Compliance News - 11 November 2011
CC:ME WEEK ENDED 11 NOVEMBER 2011
The Financial Services Authority (FSA) has proposed rules to maintain protection of policyholders with unit linked and index-linked life insurance products while taking account of new European requirements for insurers.
Unit-linked policies are used within individual pensions, endowments, investment bonds and whole of life insurance policies. They are also used as investments for both defined contribution (DC) and defined benefit (DB) occupational pensions. Recent figures show that the UK unit-linked long-term life sector has assets of £815 billion under management and a further £24 billion in index-linked policies.
New EU solvency requirements for insurers in the Solvency II directive will come into effect in 2013/14. Among its requirements are new high-level principles around how insurers’ assets, including unit-linked and index-linked funds, must be managed. This replaces the current FSA approach which lists the particular assets insurers can use. However, where individuals bear the direct risk of investing in unit-linked and index-linked policies, Solvency II allows the FSA to continue to specify which assets can be used for such policies.
The proposed new rules will largely continue the existing FSA requirements, but will expand them to permit investment in some indices-based investments and bonds. The FSA will implement high-level requirements from Solvency II that strengthen the current rules saying insurers should only invest in assets that they can properly value and monitor.
Sheila Nicoll, director of policy, said: “Millions of people rely on unit-linked policies to keep them secure in their retirement. While regulation cannot protect policyholders from market movements, these rules are designed to ensure that they can be confident that their money is being invested prudently.”
The FSA has also published a consultation paper setting out proposed Handbook changes to transpose the prudential aspects of the Solvency II directive into FSA rules.
Source: Financial Services Authority
Whereas compensation payments amounting to the refund of premium element are not taxable, the interest at 8% will be taxed by HMRC. Some firms are making payments of interest net of tax however this will still impact on higher rate taxpayers or those who do not need to pay tax. It is important that letters to recipients of PPI compensation are clearly worded, to avoid further difficulty going forward. The BBC Money Box programme had a particularly good article on this topic on Saturday 12 November.
Source: BBC
The Financial Services Authority (FSA) has fined a Dubai based private investor, $9,621,240 (approximately £6 million) for manipulating the closing price of Reliance Industries (Reliance) securities on the London Stock Exchange (LSE). This is the largest fine imposed by the FSA on an individual. The fine of $9,621,240 comprises a penalty of $6,517,600 (approximately £4 million) plus a restitution element of $3,103,640 (approximately £2 million). The FSA will use the restitution element to reimburse the bank which overpaid the investor that amount as a result of his market abuse.
On 18 October 2010 the investor placed orders and executed trades which artificially inflated the closing price of Reliance securities. He had arranged for a pre-planned series of substantial and carefully timed orders to be placed in the final seconds of the LSE’s closing auction. The orders were placed and the trades executed with the intention of increasing the closing price of the Reliance securities above a certain level. The timing of the substantial orders was intended to ensure that market participants had insufficient time to respond before the closing price was determined.
The investor held an over-the-counter (OTC) structured product which matured on 18 October 2010 and for which the pay-out depended on the closing price of Reliance securities that day. By increasing the closing price, the investor avoided a loss of $3,103,640 under the terms of the structured product. The bank, which was the counterparty to the structured product, overpaid the investor $3,103,640 as a result of his manipulation of the Reliance closing price. He had planned to engage in similar behaviour in relation to a separate structured product in April 2010 but on that occasion no actual trading took place due to events beyond his control.
Tracey McDermott, acting director of enforcement and financial crime, said:
"The structured product was an investment that would have made the investor a considerable profit had it been successful for him. When he saw that it was not going to produce the desired result, he manipulated the market to avoid a substantial loss. The impact of such behaviour goes far beyond one counterparty. Market confidence will suffer if participants cannot be satisfied that the price of quoted securities reflects the proper interplay of supply and demand.”
"The structured product was an investment that would have made the investor a considerable profit had it been successful for him. When he saw that it was not going to produce the desired result, he manipulated the market to avoid a substantial loss. The impact of such behaviour goes far beyond one counterparty. Market confidence will suffer if participants cannot be satisfied that the price of quoted securities reflects the proper interplay of supply and demand.”
Source: Financial Services Authority
Bulk insured pension companies reported an increase in funds under management, totalling £30 billion to the end of 2010, according to new figures released by the ABI last week. The pensions of over 600,000 people are now covered by these funds. Responding to increased interest the ABI and NAPF have published an updated “Bulk-Insured Pensions Guidance: A Good Practice Guide 2011” to help trustees understand the process of entering into a buy-out or buy-in bulk insured pension scheme. The guide will help pension trustees to organise, examine and implement buy-out/buy-in options, as well as highlight key legal and regulatory issues that they will need to consider.
The Guidance includes:
The Guidance includes:
- Preparation objectives of a buy-in or buy out, to facilitate a smooth, speedy and focused process
- The legal requirements in key areas such as discretionary benefits; partial Buy-ins and the role of the Pension Protection Fund (PPF)
- A glossary of terms to translate language used in Buy-in/Buy-out transactions.
Mark Edwards, Assistant Director, Financial Regulation & Tax, ABI commented: “The number of pensions covered by bulk buy-outs reached over 600,000 and the assets under management was in excess of £30 billion in 2011. It is therefore clear that the insurance industry is able to provide tailored and innovative solutions to suit the needs and circumstances of individual pension schemes; such as longevity-only insurance to mitigate the risk of pension scheme members living longer than expected.
“Pension fund trustees are faced with an ever increasing number of challenges around scheme funding. Insurance company buy-outs and buy-ins can be a very powerful tool for companies and trustees to manage the risks inherent in providing an occupational pension scheme and can also provide greater security of benefits for scheme members. Transferring pension risks can be complex and involve many stakeholders. The guide aims to demystify the process for trustees and help them make the process as smooth as possible.”
Darren Philp, Director of Policy, National Association Pension Funds (NAPF) commented:
“As a contribution to the DB de-risking debate, the NAPF welcomes this Good Practice Guide. It is important that trustees, as fiduciaries acting in the best interests of all scheme members, fully understand the key aspects of the bulk insurance solutions available to them as a de-risking tool. This Guide is a helpful source of reference with which to navigate this aspect of the de-risking process. Although scheme specific and external factors will impact upon the pace of de-risking, trustees need to keep the options open to them under review.”
“Pension fund trustees are faced with an ever increasing number of challenges around scheme funding. Insurance company buy-outs and buy-ins can be a very powerful tool for companies and trustees to manage the risks inherent in providing an occupational pension scheme and can also provide greater security of benefits for scheme members. Transferring pension risks can be complex and involve many stakeholders. The guide aims to demystify the process for trustees and help them make the process as smooth as possible.”
Darren Philp, Director of Policy, National Association Pension Funds (NAPF) commented:
“As a contribution to the DB de-risking debate, the NAPF welcomes this Good Practice Guide. It is important that trustees, as fiduciaries acting in the best interests of all scheme members, fully understand the key aspects of the bulk insurance solutions available to them as a de-risking tool. This Guide is a helpful source of reference with which to navigate this aspect of the de-risking process. Although scheme specific and external factors will impact upon the pace of de-risking, trustees need to keep the options open to them under review.”
Source: Association of British Insurers
The importance of effective risk management was discussed at a BBA conference yesterday. Delegates considered how international standards in risk management might be applied at national level. The Annual Risk Management Conference focused specifically on new regulatory requirements under Basel 3, CRD4 and Dodd Frank.
The event was chaired by Irving Henry of the BBA. Speakers included:
- Bill Coen, Deputy Secretary General of the Basel Committee on Banking Supervision, Bank for International Settlements
- Professor Moorad Choudry, Head of Business Treasury - GBM Treasury, Royal Bank of Scotland
- Brandon Davies, Senior Independent Non-Executive Director, Gatehouse Bank
- Michael Mathias, Head of Capital Markets Consulting, Tata Consultancy Services
- Peter Beardshaw, Partner, Accenture
- Roger Tym, Partner, Hogan Lovells
Source: British Bankers’ Association
The detailed recovery and resolution plans being drawn up by banks to ensure none in future will be too big to fail need to be agreed internationally to ensure the best outcomes for all, the British Bankers’ Association has said. Responding to the Financial Services Authority’s recent consultation on recovery and resolution plans (RRPs), the BBA restated its support for RRPs which minimise the impact of any future bank failure on financial stability and any need for public financial support.
In its submission the BBA said:
- the UK approach to RRPs should reflect internationally agreed recommendations on bank resolution, particularly forthcoming legislation from the EU on crisis management. Not to do so would result in expensive duplication of effort and risk creating misunderstandings between regulatory authorities in different countries;
- more data does not mean better outcomes. Banks are being asked for large amounts of data on counterparty and contractual exposures, which may lead to information overload rather than clarity over the resolution methods. Agreement on the optimum level of information for regulators and banks needs to be reached; and
- the UK solution makes welcome recognition of the need to adopt a proportionate approach with smaller banks. There is no need to burden small banks with the same level of recovery resolution planning as larger, more systemically important banks.
Simon Hills, the BBA executive director for prudential capital and risk, said: “The UK proposals complement the Basel Committee’s ‘more capital, more liquidity’ initiatives to reduce the probability of a bank failure and its negative impacts on society. Our approach should be aligned with the proposals expected any day now from the European Commission, which themselves build on international agreement, as the greatest problems occur when a bank group active across international borders gets into trouble. A co-ordinated approach will improve the outcome for all.”
Source: British Bankers’ Association
Women have made an outstanding contribution to financial services, the British Bankers' Association chief executive Angela Knight said on the eve of the Institute of Directors’ Women as Leaders conference.
Angela Knight is a well-known champion of exceptional female role models in the industry. She joined the judging panel of the Women in the City Woman of Achievement award to formally honour female executive excellence. Mrs Knight announced the winner of the financial services category on Friday. Jenny Knott, CEO of Standard Bank Plc, was named category winner at a ceremony in London.
In her speech at the ceremony, the BBA chief executive shared the judging criteria: “We wanted to recognise an outstanding role model: someone who leads a successful business – and who leads by example; someone who has made opportunities for others around her and who instils a supportive and constructive working environment for all.”
Ms Knott now contends the overall 2011 Woman of Achievement Award, to be presented at a celebratory lunch on 25 November 2011.
Source: British Bankers’ Association
