October

15 Thematic review into Insurance Brokers Conflicts of Interest Review will focus on SME and microbusiness customers Broker remuneration is the main issue If broker receives revenue from insurer and customer How are potential conflicts identified? Would broker make recommendations against the customer s best interest? Would broker improperly perform its duties to its customer? _1 15 October

16 Thematic review into Insurance Brokers Conflicts of Interest How do you demonstrate you identify and manage conflicts of interest effectively? Is your customer a genuine client, or an upsell opportunity? For example, do you sell add-ons and premium finance fairly? How do you make sure products and fees are properly disclosed and well understood by customers? Are your staff incentives consistent with delivering good customer outcomes? What does your complaints handling say about your culture? _1 15 October

17 IMD II Key issue: Mandatory prior disclosure of commission, as proposed by the EC facing opposition at European Parliament IMD II Reforms: Remuneration disclosure Direct Selling Cross-selling bundling and tying Life insurance investment products Claims management and loss adjusting Introducers _1 15 October

18 IMD II JURI opinion on IMD II Scope should be narrowed Exceptions should remain Definition of contingent commission should be widened Removal of the requirement to demonstrate appropriate professional experience Removal of detailed remuneration disclosures On 13 June 2013, EP passed resolution raising concerns about the delay of IMD II Vote scheduled in committee for 5 November 2013 EP will consider IMD II in its plenary session to be held from 9 to 12 December _1 15 October

19 SOLVENCY II UPDATE Signs of Progess? Mike Munro Partner CMS Cameron McKenna LLP 15 October 2013

20 Agenda Where were we in March? Further developments The LTG package EIOPA Guidelines: Preparing for Solvency II What next? _1 15 October

21 Where were we in March? Process stalled by ongoing discussions on Omnibus II Timing of Omnibus II vote was uncertain (October 2013 but moving target) Key issues delaying Omnibus II? Long-term guarantees package ( LTG package ) Treatment of long-term assets Equivalence Official target date for implementation was 2014 but PRA view: 1 January 2014 target date completely unrealistic PRA revised planning horizon 31 December 2015 Discussion / consultation on interim measures ongoing _1 15 October

22 Further developments (1) Overview 14 June 2013: EIOPA publishes assessment / report on the LTG package 27 June 2013: European Commission sends report on LTG assessment to European Parliament and European Council and invites the parties to approach the forthcoming discussions in a spirit of pragmatism and compromise. 12 September 2013: European Parliament reschedules vote on Omnibus II Directive to 3 February September 2013: EIOPA publishes final Guidelines for the preparation of Solvency II. 2 October 2013: EC proposes draft Directive postponing Solvency II application date to 1 January _1 15 October

23 Further developments (2) January 2016 A firm date? Statement from Commissioner Michel Barnier: Key issue for Omnibus II are modifications as regards insurance products with long-term guarantees (life insurance etc).. Agreement is within reach but: Not possible to publish Omnibus II Directive before currently scheduled application date of 1 January 2014; and [b]efore Omnibus II can be applied, a number of implementing measures are needed [ which] cannot be finalised before the details of Omnibus II are known. Is it a firm date? Postponement proposed to avoid any legal uncertainty Commission has obtained assurance from the Council and the Parliament that they would not further change this new application date of Solvency II _1 15 October

24 The LTG Package (1) Context LTG package concerned with basis for valuing liabilities for products with long-term guarantees ( LTG products ) under Solvency II Basic SII valuation principles: Assets and liabilities should be valued on a market consistent basis Base discount rate should be the appropriate risk free rate Context what should happen to liabilities if values of matched assets fall as a result of temporary market dislocations? Core question can adjustments / additions to be made to risk free rate and if so when? Objective (Michel Barnier): appropriate measures to mitigate the effects on the undertakings' own funds of artificial volatility of asset prices or discount rates _1 15 October

25 The LTG Package (2) EIOPA Report selected points Elements of package proposed in EIOPA Report fall in three categories - being: Measures applicable only in exceptional financial market circumstances/ crises Transitional measures Permanently applicable measures (e.g. the matching adjustment ). EIOPA recommend replacing temporary counter-cyclical premium ( triggered by exceptional financial market conditions) with permanent volatility adjustment Why? [T]he announcement of a CCP is a particularly delicate issue and the triggering may result in a self-fulfilling prophecy. Classic matching adjustment : the most effective tool within the tested LTG package but more work needed: What portfolios will be eligible? More work needed on ring-fencing ( needs to be workable in practice ). EIOPA recommend removing extended matching adjustment ( major concerns with regards to policyholder protection, competition and supervisability ) _1 15 October

26 Guidelines: Preparing for Solvency II (1) Overview EIOPA s final guidelines issued on 27 September 2013 Directed towards ensuring a consistent and convergent approach with respect to preparation of Solvency II. Cover four areas: Systems of governance (including risk management) Forward looking assessment of own risk (based on ORSA principles) Submission of information to National Competent Authorities (NCAs) Pre-application for internal models NCAs must decide how to incorporate the Guidelines into national regulatory frameworks However, EIOPA recognises that in a significant number of member states, the NCA does not have the legal competence to enact the relevant financial legislation _1 15 October

27 Guidelines: Preparing for Solvency II (2) Selected points ORSA: Significant criticism of requirement to undertake SII calculations when: OMD II negotiations are ongoing Technical specifications remain to be issued Result: key assessments postponed to 2015 Assumption: Technical Specifications.. will possibly be issued in the course of 2014 Enforcement / action Guidelines given to NCAs who are expected to comply with the Guidelines by ensuring that undertakings meet the specified outcomes BUT Guidelines do not require NCAs to take supervisory action if undertakings fail to comply with Solvency II requirements prior to application date Phasing-in Expectation: Solvency II preparedness will progress over time Guidelines allow for a phasing in approach for some provisions _1 15 October

28 What next? PRA Supervisory Statement for consultation setting out expectations of firms from 1 January 2014 in light of EIOPA Guidelines Trialogue parties LTG package negotiations Omnibus II vote in February Will that happen? EIOPA Subject to Omnibus II agreement, prepare technical specifications and guidance based on Omnibus II decision EU US Dialogue Project Public event scheduled for Saturday, 14 December 2013 Aim: launch initiatives in December 2012 Way Forward paper, e.g. as to: Group supervision Equivalence (including reinsurance recognition and collateral requirements) _1 15 October

29 AOB _1 15 October