Insurance regulatory update
Insurance regulatory update
Welcome to 2024 and to the latest edition of our Insurance Regulatory eBulletin, which aims to keep you updated with significant regulatory developments during January 2024 and their implications across the insurance sector.
2024 kicked off with updates to the UK Corporate Governance Code and Global Internal Audit Standards, requiring businesses and internal audit functions to align accordingly. The PRA outlined its 2024 priorities via a Dear CEO letter, and HM Treasury has announced that the UK has signed an agreement with Switzerland on Mutual Recognition in Financial Services, facilitating cross-border trade for wholesale and sophisticated clients.
In other news, the FCA is scrutinising historical motor finance commission arrangements and sales. Meanwhile, EIOPA released a Europe-wide study on non-life underwriting risk and diversification modelling in insurers' internal models. Lastly, the enforcement case highlighted in this edition underscores the responsibilities of senior managers under Individual Conduct and Senior Manager Conduct Rules.
These are a few matters that I have noted. However, as usual there is much detail included in this eBulletin, referenced to the source documents. I hope you will find this helpful in identifying matters relevant to yourself. Please do not hesitate to contact myself or your usual BDO contact if you have any concerns over any matter highlighted in this update. For more information about our audit, tax and advisory services to the insurance sector, visit our insurance services page. I hope you enjoy reading this latest update.
December saw a flurry of regulatory developments, including an annual report from the Office of Financial Sanctions Implementation and interim changes to Solvency II requirements by the PRA. The PRA also communicated key findings from its review of expected underwriting profit in internal models for general insurance firms. The FCA issued a Policy Statement with final rules on post-Brexit changes to the Insurance Distribution Directive, maintaining regulatory continuity for insurance-related activities. The FCA, PRA, and Bank also released the annual CBEST thematic report, offering insights into good practices and observed weaknesses in the UK financial sector. Additionally, there was significant activity in EU regulation with numerous consultations published.
The FCA have published a revised regulatory Initiatives grid overing the forthcoming 24 months providing the timing and the identification of closely interconnected initiatives. The are also continuing initiatives noted within this edition related to developing smarter regulation, in line with the international competitiveness and growth objective under the Financial Services & Markets Act. The Corporate Governance section also notes some interesting developments, including the results of a thematic review published by the FRC in relation to IFRS 17 disclosures.
October has seen several speeches of interest providing insight into the thinking of regulators in the areas of Mutual insurers, financial inclusion, artificial intelligence and the need for collaboration to boost the UK’s competitiveness. The month has also seen several consultations commenced. The PRA has published the last of its consultations in respect of the Solvency II regime. There is also a PRA consultation underway in respect of the regulation of branches. The deadlines for submissions to each of these being early January 2024.
September has seen the resurgence of regulatory activity in terms of speeches and issuing of guidance. There is continuing activity to formulate a post-Brexit regulatory environment and there has also been a joint consultation by the PRA & FCA in respect of Diversity & Inclusion.
The FCA have issued a series of Dear CEO letters across each of the differing insurance sectors. These set out the FCA’s priorities for 2023 – 2025, the specific risks of harm it is most concerned about and what it wants firms to do about them. In addition, during the month the FCA has issued useful guidance regarding key findings from its assessments of sanctions systems and controls in financial services firms. This includes areas of good practice and areas for improvement.
There were no speeches to report in August. Whilst the final structure of the regulators joint Complaints Scheme has been set out in a Policy Statement, no other policy statements have been published this month. The FCA has announced it will be undertaking a review of firms’ compliance with obligations regarding the risk management and treatment of Politically Exposed Persons, as well as their relatives and known close associates. There have also been several announcements regarding developments in the regulatory framework.
Following on from a busy June, July has also been a bumper month for regulatory output. July sees the publication of annual reports for both the FCA and PRA, together with various other related annual reports including associated committees.
In addition, in early July, there was the Mansion House speech by the Chancellor, setting out his vision for the future regulation of the financial services sector. There have also been various developments following the passing into law of the Financial Services and Markets Act. The FCA have therefore, issued a statement introducing its new secondary international competitiveness and growth objective. HM Treasury has issued a Policy paper outlining the government's plans for delivering a Smarter Regulatory Framework for the UK through the replacement of retained EU law on financial services. In addition, a Policy Statement has been issued detailing the PRA's final rules and policy following responses received to the Consultation Paper CP17/21 'Solvency II: definition of an insurance holding company'. A further consultation has now been commenced in relation to proposed reforms to Solvency II that seek to simplify the calculation of the transitional measure on technical provisions. The Consultation Paper notes that this principally applies to 24 Life insurers.
On immediate matters, the FCA has been urging home and motor insurers that they must improve their treatment of vulnerable customers and how they handle customers’ claims. Detailed indications of good and poor practice have been provided.
June has been the hottest on record for the UK. Whilst not correlated, it has also been a busy month on the regulatory front. The Financial Services and Markets Bill received Royal Assent. We will now await the impact of this legislation to filter through into the regulatory environment. There have also been a number of speeches made by regulators during the month, including by Sheldon Mills of the FCA in anticipation of the Bill receiving Royal Assent. A consultation paper regarding the review of Solvency II has been issued by the PRA and the FCA has been making its final communications with firms, prior to the Consumer Duty coming into effect from 31 July.
Towards the end on the month a Policy Statement regarding a Memorandum of Understanding on Financial Services cooperation with the EC was issued by the HM Treasury. This coincided Jeremy Hunt signing this Memorandum of Understanding, on behalf of the UK, during the first visit of a UK Chancellor to Brussels for over three years.
A lead news item this month has been the UK / EU memorandum of understanding regarding the financial services industry. The FCA have been ensuring that firms are alert to the impending deadline for the implementation of Consumer Duty at the end of July. They have also published feedback from their review of fair value frameworks in relation to Consumer Duty.
The FCA have published details of their new secondary objective, in relation to international competitiveness and growth. We have also noted the opening of consultation by the Bank in relation to proposed changes to its enforcement policy. These represent a further example of lighter touch regulation.
The particular matters of interest contained in this month’s edition are a speech by Shoib Khan, Chief Executive of the PRA, highlighting the responsibilities of the insurance sector in respect of the use of models, the use of stress testing and exit planning, in order to cease underwriting new business. In respect of exit planning, the planned release of a Consultation Paper, later in 2023, was heralded. This will set out the PRA’s expected approach to exit planning for insurers.
Climate issues have again been to the fore in various aspects. The Bank issued a report setting out its latest thinking on climate-related risks and regulatory capital frameworks. Later in the month, HMT and the Department for Business, Energy and Industrial Strategy published a policy paper setting out the strategy for UK’s financial services sector to support the UK's climate and environmental objectives.
In addition, the FCA has set out its assessment of the risks observed, and issues identified, in its ESG Benchmarks Review.
The thematic findings of the PRA’s Cyber Stress Test, performed in 2022, in respect of retail payments will also be of interest to many readers.
This month on the Prudential side, there have been a couple of speeches referring to potential changes in the solvency rules and also to the Government’s desire to promote growth and competitiveness in the insurance sector. There have also been several pieces of updated guidance regarding financial sanctions and cyber crime.
On the Conduct side, the FCA have issued separate letters to the life and general insurance sectors to help them implement and embed the Consumer Duty effectively. In addition, Sheldon Mills, of the FCA, in a speech at the Countdown to Implementation of the Consumer Duty event, likened the preparation for the Consumer Duty to the advice from Mark Twain who said: “Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day”. He thanked those who had taken the time to tackle a task of preparing for the Consumer Duty, that at first may have seemed overwhelming. In so doing he stated: “Many of you have eaten that frog. Or at least devoured a leg”.
The PRA have issued a dear CEO letter, setting out 2023 priorities. This summarises that the focus will be on financial resilience; risk management; implementing financial reforms; reinsurance risk; operational resilience; and ease of exit for insurers.
This edition also notes the publishing of proposals to introduce a dedicated resolution regime for insurance firms. Under these proposals, the Bank of England would be provided with new powers and tools to effectively manage the failure of a major insurance firm, these proposals are currently in the consultation phase.
Two fines imposed by the FCA have been noted, both relating to money laundering. In the case of one of the banks, fined £7.6m, there is a clear message of the need to address weaknesses identified by the regulator, as it had previously been fined in August 2013 for serious and systemic failings. The FCA has commented that this bank should have acted quickly to put in place adequate AML controls.
The Financial Services and Markets Bill is now progressed to the Committee stage in the House of Lords and we shall await the passage of this legislation.