Compliance News - 18 February 2011
This guidance is likely to be of most relevance to Banks and building societies, Insurers and Investment firms. It builds on a previous open letter from Paul Sharma (then Head of Department, Prudential and accounting standards) to the Association of British Insurers of 29 November 2004. The 2004 letter concerned the approach that the FSA would expect insurers to take when evaluating their capital requirements in relation to the defined benefit pension schemes they operate for the benefit of current and former employees. The FSA has now drafted letters with additional guidance on this matter addressed to three trade associations (ABI, BBA and BSA).
Key issues are:
- The FSA statutory objectives include market confidence, consumer protection and financial stability; they do not have a remit to protect members of defined benefit pension plans against the failure of those plans. A firm is required by GENPRU 1.2.26R to “at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due”. Accordingly, FSA basic philosophy towards pension obligation risk capital (P2PRC) is that it exists to enable a firm to meet its pension obligations throughout a period of stress and beyond.
- The FSA uses the actuarial funding valuation prepared for a pension scheme’s trustees as a starting point for its own internal assessment of P2PRC.
- Where firms choose to value their P2PRC using a different valuation basis, they should be able to explain to the FSA why this is more appropriate than the actuarial funding valuation in their case.
- Firms should calculate P2PRC by considering risks to the funding of their pension schemes consistent with a 99.5% confidence level over one year (for INSPRU firms), or a stress event that has no more than a one in 200 probability of occurring in a one-year period (for BIPRU firms). The common risks to which most schemes are subject include: equity value fall; property value fall; long-term interest rate fall; credit spread change; price and salary inflation rise; and longevity improvement.
- P2PRC may be reduced by certain offsets and management actions. The guidance provides high-level criteria which the FSA will use as a starting point in assessing whether specific offsets and management actions are acceptable.
- In assessing the allocation of P2PRC within a group, firms should consider those circumstances in which an individual firm may be subject to pension liabilities in addition to those resulting from past and present service of its employees (whether inside or outside the firm).
FSA Website
FSA have concerns about how current market conditions are increasing the risks of inadequate pricing and reserving in the sector, and proposed the Dear CEO letter will remind the CEO and Boards of their responsibilities in this area, and hence improve reserving practices.
Key issues are:
- To remind firms that it is the Board’s responsibility to ensure that adequate reserves are set, and for them to understand the main assumptions, uncertainties and risks implicit within those reserves.
- For firms to be able to demonstrate, when asked, that the processes they follow in setting reserves are robust and subject to adequate challenge.
- Expect firms to take account of all relevant external developments when setting reserves.
- Firms should have a proper understanding of their risk appetite in this area.
Source: Financial Services Authority
This covers the following topics:
- Solvency II
- Hector Sants on the future of insurance
- Stress testing exercise
- Insurance Mediation Directive (IMD) – make your views known
- Oral disclosure
- Feedback
- New guidance process
- Should we further intervene in products?
- Payment protection insurance complaints
- Gender Directive
- Enforcement cases
- Dedicated website for smaller general insurers
- Transition to new regulatory structure
Source: Financial Services Authority
This covers the following topics:
- Quarterly Consultation Paper
- Hector Sants on the future of insurance
- Solvency II
- New guidance process
- Pension reform
- Should we further intervene in products?
- Helping with the RDR
- Product disclosure
- COBS projection rules for non-MiFID products
- Gender directive
- Recent enforcement cases
- Speeches
FSA Website
Hector Sants, CEO of the FSA has written to the Chairman of the Treasury Committee on the subject of remuneration. The FSA was asked to provide aggregated details on the remuneration of highly paid individuals in FTSE 100-listed banks and comparable unlisted entities, in line with recommendation 31 of Sir David Walker’s Review.
Hector replied
“We are willing to assist with this request. On your first point, we do collect aggregated information on the remuneration of ‘high end employees’ in each of the major firms, although not in quite as much detail by pay band as envisaged in Sir David Walker’s Review. The Financial Services and Markets Act (FSMA) allows us to publish aggregated information derived from supervisory data in circumstances where it is not possible to ascertain information relating to particular firms or individuals.
However, we would point out that this is sensitive information provided by firms to us for the purpose of our regulatory functions. Firms may consider even the aggregated figures to be sensitive, given the small data set. In view of this, we think it right to seek the consent of all the firms concerned on their 2010 remuneration awards before we pass this aggregated information to the Committee.
On your second point, we do not hold information on the number of people in these firms whose remuneration is equal to or more than the remuneration of the least well paid executive board member. We have asked firms to supply this information as well.
We have no power under the FSMA to compel firms to supply information where it is not required for our regulatory functions. Therefore, the firms will need to decide whether or not they are willing to participate in the exercise. We have given them strict assurances that we will not provide the Committee with any individual information.
…... In the meantime, please do get in touch if you have any questions.
I am putting this letter in the public domain.
Hector”
Source: Financial Services Authority
Although dated October 2010, this has only been published on the FSA web-site in the last few days. The Note deals with the standardised approach to operational risk enhancing frameworks and covers a compendium of papers illustrating some of the approaches the Standardised Approach (“TSA”) firms might employ to help them meet the requirements for operational risk governance and risk management structures, risk identification, measurement, monitoring and reporting; and the Use Test.
The FSA has undertaken an initiative designed to examine, review and assess the implementation of the Standardised Approach for operational risk at firms and to establish if any elements in existing frameworks can be improved on or require clarification. This work is called: ‘The standardised approach: Enhancing frameworks’.
As part of this work FSA has initiated a series of expert groups designed to bring together the FSA and operational risk practitioners at firms to share ideas on current practice, weaknesses, and possible improvements. As well as stimulating discussions and informing the FSA and fellow participants, FSA is producing this compendium of papers covering various components of a TSA framework.
These papers are being drafted for the benefit of supervisors of TSA firms, but will also be made available on the FSA website. The compendium outlines key features of the TSA that are of interest, with observations and suggestions to support existing handbook guidance and rules. FSA uses Handbook guidance and other supporting materials to supplement the principles and rules where they think it may help firms to decide what procedures they might wish to consider adopting as good practice.
Source: Financial Services Authority
The reform of financial regulation has a real impact on society well beyond the square mile, Angela Knight told a gathering of business analysts recently. Regulatory change fundamentally affects the way banks do business, the British Bankers’ Association chief executive told delegates to the Institute of Economic Affairs State of the Economy conference. It therefore has a real impact on businesses and individuals – a fact that is not reflected in public debate on regulatory reform.
Angela Knight said:
"Although the bricks and mortar of banking buildings that face the world may look the same, a huge amount of change has taken place behind. The banks are now operating with more capital and liquidity, with top to bottom changes to risk control and transparency in ethics and in governance. They have made major changes to remuneration, they are much more transparent and understand - and are committed to meeting - their societal obligations.
"But the simple truth for any business is that you cannot increase its fixed costs of being in business without it having an impact on the cost and availability of services. The implementation of new standards early and, the super-equivalent way in which the UK has applied existing European and other requirements, not only means that there is a constraint on the international competitiveness of the banking industry in this country compared to others, but most importantly it flows directly through to an impact on the economy and economic growth.
"We can not continue down a path that says regulatory changes do not have an impact on anything other than banks themselves. Where changes have a societal impact, they need to be discussed from that perspective. It cannot be ignored or parked on the industry as if it is an industry-only problem. If a decision is being taken which says that in the interest of stability we must restrict loans and mortgages, then so be it. But that is a policymaker’s decision; it is not a decision of the banks."
Source: British Bankers Association
The Council of Mortgage Lenders attended a discussion hosted by the Housing Minister, Grant Shapps MP, to consider the position of first-time buyers in current market conditions.
The CML explained that:
- Current constraints are an issue not just for first-time buyers, but for existing recent buyers and those without a large equity cushion. Funding constraints apply across the whole market. Gross lending in 2011 will be around £135 billion compared to £360 billion at its pre-crunch peak.
- High loan-to-value lending is very capital-intensive for lenders. Under today's risk-averse regulatory environment, lenders need to hold typically 6-8 times more capital against a 90% loan than a 60% loan. This is bound to have a knock-on effect on the volume and the price of the high loan-to-value lending that is taking place.
- And consumers are also wary – demand is relatively low – not only because of the relatively higher cost of high loan-to-value borrowing, but also because they are unsure of the future direction of house prices.
- It’s important that the government considers and understands these underlying drivers before looking towards specific solutions.
- While mortgage insurance, shared ownership, and product innovation can all potentially play a part, none will provide a “magic bullet” to normalise the mortgage market – for first-time buyers or anyone else. This is likely to be a gradual process as confidence in funding markets and lending decisions is restored in the light of a more stable market environment.
Source: Council of Mortgage Lenders
In this issue FOS publish their latest set of complaints figures. These show how many new complaints they received – and what proportion they resolved in favour of consumers – during the third quarter of the current financial year (2010/2011).
The figures reveal some good news, in that complaint numbers in some categories are levelling off, or even starting to fall. However, things look very different as far as complaints about payment protection insurance (PPI) are concerned. Here, the numbers continue to rise – to the extent that these complaints now account for half of our workload.
Issues relating to PPI complaints formed a major theme of the FOS plans and budget for 2011/2012, which were published last month and on which they are currently consulting. The feedback they have received to date has largely consisted of questions about how these PPI complaints may impact on FOS operations.
FOS spent a week in court as part of the judicial review on PPI complaints. This followed a legal challenge from the British Bankers Association (BBA) on behalf of a number of high-street banks, relating to the FSA's PPI complaints-handling guidance and to information on our own website.
FOS outlined in the last issue of ombudsman news (December 2010/ January 2011) how they thought PPI complaints might start having a significant impact on their operations, as a result of this legal challenge. Since then a number of major businesses are indeed now telling FOS they don't intend responding substantively to many of these complaints until a final outcome to the legal action is known.
Regrettably, this means that many thousands of consumers are now not getting straightforward answers from some businesses. The FSA has written to trade associations to express its formal concerns about poor practice by some businesses in handling these complaints and of course, this situation impacts on us with the increasing numbers of consumers referring their complaints.
The sheer volume of these new PPI complaints – and the lack of meaningful cooperation from some businesses – is making it difficult for FOS to progress all these cases as rapidly as they would like. It is because of the operational risks and challenges these problems present that FOS are consulting on building up our financial reserves.
Source: Financial Ombudsman Service
