A sea change for insurance regulation

The new UK regulatory regime is due to come into force in spring 2013, with two new regulators: the Prudential Regulatory Authority (PRA) (a subsidiary of the Bank of England - which will have a new Financial Stability Committee – the FSC) and the Financial Conduct Authority (FCA.) Under the new regime, insurers and Lloyd’s of London and Lloyd’s managing agents will be dual regulated, with prudential supervision by the PRA and conduct supervision by the FCA. Insurance brokers and intermediaries will be regulated solely by the FCA. The new regime will be characterised by a new proactive intervention framework operated by the PRA and a greater intensity of conduct supervision by FCA.

Shortly after PRA takes over the regulation of insurers, there will be wholesale reform of prudential policy and FSA’s current rulebook with the implementation of the new EU rules under the Solvency II Directive. Uncertainty still surrounds the detail of some of the requirements and there are increasing signs that the delayed switch over date of 1 January 2014 (when the new EU requirements would take effect) may be put back again. The FSA is publishing a series of consultation papers on the transposition of the Directive into the Handbook and assessing firms’ progress towards meeting the new standards.

The FSA has also identified retail conduct risk areas and other areas of focus - including gender pricing in insurance; consumers’ focus on initial premium; products of limited value and low value/’add on’ general insurance; referral fees and its review of with-profits issues (both for mutual and non-mutual insurers.)

Changes are being made to the UK Equality Act under the EU gender directive to prevent insurers using gender as a factor in determining premiums and benefits from 21 December 2012. This follows from the Test Achats judgment by the European Court of Justice in March 2011. It will be insurers’ responsibility to make appropriate changes to their systems and controls to ensure that the pricing of products satisfies the new requirements.

Insurers will welcome the FSA’s success (in the High Court and the Court of Appeal) in the Digital Satellite Warranty case, which concerned an unauthorised issuer of regulated insurance products. The Supreme Court is due to hear the final appeal later this year.

Compliance with the FSA’s client assets regime continues to be a key priority for the regulator. Many intermediaries have been subject to investigation, and enforcement cases continue. FSA has attacked inadequate internal controls and the failures of external review by auditors. Insurance brokers (among other firms) are still seen as having a poor understanding of the trust law based regime and inadequate record keeping. The long awaited review of the CASS 5 regime for insurance has been delayed by the Lehman Brothers litigation but with the Supreme Court judgement in February this year, the FSA (and the FCA) will now proceed to review and reform the client money/assets regime; so changes are expected in 2013.

In July 2012 FSA published new rules to regulate the sale of insurance policies in packaged bank accounts following concern that policies bundled into packaged bank accounts are complex and often useless. Banks and their insurance providers need to asses the new rules (which will take effect from 31 March 2013) and the more rigorous customer checks that will be required before selling packaged bank accounts.

Bundled insurance products may face an even bigger threat from the European Commission’s proposals (published in July 2012) for the revised Insurance Mediation Directive (IMD 2). The proposals are likely to be formally adopted at EU level during 2013, with the new Directive likely to come into force in 2015. Key areas of change are the extension of scope to all sellers of insurance products; the compulsory disclosure of remuneration by intermediaries; improved requirements for life insurance products with investment elements (recognised as high risk).

Improving standards in payment protection insurance sales and obtaining redress for consumers who were mis-sold PPI policies remains a key FSA priority. The FSA is continuing to take enforcement action against firms which fall below the required standards and has imposed requirements for firms in handling mis-sold PPI policies and PPI complaints.

Those involved on the asset side of insurers’ balance sheets, should be aware not only of the new EU Solvency II rules but other EU reforms such as EMIR, MAD II/MAR and MiFID II/MiFIR. The European market infrastructure regulation (EMIR) introduces reporting, central counterparty clearing and risk management measures in relation to OTC derivatives contracts. Insurers are treated as financial counterparties and, even as end users, will be subject to the new requirements. The clearing and reporting obligations are likely to start to take effect from summer 2013. There will also be reform of the market abuse regime with a new Market Abuse Regulation and Directive.

Key issues in the Life Assurance sector include the Retail Distribution Review (RDR), the PRIPs (packaged retail investment products) review and developments related to TLPIs (traded life policy investments). The new RDR rules on adviser charging, independence and training and competence take effect from 31 December 2012. This involves two major reforms – the end of commission based distribution models and new qualification requirements. In July 2012, the European Commission published its legislative proposal for a Regulation on a PRIPs key information document (KID). The proposals require a pre-contractual product disclosure in the form of a KID for certain products (including insurance products whose surrender values are determined indirectly by returns on the insurance companies’ own investments or even the profitability of the insurance company itself). The proposals may be expected to be in place by the end of 2014. In April 2012 the FSA recommended that TLPIs should not be promoted to the vast majority of retail clients due to their complexity and high risk. Final rules restricting the marketing of TLPIs will be published in the first quarter of 2013.

http://www.law-now.com/cmck/pdfs/nonsecured/insregseachange.pdf