PUBLIC CONSULTATION ON PRIVATE MEMBERS’ BILL – CONSUMER CONTRACTS BILL 2017
The Consumer Insurance Contracts Bill (the Bill) was introduced in the Dáil as a Private Members’ Bill in January 2017 and passed second stage in February 2017. On 13 December 2018, the Joint Oireachtas Committee on Finance, Public Expenditure and Reform and Taoiseach (the Joint Committee) published a “Report on Scrutiny of the Consumer Contracts Insurance Bill 2017” in which it asked for a cost-benefit analysis on the Bill to be carried out. Some of the main aspects of the Bill as proposed are that:
- the legislative framework should apply to consumers (as defined in the Consumer Protection Code);
- the pre-contractual duty of disclosure be replaced by a statutory duty to answer specific questions posed by an insurer;
- there be proportionate remedies for innocent or negligent errors by customers;
- the concept of insurance warranties be replaced with a statutory regime;
- the requirement to have an insurable interest be replaced;
- third parties intended to benefit under a policy would have a direct claim against an insurer;
- the laws on subrogation be reformed; and
- legislation on unfair terms be adapted for insurance contracts.
Taking into account the views of the Joint Committee, the Department of Finance is seeking the views of any interested or relevant parties on the Bill.
The consultation, which is open for submissions, is available here.
CENTRAL BANK PUBLISHES DEAR CEO LETTER REGARDING FITNESS AND PROBITY REQUIREMENTS
The Central Bank has published a ‘Dear CEO’ letter regarding its Fitness and Probity regime setting out its concerns and the actions it expects regulated firms to take in response. Among the key concerns raised by the Central Bank in the letter were the following:
- Failure to carry out ongoing due diligence by firms to ensure persons holding controlled function (CF) roles remain ‘fit and proper’;
- Firms who have had concerns regarding the fitness and probity of those carrying on CF roles have tried to address those concerns (including by way of suspension), but have not informed the Central Bank about their concerns;
- Appointing persons to pre-approval controlled function (PCF) roles without obtaining prior Central Bank approval;
- A number of applicants for PCF roles have not disclosed material facts on the Individual Questionnaires that they have submitted to the Central Bank; and
- The number of applications for PCF approval that are withdrawn during the specific interview process has caused the Central Bank to question whether firms are conducting adequate due diligence on those that they are proposing for PCF roles.
The Central Bank also cautioned that if firms appoint persons to a PCF role without prior approval, the Central Bank will hold firms responsible for that failure. The Central Bank has advised firms that, in light of the letter, it expects them to:
- review their Fitness and Probity policies, procedures and practices;
- address any shortcomings;
- be in a position to explain how they have considered the issues raised in the letter; and
- be in a position to explain and demonstrate any actions taken by them to remedy those shortcomings.
It has also asked that the contents of the letter be discussed with the boards and, if relevant, nomination committees of relevant firms.
CENTRAL BANK PUBLISHES Q1 2019 INSURANCE QUARTERLY NEWSLETTER
In this newsletter, the Central Bank confirms that its “Guidance on the Risk Management of Derivatives” does not apply to Solvency II companies and has removed it from that section of the website. In addition, going forward, regulatory reporting provided by the Head of Actuarial Function must be submitted through the ONR. The newsletter also discusses a number of updates from EIOPA, such as the recently published “Recommendation for the insurance sector in light of the United Kingdom withdrawing from the European Union”. The recommendation urges competent authorities to minimise the detriment to policyholders and beneficiaries in their treatment of cross-border business conducted by UK insurance undertakings in the event of a hard Brexit. The recent MoUs that have been agreed between European regulators and the PRA and FCA if the UK leaves the European Union without a withdrawal agreement in a hard Brexit scenario, are summarised.
The European Commission has extended the matters to be considered in the upcoming Solvency II review. It has also given a welcome extension to EIOPA to provide its advice on the review now due by 30 June 2020. It also describes the changes envisaged by the draft Delegated Regulation amending the Solvency II Delegated Acts following the recent SCR review, e.g. new principles to promote convergence in the calculation of the Loss Absorbing Capacity of Deferred Taxes and the introduction of further simplifications in a number of life and non-life insurance risk modules. These changes are now subject to a 3-month scrutiny period by Council and Parliament.
The newsletter is available here.
OPENING REMARKS AT THE CENTRAL BANK OUTSOURCING CONFERENCE – DIRECTOR GENERAL DERVILLE ROWLAND
Following on from the Central Bank’s recent review of outsourcing activity across the financial services sector, Derville Rowland, Director General, Financial Conduct, addressed the industry at a conference held in Dublin on 30 April. She noted that the review found 7,700 financial services outsourcing arrangements were reported to be in place and the Central Bank received data for its review on about 3,600 of these. Important risk management defects were uncovered on a widespread basis. In particular, Ms Rowland commented on a lack of board awareness, cautioning that governance and risk management standards are “emphatically not where they need to be”.
The purpose of the conference was to discuss the evolving risks linked to outsourcing and to establish whether further guidance or policy is required in this area. Management of outsourcing risk is vital from both a Conduct and Prudential perspective. Ms Rowland emphasised that the Central Bank was particularly disappointed with the lack of board awareness of outsourcing risk. Boards should have appropriate oversight and awareness of outsourcing arrangements and the associated risks. In the event a firm decides to outsource a regulated activity, that firm will be responsible for any regulatory breaches that arise. Enforcement action has and will be taken. The Central Bank also expects operational oversight to be clearly designated to relevant individuals.
The Central Bank needs to be aware of all activities that are being outsourced and requires firms to ensure that, when entering into outsourcing arrangements, there are no obstacles that impede the Central Bank’s ability to effectively supervise those activities. It is also vital that regulated firms can clearly show their understanding of their outsourcing arrangements and effectiveness of the governance and risk management measures in place.
The speech is available here.
INTRODUCTORY STATEMENT AT THE JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM, AND TAOISEACH
Gerry Cross, the Director of Financial Regulation, delivered a speech covering the future framework for accountability in the banking sector. Mr. Cross indicated that changes are needed to raise conduct standards and to ensure that individuals at senior levels are held accountable and outlined three proposals:
- Firstly, the Central Bank are proposing enforceable conduct standards. These standards would include obligations on the part of regulated firms and individuals working within them to act with honesty and integrity and with the best interests of consumers in mind.
- Secondly, the Central Bank proposes to introduce a senior executive accountability regime (SEAR). This will require firms to clearly identify where responsibility and decision-making rest. The regime aims to facilitate better governance by identifying Senior Executive Functions with clear responsibilities. It is proposed that the initial introduction of SEAR would focus on a sub-set of the financial services industry including credit institutions, certain insurance undertakings and investment firms and then it would be rolled out more widely in the future.
- Thirdly, a new simple unified enforcement process is proposed. The objective is to ensure individuals account directly for their misconduct, rather than only where it is established that they have participated in a firm’s breach of rules.
- Lastly, it is proposed that the fitness and probity framework should be modified to include a requirement for firms to certify the continuing fitness and probity of individuals in key roles.
The speech is available here.
EIOPA SUPERVISORY PRIORITIES FOR 2019
EIOPA recently published its three supervisory priorities for 2019. While the same areas were prioritised in 2018, new elements have been focused on in 2019 within each area:
- To continue to focus on the practical implementation of a common supervisory culture and to further develop supervisory tools. This includes EIOPA carrying out a thematic review on travel insurance, work on the Conduct of Business chapters for the Supervisory Handbook, ensuring convergent supervisory practices on Solvency II remuneration requirements and carrying out a peer review of supervisory practices;
- To examine the risks to the internal market and to the level playing field, which may result in supervisory arbitrage. In particular, EIOPA will consider the calculation of technical provisions, perform comparative studies on the outcomes of internal models regarding underwriting risks (for main non-life lines of business) and market and credit risk, and establish a network of authorisation officers to ensure greater convergence among supervisory authorities concerning authorisation practices; and
- To supervise emerging risks, including paying attention to new matters and risks such as the supervision of run-off undertakings or the usage of risk mitigation techniques;
- EIOPA views Brexit, InsureTech and the supervision of data and IT-related risks (including cyber risk) as emerging risks. The report is published in line with Article 259 of the Solvency II Directive (2009/138/EC).
The report is available here.
INSURANCE FIRMS FAILING TO CONSIDER VALUE OF THE PRODUCTS AND SERVICES PROVIDED TO CONSUMERS
The Financial Conduct Authority (the FCA) has warned General Insurance (GI) firms about manufacturing, sales and distribution approaches that can result in customers buying unsuitable products, paying excessive prices or receiving substandard service. Every firm in the GI distribution is obliged to act in accordance with the best interests of the consumer under the recently implemented Insurance Distribution Directive. Furthermore, the current Senior Manager and Certification Regime is designed to make senior managers responsible for the actions of their firms.
The FCA has stated that it will intervene in instances where firms and senior managers fail to have appropriate regard to the value their ultimate customers receive. A report by the FCA explains how the remuneration of all the parties in the distribution chain can lead to customers paying considerably higher prices than the production and delivery costs of the products they are purchasing. Two other reports published by the FCA highlight failings in the governance and control of GI distribution chains. The FCA recommends that all firms focus on customer outcomes in order to mitigate the potential harm to customers.
The press release is available here.
EIOPA’s Risk Dashboard for April 2019 shows broadly unchanged risk levels for the European Union insurance sector
On 11 April 2019, EIOPA published its updated Risk Dashboard based on Solvency II data from the fourth quarter of 2018. The results illustrate that the risk exposures of the European Union insurance sector remain steady and that Macro risks remain at medium level. Low swap rates and recent downward changes to Gross Domestic Product growth and inflation forecasts continue to be a concern going forward.
Credit and market risks remain at medium level amid slightly reduced bond spreads, stable portfolio exposures and mainly unchanged bond volatility. Profitability and solvency risks are stable, with overall unaltered profitability indicators compared to the latter half of 2018 and end-2017. Median Solvency Capital Requirement ratios exceed 100% for groups, life and non-life solo undertakings. Insurance risks rose to medium level owing to a further increase in the catastrophe loss ratio.
The press release is available here.
EIOPA CALLS FOR CONSISTENT APPLICATION OF THE PROPORTIONALITY PRINCIPLE FOR THE SUPERVISION OF THE SOLVENCY CAPITAL REQUIREMENT
Following analysis of the proportionality principle in the supervisory review process, EIOPA has identified potential divergences in supervisory practices across Europe in relation to the calculation of immaterial (i.e. not relevant for decision-making processes) SCR sub-modules. The supervisory statement sets out guidance, which aims to ensure supervisors apply the principle of proportionality more consistently.
Supervisors may allow individual undertakings to adopt the principle of proportionality in cases of “proven” immaterial SCR sub-modules (but not at group level). However, it stressed the importance of consistently applying the principle in order to ensure supervisory convergence and avoid supervisory arbitrage. The supervisory statement looks at the application of the proportionality principle to immaterial SCR sub-modules. It provides guidance as to how: undertakings should go about calculating the immaterial SCR sub-modules; the proof those undertakings should provide their supervisors to demonstrate the SCR sub-module is immaterial; and how they should address the approach taken in both the ORSA and ongoing supervisory reports and public disclosures. EIOPA emphasises that supervisory authorities should be satisfied and agree with the approach followed by undertakings and should be regularly updated as to any changes to it.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.