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Life Insurance Newsletter Issue July

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					Life Insurance Newsletter
Key information from the FSA for your firm
July 2010       |     Issue 2




                                          Welcome to the latest Life                 (QIS5), and I
 What’s inside                            Newsletter. It’s hard to believe           hope the
                                          three months have passed since             information we
                                                                                     provide on the
1     Introduction                        our last edition – they have
                                          certainly been busy.                       newly released
      With-profits regime review                                                     technical
                                          You’ll be aware that the government        specifications
2     From ICAS to Solvency II            has announced its plans for our
                                          future. Rest assured that our
                                                                                     will help
                                                                                     with your          Ken Hogg
                                                                                                        Director,
                                          business continues as usual.               preparations       FSA Insurance Sector


3     Preparing your firm for
      Solvency II
                                                  ...the government
                                                                                     for the
                                                                                     implementation of Solvency II.
      Annual report
                                                  has announced                      While you should make every effort
                                                                                     to participate in QIS5, we’ve also
                                                  its plans for
4     Smaller insurers seminar
      Credible deterrence and
                                                  our future. Rest
                                                  assured that our
                                                                                     considered how we can reduce the
                                                                                     load in other areas, and in this
                                                                                     edition you will find an important
      recent enforcement cases
                                                  business continues                 message about our plans to do this.
      Unfair contract terms                       as usual.
                                                                                     We’ve recently published our review
                                                                                     on the with-profits regime, which you

5     New online service
      Small firms financial crime         The more intensive supervisory
                                                                                     should read if you are involved in
                                                                                     that business. Our main concerns
                                          philosophy we developed in response        involve governance and post-sale
      review
                                          to the financial crisis, and specific      policy holder communications.
      Regulatory developments             initiatives such as the Retail
      in complaints handling              Distribution Review and Solvency II        I hope you find this edition helpful.
                                          will continue and carry over to the        If you have any feedback or ideas for
                                          new bodies.                                improvement, please let us know.

                                          We are asking you to participate in        Ken Hogg
                                          the Quantitative Impact Survey 5           Director, Insurance Sector


With-profits regime review
We recently published our with-profits    quality of consumer communications.        be the subject of further policy work
funds review. The review showed the       Supervisors will continue to closely       and any proposed changes will be set
performance of firms is mixed. Some       monitor firms, and will expect action to   out in a consultation paper by the end
firms are performing satisfactorily       be taken where necessary. We are           of 2010, and in 2011 for any policy
while a significant number are not        encouraging all with-profits firms,        proposals which might be directly
adequately demonstrating the              whether involved in the review or not,     affected by Solvency II considerations.
practices we expect from a well-run       to consider our findings.
with-profits business.
                                          We also found that some                    – For further information
                                                                                       http://www.fsa.gov.uk/pages/
Our main areas of concern are             with-profits rules could be                     Library/Communication/
ineffective governance of with-profit     strengthened to provide greater                 PR/2010/110.shtml
funds and significant weaknesses in the   protection for policyholders. This will
Life Insurance Newsletter                                                                                                             2




         From ICAS to Solvency II
  As we move towards implementing           Frequently Asked Questions                     they crystallise. If you have not
  the Solvency II regime, we are                                                           already done so, you should consider
  changing our approach to reviewing        Q: Do I still need to calculate my ICA?        whether to update your most recent
  firms’ scheduled Individual Capital       A: Yes, firms must continue to calculate       assessment of the adequacy of your
  Assessments (ICAs). This will                their ICA for as long as the rules and      overall financial resources. You should
  ensure that both we and your firm            guidance in INSPRU 7.1 remain in force.     consider how the financial crisis
  can focus resources on preparing                                                         affects or is likely to affect your firm
  for Solvency II (including                Q: Will the same criteria apply to             as part of your base case capital
  participation in QIS5), while                all firms?                                  projection, with further consideration
                                                                                           of extreme scenarios as part of your
  ensuring your firm remains                A: Yes, the evaluation will consider the       stress tests as appropriate.
  adequately capitalised.                      nature, scale and complexity of the
                                               firm’s risks, available capital resources, Q: Will ARROW reviews continue?
  This does not mean we are changing
                                               the previous ICA review, ICG given and
  our rules. Firms who are required to                                                    A: Yes, this communication relates to
                                               ARROW risk assessments.
  conduct an ICA in accordance with                                                          your ICA; the ARROW process is
  INSPRU 7.1.15R must continue to           Q: How will I know if you decide not to          unaffected by this communication.
  assess how adequate their overall           proceed with a scheduled ICA
  financial resources are in accordance       submission?                                Q: I am participating in QIS5 – do I
  with that rule and associated guidance.                                                   still need to do an ICA?
                                            A: We will contact you and inform you
                                               of this.                                  A: Yes, participation in QIS5 does not
  The change is that firms scheduled
                                                                                     affect the requirement to calculate
  to submit their ICA for review during
                                         Q: I feel my ICG no longer matches my       an ICA.
  the period leading up to the
  implementation of Solvency II             business – may I still request an ICG
                                            review?                               Q: What happens if the Solvency II
  will be evaluated based on certain                                                 implementation date is changed?
  criteria. Based on this evaluation and A: We will consider requests to review
  prevailing market conditions, we may      previous ICG on a case-by-case basis. A: The implementation date is 31 October
                                                                                     2012; firms should continue to plan on
  decide not to go ahead with scheduled     It is important to note that we may
                                            undertake further work, including in     this basis. Any changes to the date
  ICA reviews for certain firms.
                                            connection with your ICA, at any         will be formally communicated by the
  Evaluation criteria will include:
                                              time, or expect you to undertake             European Commission, after which we
  •	 the nature, scale and complexity         additional work and to inform us of          will consider and communicate the
     of the firm’s risks;                     this if, for example, your risk profile      potential impact on planning and
                                              changes, there are significant changes       preparations for itself and firms.
  •	 available capital resources;
                                              in market or economic conditions,
  •	 the previous ICA review and              and/or additional risks are identified
                                              or crystallise.                               Further information
     Individual Capital Guidance (ICG)
     given; and

  •	 ARROW assessments.
                                            Q: Do I still need to notify the FSA of
                                               material changes in my business?
                                                                                         – More information can also be
                                                                                           found on our website:
                                            A: Yes, all rules and guidance applicable         http://www.fsa.gov.uk/Pages/
  Please find here some FAQs you may                                                          About/What/International/
                                               to the firm and which require the firm
  find useful.                                                                                solvency/index.shtml
                                               to notify us remain the same.
                                              The current financial crisis is a
                                                                                      If you have any further queries,
                                              reminder that you should update your
                                                                                      please direct them to your usual
                                              view of adequate financial resources as
                                                                                      supervisory contact.
                                              risks evolve, and in particular should




July 2010 | Issue 2
Life Insurance Newsletter                                                                                                   3




Preparing your firm for Solvency II
Quantitative Impact Study (QIS5)                                                     Change in control
The European Commission published its        standard formula or an internal         process
call for advice and technical                model; and
specifications for QIS5 on 6 July 2010.                                              Consolidation of firms may increase
                                           •	 use the QIS5 templates to test their   over the coming years as various
You should take part in QIS5 if at all        contingency planning, identify any     regulatory reforms come into effect,
possible. It is important that QIS5 is        gaps in their plans and prioritise     including Solvency II.
completed realistically rather than on        accordingly.
a ‘best effort’ basis as this will allow                                         You are reminded that the Financial
firms to:                                  The submission toolkit is expected to Services and Markets Act 2000 (FSMA)
                                           be released by the Commission in earlyrequires individuals or corporate
•	 gain a greater understanding of the     August, but you can start work now.   bodies wishing to acquire or increase
   impact the new requirements will                                              control in a UK authorised firm to seek
   have on their firm;                   You can address any queries about QIS5
                                                                                 our approval.
                                         to QIS5@fsa.gov.uk or get in touch
•	 test how well prepared they are with with your usual supervisory contact.
   regard to the financial and capital   You should also have received             Further information
   aspects of Solvency II, depending on invitations to various events and
   whether the firm intends to use the briefings taking place this summer.
                                                                                     – Call for advice and technical
                                                                                       specifications:
                                                                                       http://ec.europa.eu/internal_
Life liquidity premium                                                                 market/insurance/solvency/
                                                                                       index_en.htm#qis5
The question of whether and how a        drafting of the relevant Level 2
liquidity premium might be allowed for implementing measures for Solvency II.
in the risk discount rate under Solvency While details, extent and scope have        – QIS5 web pages
                                                                                       http://www.fsa.gov.uk/pages/
II has significant implications for the  not been finalised, current indications       About/What/International/
UK life insurance sector.                are that Solvency II may incorporate a        solvency/qis/qis5/index.shtml
                                         liquidity premium.
Following a joint Committee of
European Insurance and Occupational
Pensions Supervisors and industry task
                                         We continue to engage with relevant
                                         stakeholders in order to achieve an         – Delivery Solvency II newsletter:
                                                                                       http://www.fsa.gov.uk/pubs/
force earlier this year, the European    appropriate outcome for the UK                newsletters/sol2_june10.pdf
Commission is now working on the         insurance industry.

                                                                                     – Change in control:
                                                                                       http://www.fsa.gov.uk/pages/
                                                                                          Doing/Regulated/Notify/Control/
  Annual report                                                                           index.shtml


  We have published our annual report for 2009/10. The report outlines
  how we have performed against the priorities set out in our business
  plan and against our statutory objectives.

  – For further information:
    http://www.fsa.gov.uk/pages/Library/Corporate/Annual/ar09_10.shtml




July 2010 | Issue 2
Life Insurance Newsletter                                                                                                      4



Smaller insurers
seminar                                       Credible deterrence and
Our recent smaller insurers seminar was       recent enforcement cases
an opportunity to discuss policy and
                                              In line with our credible deterrence      to adequately protect clients’ money
supervisory changes affecting them.
                                              strategy, we are taking hard-hitting      and assets. Way has been fined and
We outlined the importance of                 action against firms and individuals      banned from the industry while
the new stress testing requirements           who break the rules by imposing           Shillaker has received a ban.
                                              strong penalties and levying record
                                                                                        – Further information:
and discussed how they could be
applied proportionally to small firms.        levels of fines. We recently announced
                                              our largest ever fine to JP Morgan for      http://www.fsa.gov.uk/pages/
Solvency II firms also had the                failing to protect client money.               Library/Communication/
opportunity to learn more about the                                                          PR/2010/096.shtml
qualitative aspects of Solvency II,
while those not subject to the
                                              – Further information:
                                                http://www.fsa.gov.uk/pages/
                                                                                        We have fined John Charalambous of
                                                                                        The Financial Associates Ltd for
Solvency II Directive discussed                    Library/Communication/
                                                                                        taking part of a customer’s mortgage
potential changes to their future                  PR/2010/089.shtml
                                                                                        advance, and attempting to defraud
prudential regime.                            We have taken action against two          life insurance companies.
                                              insurance brokers; Delwyn Way of
Having received very positive feedback,
we plan to run more of these seminars
                                              Shield Insurance Consultancy Ltd
                                              (Shield) and Adrian Shillaker of
                                                                                        – Further information
                                                                                          http://www.fsa.gov.uk/pages/
on an invitation basis.                       Griffiths McAlister Insurance Brokers          Library/Communication/
                                              Ltd (Griffiths McAlister), for failing         PR/2010/099.shtml




Unfair contract terms                                                                   Recent speeches

‘Read and understood’ declarations
As contract terms are a tangible           Last year we published an
                                                                                       – Ken Hogg, Sector:
                                                                                         Insurance
                                                                                                   FSA Director,

indicator of how firms treat their         undertaking relating to a term in a             speech on Solvency II at
customers, we constantly seek to raise     firm’s contract requiring consumers             the Informa Insurance Day
firm standards by providing guidance on    to declare that they had read and               conference
how to draft fair terms. We also seek to   understood the terms of the                     http://www.fsa.gov.uk/pages/
challenge any unfair terms that we do      contract. We have now published a               Library/Communication/
find included in consumer contracts.       statement providing further                     Speeches/2010/0518_kh.shtml
                                           information on our views and the
        ...we constantly
                                           approach that firms should take
                                           when drafting or relying on
                                                                                       – Ken Hogg, Sector:
                                                                                         Insurance
                                                                                                   FSA Director,

        seek to raise firm                 consumer declarations.                          speech on key priorities in
        standards by                                                                       regulation at the Institute of
        providing guidance                                                                 Economic Affairs
        on how to draft
        fair terms.
                                           – For further information
                                             http://www.fsa.gov.uk/Pages/
                                                                                           http://www.fsa.gov.uk/pages/
                                                                                           Library/Communication/
                                                Doing/Regulated/uct/index.shtml            Speeches/2010/0519_kh.shtml




July 2010 | Issue 2
Life Insurance Newsletter                                                                                                         5



Small firms financial crime                                                            New online
review                                                                                 service
We have published a review of              The review involved 159 visits to smaller   We have launched a new web-based
financial systems and controls in          firms and was produced following            system called Online Notifications and
small firms. The review contains           recommendations from the National           Applications (ONA). ONA allows you to
useful examples of good and poor           Audit Office and the                        submit the following regulatory
practice which you may find useful in      Financial Action Task Force.                applications via the internet instead of
assessing whether any improvements                                                     using the old paper-based system:
are required at your firm.
                                           – For further information
                                             http://www.fsa.gov.uk/smallfirms/
                                                                                       •	 approved persons;

                                                pdf/financial_crime_report.pdf         •	 appointed representatives;

                                                                                       •	 variations of permissions;

                                                                                       •	 passports;

                                                                                       •	 cancellations;
Regulatory developments in                                                             •	 waivers; and

complaints handling                                                                    •	 standing data.

                                                                                       ONA will make it easier for you to
We will publish the first                Other areas of complaints handling
                                                                                       submit applications and enable us to
consolidated table of firms’             we are focusing on include:
                                                                                       process applications in a more efficient
complaints data in September.
                                         •	 reviewing aspects of firms’                manner. Although it is currently
                                            complaint handling rules following         voluntary to use ONA, and you can
                                            our review of complaints handling          continue to send in applications to us
        ...firms that                       in major banking groups; and               in the normal way, it will be mandatory
        receive 500 or                   •	 reviewing the maximum award                from September.
        more reportable
        complaints in
                                            limit of the Financial Ombudsman
                                            Service, which has remained at             – For further information,
                                                                                         http://www.fsa.gov.uk/Pages/
        a six-monthly                       £100,000 since it was established               Doing/Regulated/ona/index.shtml
        reporting period                    in 2001.
        to publish a                     We will publish a Consultation Paper
        summary of their                 in September setting out our
                                         proposals on these areas. We are also
        complaints data
                                         considering responses to DP10/1,
        for that period                  Consumer complaints (emerging risks
                                         and mass claims). This DP proposed
                                         that a joint committee (the
This follows the introduction of rules   Ombudsman, the Office of Fair Trading
that require UK authorised firms that    and us) discuss emerging risks and            Your feedback is important to us and we
receive 500 or more reportable           mass claims. We intend to publish a           would be grateful to know what you think
complaints in a six-monthly              Feedback Statement later this year.           of this newsletter. Suggestions for

                                         – For further information
reporting period to publish a                                                          improvement and general feedback should
summary of their complaints data for                                                   be sent to John Lavabre via email at
                                           http://www.fsa.gov.uk/                      john.lavabre@fsa.gov.uk.
that period.                                  pages/Library/Policy/
                                                                                       Alternatively you can call John on
                                              Policy/2010/10_01.shtml
                                                                                       020 7066 4320.


July 2010 | Issue 2

				
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