|February 6, 2012|
Previously published on February 1, 2012
On 27 January 2012, the UK Parliament published the text of the Financial Services Bill, together with explanatory notes. In addition, HM Treasury published A new approach to financial regulation: securing stability, protecting consumers. The document summarises the key policy decisions taken on the new regulatory structure and sets down the Government’s response to recent reports by both the Joint Committee and Treasury Select Committee. It also includes the proposed Memorandums of Understanding on crisis management and international organisations. The following issues will be of particular interest to insurers and intermediaries:
The PRA’s insurance objective
The HM Treasury paper confirms that the insurance objective of the Prudential Regulation Authority (PRA) was supported by a range of respondents to the June 2011 consultation, including insurance companies and their representatives. In relation to with-profits policies, the draft Bill supplemented the insurance objective to confirm that the PRA will be responsible for ensuring that the reasonable expectations of policyholders are protected. According to the paper, this provision was also broadly welcomed.
However, the Joint Committee suggested that the phrase “reasonable expectations” of policyholders should be replaced. The Government has now amended the Bill to focus on “decisions by insurers relating to the making of payments under with-profits policies at the discretion of the insurer (including decisions affecting the amount, timing or distribution of such payments or the entitlement to future payments)”. In addition, the Bill now requires the Financial Conduct Authority (FCA) and the PRA to enter into, and maintain, arrangements for the FCA to provide the PRA with information and advice in connection with the regulation of with-profits policies.
It should be noted that a number of respondents to the June 2011 consultation questioned whether the reference to protecting “future policyholders” in the PRA’s insurance objective could prove to be ambiguous. Respondents also queried whether the insurance objective would be consistent with the full implementation of Solvency II.
Influencing EU and international decisions
In response to the Government’s proposals, many have expressed concern that the European Supervisory Authority’s regulatory responsibilities are divided based upon subject area, whereas the new UK regulatory bodies will be split into prudential and conduct regulation across all subject areas. This means that the PRA will hold the UK’s voting seat in the European Insurance and Occupational Pensions Authority (EIOPA). Additionally, the PRA will represent the UK in the International Association of Insurance Supervisors (IAIS).
This creates the risk of the UK not speaking with one voice on the international stage and one body may have to represent the UK’s position on a subject where it is not the national expert. The Memorandum of Understanding on international organisations sets out a framework for consultation and cooperation amongst the relevant authorities in order to ensure that the UK takes a coherent position internationally and a consistent line in discussions with its international partners. Amongst other things, the Memorandum of Understanding confirms that where not all the UK authorities are represented in international organisations and bodies, the UK authorities that are represented shall, in a timely manner, consult with and keep the other UK authorities informed in relation to any matter of common interest. It also provides for the establishment of an International Coordination Committee, which will be responsible for ensuring that the UK authorities act in accordance with the principles set out in the Memorandum of Understanding.
Early publication of disciplinary action
As previously reported, the Bill will amend the Financial Services and Markets Act 2000 (FSMA) to relax the general prohibition against the publication of warning notices. In its recent report (published on 19 December 2011), the Joint Commission argued that the requirement to consult the firm or individual subject to the notice ahead of disclosure should be removed. Conversely, industry respondents were either opposed to the power in principle or called for it to be subject to additional safeguards.
The Government believes that the proposal detailed in the June 2011 consultation strikes the right balance between making the power useable and providing appropriate safeguards for those affected. The Government has, therefore, not made any changes to this power.
The Financial Services Bill had its second reading in the House of Commons on 30 January 2012. It will now make its way through Parliament, and the Government has confirmed that it is firmly committed to securing passage of the Bill by the end of 2012, so that the changes can be implemented in 2013.