AFM Regulation and Governance Committee

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AFM Regulation and Governance Committee AFM Regulation Update, SEPTEMBER 2014 New items highlighted throughout in yellow REGULATORY THEMES 1.

1 AFM Regulation and Governance Committee AFM Regulation Update, SEPTEMBER 2014 New items highlighted throughout in yellow REGULATORY THEMES 1. GOVERNANCE OF FINANCIAL MUTUALS The Annotated Corporate Governance Code remains the main focus of corporate governance compliance in AFM members. The AFM Constitution now makes completion of the compliance exercise a condition of membership. Our report on compliance during 2013 has now been released, and charts significant improvements in governance practices during the year, as well as areas for continued attention. See: FRC has confirmed it is finalising changes to the UK Corporate Governance Code. AFM will review what changes are needed to the Annotated version, and issue an updated Code before the end of 2014, for firms to apply during 2015 and for reporting in Exploring the best ways to engage with members is key to mutuals, as they are both customers and owners, and our claims to democracy rely on our members actively participating in key decisions for the organisation. The sector has not always found it easy to achieve high turnouts for the AGM, and we are running a workshop in July, hosted by LV= to look at all aspects of engagement, from the AGM mailing, to the event itself and incorporating other aspects of engagement. We aim to produce a report with suggestions on good practice in time for the AFM conference. 2. WITH PROFITS The FCA and PRA both issued policy statements on 28 March on mutuals and with-profits. The statements mark the culmination of sector engagement with the regulators over many years, and are designed to give a clear view for mutuals on how to proceed, in situations where their current structure risks harming their long term business prospects. In particular, where volumes of new with-profits business are falling, mutuals can now go through an exercise to separate the liabilities for with-profits and the remaining mutual capital, where the organisation can demonstrate it is being fair to policyholders and has a sound future business plan. Both FCA and PRA have stressed their intent to make the waiver process workable for mutuals, and are keen to identify organisations who might benefit from making an early application. AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 1

2 FCA reports that it has see a constructive approach from AFM members to supporting its review of legacy books, including with-profits. FCA is now conducting visits to confirm information found during desk-based research, and expects to produce some findings during TOWARDS SOLVENCY 2: RISK AND CAPITAL MANAGEMENT There has been significant effort in recent months to set out a clear timetable for implementation of Solvency 2. On 12 March the European Parliament approved Omnibus II, confirming the process to enable the Directive to take full effect from 1 January Over the summer HM Treasury and the PRA issued consultations covering Solvency 2 transposition. PRA has also indicated that it is planning a number of other consultations later in the year, and has released details of a Solvency 2 conference on 17 October. PRA s key priorities at present are to ensure that insurers have developed their ORSA, and undertake an effective gap analysis on governance arrangements. They are also keen to see smaller insurers in particular make effective progress on the reporting arrangements, amid concerns that some insurers have not yet recognised the extent of work required. A key concern for many mutuals at present is the quality of data they receive from asset managers, as well as what rating licenses they need on their investment portfolio. AFM is represented on PRA regulatory reporting working group, and is working with asset managers and rating agencies to identify practical solutions. PRA is also due to review the non-directive regime before January 2016, and has confirmed work has started on retaining rules as appropriate for non-directives. The PRA s website includes updated pages on Solvency II. 4. FINANCIAL CRIME JMLSG guidance The JMLSG Board consulted on changes to their guidance in July which was updated in August and can be found on their website. The most important amendment for the AFM membership to consider is the additional FAQs in Chapter 7 of Part II, which raise awareness of the potential impacts of the Government s relaxation on pensions on the risk assessments for pension products. The consultations can be accessed via the following link: JMLSG - Consultations AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 2

3 Financial Sanctions Compliance Mutuals are reminded to review the notifications from HM Treasury in relation to financial sanctions. To receive regular notifications, with the words SUBSCRIBE SANCTIONS in the subject field. HM Treasury regularly reviews the sanctions lists, and publishes changes on its website: HM Treasury has issued some FAQs (and answers) relating to sanctions and sanctions screening which may be of use to the AFM s members: At present there is no carve out for regulated individuals/ entities (such as IFAs, brokers, doctors, solicitors etc.), though the insurance industry continues to question the need to screen such FCA regulated individuals and entities. Employee fraud With predictions that the scale of fraud will continue to increase sharply, CIFAS has produced a helpful and extensive guide on employee fraud. The Committee recommends members review the good practice in the paper: Third party reliance: the trade bodies AFM, ABI and IMA have agreed a note relating to reliance on an intermediary to provide confirmation of a policyholder s identity. The note has been developed with APFA (representing intermediaries) and sets out processes insurers might adopt. A copy of the note is provided with the September 2014 regulation update. 5. UPDATED EUROPEAN DIRECTIVES There are significant changes to the UK regulatory landscape via European Directives (in addition to Solvency II), including: IMD2: Insurance Mediation Directive PRIIPS: Packaged Retail Investment and Insurance Products Regulations on KID: Key Information Documents: see KID article MiFID 2: Markets in Financial Instruments Directive (FCA s MiFID conference on 18/9) Most of these Directives and Regulations are in the final stages of development, with confirmation that on the whole they come into effect by early in Amongst some of the biggest impacts will be: the need for an appropriateness test on non-advised investments, the requirement for a stand-alone three-sided KID, and the extension of many requirements to general insurance and protection as well as investments. New directives the AFM Regulation and Governance Committee is tracking include the Audit Reform Directive and changes to the Data Protection Directive: AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 3

4 European Audit Reform Directive: Regulation (EU) No 537/2014 entered into force on 17 June 2014 allowing member states two years to transpose the new requirements. It affects Public Interest Entities (PIEs): this includes insurers, except mutuals with income below 1m. It reinforces rules and best practices on the composition and quality of audit committees. Auditors are required to provide more detailed audit reports to members. Auditor reports to the Audit Committee and Competent Authorities are specified, as is a more prescriptive audit tendering process under the responsibility of the audit committee. A list of prohibited non-audit services is given and a limit on fees permitted for non-audit services. Mandatory rotation of the auditor and audit partner within specified periods is laid down. Data Protection: the new European Commission sees the review of the Directive as a priority and intends to complete legislation in the next few months. The new Directive overhauls the legislation to take better account of online security, and is expected to take effect in NEW REGULATORY ISSUES AFM members should be aware of the following recent issues or documents: 1. FCA restricts distribution of CoCos to retail investors: On 5 August 2014, the FCA announced that it will restrict firms from distributing contingent convertible securities (CoCos) to the mass retail market from 1 October This will apply until 1 October 2015 by which time it expects to have finalised rules, which are subject to consultation this autumn FCA s supervisory approach to financial promotions in social media: FCA has issued a guidance consultation on the uses of social media by financial services organisations. This explains how firms can ensure they complain with financial promotions rules, and provides some useful case studies AFM members might wish to review FCA fines Stonebridge International Insurance 8.4 million, relating to sales of accident insurance products (August 2014): FCA found that the telesales scripts that Stonebridge designed for its outsourcing companies did not provide clear, fair and balanced information. It also found that Stonebridge s poor systems and controls, and inadequate oversight of its outsourcing companies breached the FCA s requirements that firms treat customers fairly and have appropriate systems and controls in place. 4. Connect - the new FCA online notifications and applications system: Connect is the new online system that will be used by firms to submit applications and notifications to the FCA. Connect will replace the majority of applications that are currently submitted on the Online Applications and Notifications (ONA) system. It goes live on 1 October. To learn more, visit: 5. Non-financial loss: compensation for trouble and upset: the Financial Ombudsman has provided updated guidance to firms on how to decide when to make an award, and what is reasonable to pay. AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 4

5 a) PRA papers SS5/14 REGULATORY WORK IN PROGRESS GRID, SEPTEMBER 2014 PRA discussion paper Subject Overview Deadline for comment/ action Solvency 2: calculation of technical provisions (GI) Procyclicality and structural trends in investment allocation by insurance companies and pension funds CP16/14 Transposition of Solvency 2: Part 3 SS8/14 Subordinated guarantees and the quality of capital Sets out PRAs expectation of general insurers in relation to Solvency 2 technical provisions as well as internal models. Sets out Bank of England s thinking on the procyclical nature of insurance and pension funds, and its potential impact on consumers and on financial stability more generally. Sets out changes to PRA s handbook to reflect Solvency 2, with main sections on the long-term guarantee package, proposals on surplus funds and national reporting templates. Sets out how firms might use subordinated guarantees and where they do avoid affecting the quality of capital under Solvency 2 regime SS9/14 Valuation risk for insurers Sets out the PRA s expectations of firms in relation to existing rules on the valuation of financial assets and seeks to reduce the risk caused by intended or unintended misstatement of values b) FCA consultation papers CP14/10 DP14/3 GC14/3 CP14/11 1 January 2016 No date given AFM Response? 7 November AFM to respond 1 January August 2014 Subject Overview Deadline for comments Proposals for a price cap on high-cost short-term credit The use of dealing commission regime Retail Investment Advice: clarifying the boundaries and exploring the barriers to market development Retirement reforms and the guidance guarantee Explains why and how FCA will be introducing a price cap for high-cost short-term credit from 1 January 2015 Reports on recent supervisory findings and stakeholder discussions on the use of dealing commission, specifically for the purchase of research Seeks to clarify the difference sales models for retail investments and their associated regulations. Explores which circumstances amount to a personal recommendation Sets out how FCA intends to regulate the provision of the guidance guarantee as part of the reform of the at retirement market AFM Response? 1 September No AFM 10 October No AFM 10 October AFM to respond 22 September No AFM CP14/15 Implementing the BRRD Sets out how FCA intends to 1 October No AFM AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 5

6 implement the Bank Recovery and Resolution Directive. CP14/16 Proposed rules for Explains how providers of workplace independent governance pensions schemes will be required to committees set up an independent governance committee. GC14/6 FCA s supervisory approach Seeks to explain how firms can use to financial promotions in social media for financial promotions social media and remain compliant- with examples intended to help compliance. CP14/17 Early implementation of the Relates to issuers are active in the Transparency Directive extractive or logging of primary forest industries, to prepare a report annually on payments made to the governments in the countries in which they operate. CP14/18 Quarterly Consultation 6 Makes a series of proposals on Consumer Credit, the Listings regime and the CASS regime 10 October No AFM 6 November No AFM 7 October No AFM 5 November No AFM c) FCA Policy Statements PS14/12 Subject Overview Implementation Dates A new capital Sets on final capital rules for SIPPs operators. 1 September 2016 framework for SIPPs d) Other regulatory Papers HMT Solvency 2 transposition Subject Overview Deadline for comments Treasury is consulting on the remaining policy issues for Solvency 2, covering the process by which an insurer might make use of volatility adjustments rather than a matching adjustment, as well as circumstances where a firms permissions would be removed following a breach of the MCR. AFM Response? 19 September AFM responded e) Selected EU and EIOPA papers Set 1 of Solvency 2 guidelines Subject Overview Deadline for comments Solvency 2 guidelines EIOPA is consulting on its first set of guidelines for Solvency 2, covering Pillars 1 and 2, with a wide range of issues such as technical provisions, market risk, the ORSA and ring-fencing. AFM Response? 29 August No AFM Note that the FSA website is now archived, though past content can still be accessed via the National Archive. Copies of all our s are provided on the AFM website: AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 6

7 AFM Regulation and Governance Committee Alan Goddard (Chair) Cornish Mutual Andrew Horsley engage Mutual Assurance Keith Meeres Family Investments Stuart Bell Metropolitan Police John Gilbert Hogan Lovells LLP Steve Dixon Steve Dixon Associates Jayne Haley LV= Gary Morley Oddfellows Friendly Society Ayo Salam British Friendly Cara Spinks OAC Consultants and Actuaries Simon Rogers Teachers Assurance Ray Tidbury Mazars Conolly Tunnard Foresters Friendly Society Robert Wharton Foot Anstey AFM representatives on other industry/ regulatory bodies Peter O Sullivan Keith Meeres Steve Dixon Conolly Tunnard -Joint Money Laundering Steering Group (JMLSG) Ltd - Financial Crime Sector Group - Member, ILAG Regulations Committee, 2014 chair of ILAG - ILAG Prudential Regulations Focus Group - Member, ILAG Regulations Committee AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 7

8 FORTHCOMING EVENTS, with a Regulation and Governance theme: Member engagement roundtable: A second roundtable was held on 12 September at the offices of LV=, looking at areas of member engagement beyond the AGM. Smaller societies and mutuals Forum: the next meeting of the forum will be held on 26 September in London. The agenda includes Solvency 2, rating agencies, underwriting and product development. ILAG events: our affiliate membership with ILAG enables smaller AFM members to send a representative to any of their events. Events are free to attend, full details can be accessed via the ILAG website events. In the near future this includes: Simplified advice- is the industry ready yet? Wednesday 24 September, 10am- 1pm, Squire Patton Boggs, 7 Devonshire Square, London Non-Executive Directors Workshop: Risk, assurance and Solvency II- how does the jigsaw fit together? Tuesday 30 September 2014, 10.00am pm Mazars LLP, Tower Bridge House, St Katharine s Way, London Financial reporting for insurers: Wednesday 15 October, 10am 1pm, PricewaterhouseCoopers, 7 More London Riverside, London For further details or to book (you must be website registered first) visit the events section of the ILAG website help with complaint handling from the ombudsman service Booking has now opened for more of the Financial Ombudsman Service s meet the ombudsman roadshows, starting in September. These are aimed at a range of smaller financial services businesses that are covered by the ombudsman but which usually have few - if any - dealings with the service. Nevertheless, they see the benefit of building-up their knowledge and understanding in this important area. Many AFM members will fall into this category. Delegates learn more about good complaint handling, and how the ombudsman service works and decides on the outcome of disputes. The sessions are run in a round table discussion format, so there is plenty of opportunity to ask questions and discuss the issues with other delegates as well as the ombudsman service staff present. This makes for a lively and engaging session. More information (including details of how to book your place) is available from the ombudsman s website. AFM Regulation and Governance Committee, Regulatory update, September 2014 Page 8

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LMA GUIDANCE: SENIOR INSURANCE MANAGERS REGIME (SIMR) JULY 2015 LMA GUIDANCE SENIOR INSURANCE MANAGERS REGIME (SIMR) 1. SUMMARY Starting November 2014, the PRA and FCA issued a joint series of three consultation