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Flashcards in Chapter 6 - Legal And Regulatory Environment Deck (28)
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FCA - takes care of consumer protection and market regulation

PRA - responsible for solvency and stability of institutions important to financial services such as banks and insurers

FPC - watches for systemic risks which impact whole industry


Objectives of PRA

- Promote the safety and soundness of PRA regulated persons


- ensuring people behave in way which avoids adverse effect on stability of UK financial system

- minimising adverse effect of the above

- facilitating competition (subordinate to promoting safety)


- contributing to securing protection for policyholders

- protection for reasonable expectations of policyholders as to the distribution of surplus under with-profits policies


PRA threshold conditions

- head office to be in UK
- business conducted in prudent manner
- firm fit and proper and appropriately staffed
- firm and group capable of being supervised


PRAs Risk Assessment Framework - 3 elements

3 elements
- potential impact on policyholders
- macroeconomic and business risk context in which firm operates
- mitigating factors (risk management and governance)


PRAs Risk Assessment Framework - Baseline level of supervision

- ensuring compliance with prudential standards for capital
- liquidity, asset valuation, provisioning and reserving
- annual review of risks posed by firms or sectors to the PRAs objectives
- assessing firms planned recovery actions and how it may exit market


FCA objectives

- ensure the relevant markets function well


- Consumer protection
- Integrity
- Competition

Both FCA and PRA must have regard to efficient and economic use of resources
- proportionately
- consumer responsibilities
- transparency


FCA authorisations and approvals

Focuses on proposed business model governance and culture, and systems and controls firm intends to use especially over:
- product governance
- end to end sales processes
- prevention of financial crime

Applicants must have good understanding of good outcomes through:
- corporate culture
- conduct risk management
- product design


FCA supervision

Changes to model since 2015
How it classifies firms as fixed or flexible
Fixed = Require highest level of supervision. Small population. Named individual supervisor
Flexible = proactively supervised through market based thematic work and programmes of communication engagement and education. Firms use FCA Customer Contact Centre as 1st point of contact


FCA Risk Framework - 3pillars

- Firm systematic framework: are customer interests at heart?

- Event driven work

- Issues and products - flexible approach


FCA responses

Banning products in retail
Withdrawing misleading financial promotions

FCA reports to Government and Parliament
4 statutory panels representing view of consumers, regulated firms, smaller regulated firms and market practitioners


11 Principles for Business

1. Integrity *
2. Skill, care, diligence *
3. Management and control *
4. Financial prudence *
5. Market conduct
6. Customers interests
7. Communications with clients
8. Conflicts of interest *
9. Customers: relationship of trust
10. Clients assets
11. Relationship with regulators *
* = PRA


Fair treatment of customers through product cycle

- product design and governance
- identifying target market
- marketing and promoting product
- sales and advice process
- after sales information
- complaint handling


Difference between consumer and commercial customers

Consumer - natural person acting for something outside trade or profession

Commercial- acting in trade or profession

Consumers expected to take responsibility for their decisions when purchasing


Senior Management Arrangements, Systems, and Controls (principle 3)

Rules in principle 3 for controlled functions
“Apportionment and Oversight Officer” responsible for allocation and monitoring of regulated activities within the firm.
Requirement for insurers to appoint a Money Laundering Officer


Public Interest Disclosure Act 1998 (PIDA)

Whistle blowing
Those who make disclosures have the right not to suffer detriment
- criminal offence
- failure to comply with legal obligation
- miscarriage of justice
- putting off health and safety of someone in danger
- damage to environment
- deliberate concealment of above


Writing business overseas

If based in London,
Must be admitted by country’s regulator
Often has to set up office there

If authorised in Country if EU can operate in EU freely


Writing in USA

Individual states manage regulation
Must obtain permission multiple times
Foreign insurance companies can write alongside local insurers on an Admitted basis.
Lloyd’s write on Surplus Lines basis


Lloyd’s writing in USA

Admitted insurer for direct business in:
Kentucky, Illinois, Virgin Islands
Same rights as local insurers

Surplus lines status elsewhere meaning Lloyd’s is 2nd tier market

Can accept reinsurance in all 50 states


Overseas regulators

Some interested in
- direct, facultative insurance, excess of loss reinsurance, proportional treaty reinsurance

Some interested in
- location of risk
- location of broker
- services or establishment of business
- tax payable
- other charges
- category of risk


Lloyd’s market governance

Lloyd’s Required to undertake:
- all participants in market made aware of obligations
- maintain controls over risks which market is exposed to
- assess capital needs of each member or name

Managing agents required to:
- file annual solvency test
- assess capital needed to engage in the insurance business for each syndicate
- maintain controls over risk of day to day insurance


Lloyd’s less than acceptable behaviour

- dishonesty
- forging or faking docs
- failure to look after money held on trust
- failure to organise or control business
- any act capable of damaging Lloyd’s name


Two main types of regulation Lloyd’s issues

Bylaws and regulations


What is a solvency margin

Amount by which assets must exceed liabilities
Companies must maintain balance


Monitoring- every insurer must submit to the regulator 3 things

Revenue account

Profit and loss account

Balance sheet


What is formal cessation?

Company being wound up by the regulator as it fails to meet requirements,

Lloyd’s syndicate would be put into run off


Financial Ombudsman service

Compulsory membership for insurers

Provides impartial and independent resolution of disputes where the insured is private individual or small business with TO less than €2m

Claimant has 6 months to refer a matter to the FOS after going through internal complaints

Max reward is £350,000 after April 2019



Compensation when firms unable to pay out on a claim due to going out of business

Protection 100% for
- compulsory insurance
- professional indemnity insurance
- long term insurance (pensions)


Central Fund

Lloyd’s reserve fund for contingency