FSA Policy Documents

Feedback Statement 11/1: Enhancing the auditor's contribution to prudential regulation

10 March 2011

The FSA and the Financial Reporting Council (FRC) have jointly published a Feedback Statement which reports on the main issues arising from the joint Discussion Paper DP10/3 Enhancing the auditor's contribution to prudential regulation. The latter was intended to stimulate debate as to how the FSA can best use audit and auditors to help meet its statutory objectives.

FS11/1 summarises the feedback received in response to the Discussion Paper, and sets out the FSA and FRC's joint response to that feedback. The response includes actions the FSA and FRC have taken since the Discussion Paper and the progress being made in enhancing auditors' contribution to prudential regulation.

The issues covered are:

  • Auditor scepticism and firms' disclosures;
  • Enhancing dialogue and sharing information between the FSA, firms' auditors and audit committees;
  • Scope of reporting by auditors and other; and
  • FSA and FRC powers and whether or not they require expansion or enhancement.

Further, it discusses the next steps and expectations for the future which include the intention to further enhance interaction with external auditors and make use of the guidance and frameworks developed together with the need for close monitoring of the success of the FSA's increased engagement with auditors and audit committees.

A copy of the Feedback Statement can be found at: http://www.fsa.gov.uk/pubs/discussion/fs11_01.pdf

Handbook Release 111

10 March 2011

The Release contains updates as to changes to the FSA Handbook which came into force between 7 February 2011 and 6 March 2011.

The updated sections are as follows:

  • Banking: Conduct of Business sourcebook
  • Client Assets
  • Collective Investment Schemes
  • Decision Procedure and Penalties Manual
  • Fees
  • General Provisions
  • Glossary of definitions
  • Interim Prudential sourcebook for Insurers
  • Insurance: Conduct of Business
  • Market Conduct
  • Supervision
  • Senior Management Arrangements, Systems and Controls

A copy of the handbook release can be found at: http://www.fsa.gov.uk/pages/Library/Policy/Handbook/Releases/2011/111.shtml

Policy Statement 11/5: Auditors' Client Assets Report

25 March 2011 Further to Consultation Paper 10/20, the FSA has published Policy Statement 11/5 which sets out ten new rules that will affect both regulated firms and their auditors. The new rules will come into force on 1 June 2011, although there will be transitional provisions in place until 29 September 2011.

In relation to the preparation of auditors' client asset reports, the rules aim to confirm and clarify the standards required and to increase the quality and consistency of the information provided. Generally, the rules are also intended to improve firms' governance oversight of their auditors and their compliance with client assets rules.

A copy of the Auditor's Client Assets Report can be obtained at: http://www.fsa.gov.uk/pages/Library/Policy/Policy/2011/11_05.shtml

Handbook Notice 108

25 March 2011

Handbook Notice 108 sets out the changes made to the FSA Handbook made by the FSA Board on 24 March 2011. These changes include amendments to:

  • defer the commencement date of various new controlled functions;
  • update a list of appropriate qualifications in the training and Competence sourcebook;
  • defer until 2015 the full implementation of the Simplified Liquidity Adequacy Standards (ILAS) Regime;
  • revise the Conduct of Business sourcebook following removal of the requirement to annuitise pension savings by age 75; and
  • reflect new rules in relation to auditors' client assets reports and general governance oversight in this area.

A copy of Handbook Notice 108 can be obtained at: http://www.fsa.gov.uk/Pages/Library/Policy/Handbook/Notices/index.shtml

Feedback Statement 11/2: Consumer complaints (emerging risks and mass claims)

28 March 2011

A Feedback Statement has been published outlining the response received in relation to the publication by the FSA, the OFT and the Financial Ombudsman Service of Discussion Paper DP10/1 (Consumer complaints (emerging risks and mass claims)). The Feedback Statement provides details of the responses to DP10/1 and discusses the actions to be taken to improve the regulator's coordination of complaints handling. This forms part of the government's agenda for transforming financial services regulation.

In brief, a new Coordination Committee will replace the Wider Implications Process and will take on the role of identifying emerging risks. The government proposes to introduce a statutory obligation for the Financial Ombudsman Service and the Financial Conduct Authority to put in place a Memorandum of Understanding to govern interactions between the two bodies. This would replace the current voluntary framework that exists between the FSA and the ombudsman. The regulator will also continue to work with trade and consumer bodies in this arena, as well as working alongside the Claims Management Regulator.

A copy of the Feedback Statement can be obtained at: http://www.fsa.gov.uk/pages/Library/Policy/DP/2011/fs11_02.shtml

FSA Communication Documents Speech by Hector Sants at the BBA Conference – Creating the FCA

2 March 2011

Hector Sants, Chief Executive of the FSA, gave a speech on the opportunities created by the government's intention to establish the Financial Conduct Authority (FCA), the proposed new specialist regulatory authority focusing on consumer protection and markets.

In his speech he focused on five topics:

  • The issue of consumer protection – Hector Sants described the key elements of FCA's strategy and explained that it will be based on a proactive and intensive approach.
  • The FCA's powers in relation to consumer protection - New powers will be granted to the FCA, as it will need stronger powers of intervention than the FSA currently has.
  • The regulation of markets and wholesale conduct – Hector Sants stated that the government broadly sees the existing markets regulation framework as performing effectively and therefore, it has proposed relatively few changes in this area. The creation of the FCA, does provide an opportunity to take a fresh look at how wholesale conduct issues are addressed.
  • The importance of Europe - A key success measure of the new UK regulatory landscape will be its impact in the new European regulatory framework as it is important for the UK to effectively influence decision-making at a European level.
  • The FSA's transitional arrangements - Hector Sants explained how the FSA is taking forward the transition to the new regulatory structure. As part of these preparations, a new management structure will be put in place at the FSA from April with the Risk and Supervision business groups being replaced by a Prudential Business Unit and a Conduct Business Unit.

In conclusion, Hector Sants stated that the creation of FCA is intended to fundamentally improve the market place for the benefit of both consumers and firms.

A copy of the speech can be found at: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2011/0302_hs.shtml

FSA Corporate Documents Prudential Risk Outlook 2011

17 March 2011

The FSA has published its Prudential Risk Outlook for 2011. Given the increasing split between the regulation of conduct of business and prudential issues, the FSA has this year divided its risk outlook along the same lines, giving rise to two publications (the Prudential Risk Outlook and the Retail Conduct Risk Outlook) which have replaced the former combined Financial Risk Outlook.

Clearly much of the Outlook's content focuses upon the macro-economic environment and also on the banking sector. However, in connection to this, the FSA has noted that there is an element of risk transfer between the banking and insurance sectors which could if not adequately contained threaten wider financial stability. Of particular note in this regard is the significant investment of UK insurers in the debt and capital instruments of banks. The FSA has commented that this investment pattern will be monitored. Large scale lending of gilts from insurers to banks has also been identified as a risk transfer capable of causing contagion, with the FSA noting that insurers should be mindful of their own potential shortterm cash needs and also of their counterparty exposure. In terms of the impact of Solvency II, the FSA has commented that more detailed work is required to understand its impact on insurance company demand for medium and long-term securities.

The Prudential Risk Outlook also identifies issues specifically affecting the UK insurance sector. It notes the challenges facing the life sector, commenting upon the relationship between household saving/income and future new business volumes, whilst adding that from a capital perspective, UK life insurers remain sound even without taking into account the enhanced requirements of Solvency II. The FSA comments that life insurers should of course be alive to long term developments such as changes in savings patterns as well as changes in law and regulation such as Solvency II.

As a general message to insurers, the FSA notes that in light of current uncertainties, firms should have strong strategic planning and measured risk management processes to enable them to deal with change, perform obligations and ensure that policyholders are adequately protected. The Outlook also states that for all insurers, the current low level of investment return necessitates a more prudent approach to underwriting and reserving thereby requiring increased actuarial input and authority. The impact of rising inflation is highlighted as a key factor that insurers should consider when business planning. In general, the FSA comments that the industry needs to continue to plan broadly for Solvency II in advance of details of the directive being finalised.

A copy of the Prudential Risk Outlook can be found at: http://www.fsa.gov.uk/pubs/other/pro.pdf

Business Plan 2011/2012

22 March 2011 The FSA has published its Business Plan setting out its priorities for 2011/12 together with implications for the FSA's budget.

The Business Plan builds on the recently published Prudential Risk Outlook (as referred to above) and the Retail Conduct Risk Outlook which identified trends in the markets and firms the FSA regulates, and key risks to which the FSA needs to respond.

From a budgetary standpoint, Business Plan notes that despite a 10 per cent increase in the FSA's Annual Funding Requirement (to be borne by larger firms), the set off of enforcement fines received by the FSA means that overall, firms will pay approximately 2 per cent less than for the previous year.

Further to the Government's announced plans for fundamental changes to the structure of financial regulation in the UK, the Business Plan includes a chapter on regulatory reform which details preparatory work to be undertaken ahead of the move to the new regulatory structure of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).

Pending the implementation of the new regulatory framework which is not expected to occur until late 2012 at the earliest, the FSA will continue to focus on its statutory objectives of delivering financial stability, market confidence and consumer protection and fighting financial crime. With this in mind, the Business Plan notes that areas of focus for the forthcoming year will include:

  • progressing the government's program of regulatory reform;
  • feeding into and influencing regulatory reform at European and international levels, including in relation to Basel III;
  • enhancing consumer protection by continuing to work towards the implementation of the Retail Distribution Review, in particular in relation to the new commission, training and qualification regimes;
  • continuing to consult on and analyse the impact of proposals in relation to the Mortgage Market Review with a view to publishing a final set of rule changes in early 2012. The changes should strike a balance between enhancing consumer protection and ensuring sustainability of the market;
  • progressing towards implementation of Solvency II; and
  • improving the quality of regulatory systems and supervision.

A copy of the Business Plan can be found at: http://www.fsa.gov.uk/Pages/Library/corporate/Plan/bp2011.shtml

Other FSA Publications

FSA Note of legal position on the rights and expectations of with-profits policyholders in mutuals

23 March 2011

The FSA has published a note setting out its legal position on the rights and expectations of with-profits policyholders in mutual insurers. This acts as an update to the legal advice that accompanies the FSA's original October 2009 "Dear CEO" letter to mutual insurers.

The updated note comprises a list of nine points and is expressed to reflect the legal points as briefly summarised in recent Consultation paper, CP11/5: Protecting with-profits policyholders.

A copy of the note can be found at: http://www.fsa.gov.uk/pubs/other/fsa_note_of_legal_position.pd f

EIOPA Publications EIOPA to establish new stakeholder groups

8 March 2011

EIOPA has announced the members of its two stakeholder groups, the Insurance and Reinsurance Stakeholder Group and the Occupational Pensions Stakeholder Group. The groups each include 30 members and are established to facilitate EIOPA's consultation with stakeholders in Europe on matters of regulation and implementation of technical standards in addition to the guidelines and recommendations that apply to the insurance and occupational pensions industry. They will also be tasked with reporting inconsistencies between local and European regulation or supervisory practices to EIOPA.

The announcement provides details of the composition of the two stakeholder groups and their selection. It also provides further details regarding the roles of the groups and the terms of their respective appointments.

A copy of the press release can be found at: https://eiopa.europa.eu/fileadmin/tx_dam/files/pressreleases/Stakeholder-Groups.pd

EIOPA Publishes Results of Fifth Quantitative Impact Study

14 March 2011

EIOPA has published the results of the fifth Quantitative Impact Study (QIS5). QIS5 was executed upon request of the European Commission and assesses the practicability, implications and impact of specified approaches to (re)insurers' valuation of assets and liabilities as well as capital setting under Solvency II. The key message from QIS5 is that sound capital requirements and the quality of capital are the fundamental elements of a prudent framework.

Almost 70% of all insurance and reinsurance companies under the scope of the Solvency II directive participated in QIS5, an increase from the 33% who participated in the fourth Quantitative Impact Study (QIS4). Further, 167 insurance and reinsurance groups participated, a significant increase from the 111 participants in QIS4.

The results of QIS5, including the levels of excess capital held by participants, demonstrate that the European insurance and reinsurance sector's financial position assessed against the Solvency Capital Requirements of the Solvency II directive remains sound despite the challenging market conditions created by the impact of the global financial crisis.

In addition to its role in assessing capital levels, QIS5 was also intended to encourage insurance companies and supervisors to continue preparations for the introduction of Solvency II. QIS5 has enabled EIOPA to identify areas where further guidance is required and has revealed important areas in need of greater attention such as governance, risk management and reporting requirements.

In terms of implementing Solvency II, EIOPA notes that whilst transitional measures are needed to move insurers from Solvency I to Solvency II, these measures must strike a balance in terms of their scope and duration.

A copy of the report and annexes can be found at: https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/QIS5_Report_Final.pd https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/QIS5_Annexes_Final.pdf

EIOPA Letter to the European Commission: EIOPA QIS5 Report

14 March 2011

EIOPA has published a letter from Gabriel Bernardino, EIOPA's Chairman, to Jonathan Faull, Director General for Internal Market and Services at the European Commission confirming that EIOPA has published its report on QIS5. In doing so, the Chairman states that EIOPA has successfully carried out a comprehensive assessment on the functioning of the Solvency II regulatory framework and its implications for the industry.

The letter states that QIS5 exceeded participation target set in the Commission's letter of 5 July 2010. It confirms that QIS5 was the last fully comprehensive test to take place before the implementation of Solvency II and goes on to explain the outcomes of the study.

A copy of the letter can be found at: https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/submissionstotheec/QIS5_Cover_Note.pdf

EIOPA launches Europe-wide insurance stress test

23 March 2011

EIOPA has launched the second Europe-wide stress test for the insurance sector on 23 March 2011. It is designed to test whether the insurance sector in the European Union will be able to meet the minimum capital requirement even after applying well defined stress scenarios. It will be carried out between now and the end of May based on 2010 financial results. EIOPA expects to publish the aggregated results in July 2011. The test will include a minimum of 50% of insurance companies per country measured by gross premium income. The Swiss Financial Market Authority will join the test as well as EU and EEA states.

The stress test will assess the strength of individual institutions and evaluate the stability of the insurance sector. The test intends to replicate macroeconomic scenarios and aims to identify and quantify the impact of three different stress scenarios: baseline, adverse and inflation scenario.

A copy of the press release, the Stress Test Framework, the Stress Test Spreadsheet and the Stress Test Curves Ultimo can be found at: https://eiopa.europa.eu/fileadmin/tx_dam/files/pressreleases/Stress-Test-Exercise-FinalLaunch.pdf

https://eiopa.europa.eu/fileadmin/tx_dam/files/pressreleases/Stress-Test-Framework.pdf

https://eiopa.europa.eu/fileadmin/tx_dam/files/pressreleases/EIOPA-Stress-Test-Spreadsheet.xls

https://eiopa.europa.eu/fileadmin/tx_dam/files/pressreleases/Stress-Test-Curves-Ultimo-2010.XLS

International

Chinese Insurance Regulatory Commission announces Pilot Insurance Exchange Project in Shanghai

13 March 2011

Shanghai will launch a national insurance exchange. This announcement was made by Wu Dingfu, CIRC Chairman, at an assembly of the National Peoples' Congress. State media reports claim the exchange will trade in liability insurance, reinsurance, property and group life products. Accordingly, state media reports have said that foreign players would be allowed to participate.

For now, this announcement remains just that - an announcement. No concrete details, such as a timeline or the types of products to be offered through the exchange, accompanied it. Yet, the announcement was made at a meeting of China's highest organ of State, and can be construed as a serious statement of intent. Amidst all this, one major question to ask is: Where will the exchange be housed? Will its products be listed on the Shanghai Stock Exchange, or will it have its own home, just like the Futures Exchange or the Metals Exchange?

Observers have said that China is not ready for an insurance exchange. The Chinese reinsurance market is not fully developed, and it lacks the necessary regulations to govern the proposed exchange's structure, products and procedures. It may well be that China's bold announcement has come too early, and that China has not yet appreciated the complexity of such an exchange.

A copy of the related news item can be found at: http://www.chinadaily.com.cn/usa/business/2011-03/07/content_12130923.htm

EU watchdog: no big Japan hit to Europe's insurers

17 March 2011

An article published by Reuters states that the European Union's insurance watchdog EIOPA sees no major impact from the earthquake crisis in Japan on Europe's insurers.

Carlos Montalvo, the executive director of EIOPA, told a committee of the European Parliament in a statement monitored over the Internet that from a European viewpoint, the impact is not severe, it is under control and there will be no problem for European insurers or for European insurance solvency.

The article can be found at: http://uk.reuters.com/article/2011/03/17/europe-insurance-idUKWEA920720110317

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