Compliance News - 25 February 2011
INDUSTRY NEWS FLASH WEEK ENDED 25 FEBRUARY 2011
The ABI have stated that the decision by the European Court of Justice (ECJ) to ban the use of gender in insurance policies from December 2012 is disappointing news. The insurance industry has fought against the possibility of this for the last decade and will do everything possible to manage negative effects for customers. Before this judgment, insurers were able to take gender into account when assessing a person’s risk. The judgment means that insurers will be legally prevented from taking a person’s gender into account when pricing insurance from December 2012.
The judgment will particularly affect products which take account of the risk differences between men and women such as motor insurance and some annuity products. For example, young female drivers pay less for motor insurance because they are less likely to have accidents and therefore women make fewer claims than men. For life insurance, women on average pay less to reflect their longer life expectancy, while pension (annuity) income for males is often higher because men typically have fewer years in retirement.
ABI-commissioned research by Oxera carried out in autumn 2010 highlighted the possible impact of removing gender from assessing risk:
- For motor insurance: women under the age of 25 could see an average rise of 25 per cent to their premium.
- For annuities: men approaching retirement could see an eight per cent reduction in annuity rates while rates for women approaching retirement could rise by six per cent.
- For life insurance: women could see a rise of as much as 20 per cent in the cost of cover, while men could see a fall of 10 per cent.
Over the next 20 months insurers will have to make large scale changes including amending all affected policy documentation; contacting customers with new information; updating and changing computer systems; ensuring insurance brokers have the right pricing information; adjusting insurance renewals and updating all sales material.
Source: Association of British Insurers
The Financial Services Authority (FSA) has published proposals to strengthen its existing rules on with-profits to improve protection for policyholders. Last year the FSA carried out a review of the way in which firms have met the requirements for the fair treatment of with-profits policyholders that were introduced in 2005. The FSA’s review identified a number of concerns about the way in which firms were operating their with-profits funds and treating their policyholders.
The proposals issued are based on the findings from that review and aim to improve protection for with-profits policyholders. The key proposals are to:
- strengthen the requirement for boards and governing bodies to obtain independent advice on the management of funds by enhancing the role of the with-profits committee and the with-profits actuary;
- require all firms to have a plan to distribute any excess surplus fairly to policyholders, particularly where a firm experiences a significant fall in the amount of new business it is writing;
- strengthen the requirement for any new business backed by the with-profits fund to deliver value to all with-profits policyholders so that writing new business has no adverse effect on their interests;
- improve the ways in which firms identify and manage conflicts of interest affecting with-profits policyholders;
- emphasise how with-profits policyholders in mutually-owned funds should expect to be treated, specifically around distributions of excess surplus;
- restrict the circumstances under which firms can impose a market value reduction; and
- Improve the reattributions process.
Sheila Nicoll, FSA director of conduct policy said:
“We have taken the time to review the entire with-profits regime and these proposals aim to address the issues that we have found. The proposals focus on addressing practical issues where policyholders are not always getting the fair treatment that they deserve.
Policyholders expect to receive a fair return on their investments and that is what we want firms to be able to deliver for them.
The purpose of these proposed changes is to ensure that with-profits policyholders are able to feel more confident that firms will conduct themselves appropriately now and in the future. This is not the end of our work on with-profits. We will publish further proposals before the end of 2011 to improve firms’ communications with policyholders and we will continue to supervise the sector in an intensive way.”
Source: Financial Services Authority
This Policy Statement (PS) will be of general interest as it gives guidance on aspects of our use of enforcement action as a regulatory tool. It will be particularly relevant to both the regulated community and to those unregulated persons against whom we may use our enforcement powers.
In CP10/23 FSA sought views on the amendments they proposed to make to ensure that DEPP and EG continue to contain accurate and up-to-date statements of our approach to enforcement. FSA proposed to make four main changes to DEPP and EG:
- To include in EG FSA’s policy for publishing decision notices.
- To amend FSA policy for reviewing whether published notices and related press releases should remain published on the FSA website.
- To apply the settlement discount scheme to the length of suspension periods.
- To adopt a penalties policy and decision maker for using FSA enforcement powers under the Cross-Border Payments in Euro Regulations 2010 (the ‘Cross-Border Regulations’).
FSA also sought views on a proposal to impose a new rule in GEN that an authorised firm, except a sole trader, must not pay a financial penalty imposed on a present or former employee, director or partner of the firm or an affiliated company.
Source: Financial Services Authority
FSA – SPEECH BY LORD TURNER ON RADICAL REFORM
Lord Turner, Chairman of the FSA, addressed Clare College, Cambridge to deliver the 2011 Clare Distinguished Lecture in Economics and Public Policy. He stated:
“Between 2007 and 2009 the financial systems of the developed world suffered a major crisis, the after-shocks of which we are still seeking to manage. As a financial crisis, it was as big as anything in 75 years; in the UK you have to go back to before the First World War to find an equivalent scale of bank losses or liquidity runs. And the crisis has had major macroeconomic and human consequences – unemployment, real income loss, some house owners in negative equity, and taxpayers burdened for a decade or more with dramatically increased government debts.”
Click on the link below for the full speech.
Source: Financial Services Authority
In CP10/13 FSA consulted on proposals to help claimants trace insurers that provided commercial lines employers’ liability cover for claimants’ employment. In developing their policy further, FSA liaised with the Department for Work and Pensions (DWP) to ensure that current government policy and the responses to the DWP consultation, Accessing Compensation – Supporting people who need to trace Employers’ Liability Insurance (February 2010) about the Employers’ Liability Tracing Office (the ELTO) have been appropriately taken into account.
FSA’s policy applies to all general insurers and Lloyd’s managing agents including both UK-authorised firms (including UK branches of non-EEA insurers authorised in the UK) and EEA firms passporting into the UK, whether providing cover cross-border under freedom of services or through a UK branch. FSA’s policy is intended to support long-term structural change to the way firms record employers’ liability information. This will ensure that employees are able to access the relevant insurers, who provide employers’ liability cover, whenever they need to for future cover.
FSA’s policy is also intended to start to address the issues of historical cover by providing a comprehensive list of insurers that are liable or potentially liable for UK commercial lines employers’ liability insurance and including future claims in respect of historical policies. As suggested by the consultation responses, FSA has introduced a number of improvements and refinements to the FSA list and the Employers’ Liability Register (ELR) proposed in the CP. They are proposing to consult further on the scope and form of director certification and independent assurance and the relationship between them.
The rules and guidance were made on 24 February 2011 and come into force on 6 March 2011. All general insurers must notify FSA by 6 April 2011 of their actual or potential liability for UK commercial line employers’ liability cover, and where applicable, the internet address of the tracing office used or their own web page together with other contact details.
Where applicable, insurers must set up their initial ELR (not necessarily with any policy information at this stage) dated 1 April 2011. Tracing information must be made available on ELRs for policies that on or after 1 April 2011 are entered into, renewed or for which claims are made. The information must appear on the ELRs either on insurers’ websites or through a qualifying tracing office no later than three months from the date of transaction.
Source: Financial Services Authority
This paper sets out the results of the Financial Services Authority’s (FSA) latest Hedge Fund Survey (HFS) conducted in September 2010 and the Hedge Fund as Counterparty Survey (HFACS) conducted in October 2010.
These surveys help FSA to analyse the systemic risk posed by hedge funds and are conducted every six months as part of FSA work on assessing risks to financial stability from outside the boundary of prudential regulation. This, in turn, is a key part of FSA’s work to protect and enhance the stability of the UK financial system, one of their statutory objectives.
These surveys help FSA to analyse the systemic risk posed by hedge funds and are conducted every six months as part of FSA work on assessing risks to financial stability from outside the boundary of prudential regulation. This, in turn, is a key part of FSA’s work to protect and enhance the stability of the UK financial system, one of their statutory objectives.
These voluntary surveys provide only a snapshot of hedge fund exposures and partial view of the hedge fund industry, and when examining the results it is important to consider the surveys’ limitations. The analysis presented only covers the broad systemic conclusions and does not discuss individual firms or funds.
Nevertheless, the surveys are important tools in providing FSA with a window into the hedge fund industry. Risks to financial stability from hedge funds could crystallise through two potential channels: market dislocations that disrupt liquidity and pricing (the ‘market channel’); and/or losses in hedge funds leading to losses by banking and other counterparties (the ‘credit channel’).
The latest results suggest that the footprint of surveyed hedge funds remains small within most markets and leverage is largely unchanged, so that risks to financial stability through the market channel seem limited at the time of the latest surveys. In addition, counterparties have increased margin requirements and tightened other conditions on their exposures to hedge funds since the crisis, increasing their resilience to hedge fund defaults.
Nevertheless, some risks to hedge funds remain, particularly if they are unable to manage a sudden withdrawal of liabilities during a crisis period, potentially resulting in forced asset sales. Forced asset sales during stressed market environments may exacerbate pressure on market liquidity and efficient pricing.
Source: Financial Services Authority
The ABI has announced new names for its managed fund sectors, to help customers better understand how their savings are invested. The new fund sector names have been shaped using extensive consumer research and will replace labels such as “cautious” and “balanced”, which customers find confusing.
The ABI managed fund sectors contain almost 2,000 life and pension funds, worth an estimated £340 billion, approximately 80% of all money invested in managed funds. ABI research showed that consumers want jargon-free titles for fund sectors that give them simple information about the minimum and maximum exposure to shares. Following consultation with stakeholders, the ABI has decided to replace risk-based labels with factual descriptions of the level of shares involved.
The ABI managed fund sectors contain almost 2,000 life and pension funds, worth an estimated £340 billion, approximately 80% of all money invested in managed funds. ABI research showed that consumers want jargon-free titles for fund sectors that give them simple information about the minimum and maximum exposure to shares. Following consultation with stakeholders, the ABI has decided to replace risk-based labels with factual descriptions of the level of shares involved.
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OLD Managed Sector names
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NEW Mixed Investment Sector names
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Defensive (up to 35% equity) Managed
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Mixed Investment 0-35% Shares
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Cautious (up to 60% equity) Managed
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Mixed Investment 20-60% Shares
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Balanced (up to 85% equity) Managed
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Mixed Investment 40-85% Shares
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Flexible (up to 100% equity) Managed
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Mixed Investment 60-100% Shares
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Helen White, the ABI’s acting Director of Life and Savings, said:
“It was becoming increasingly clear that terms like “cautious” were confusing for consumers so the ABI was keen to act quickly and make changes to help customers. Our research of over 2,600 adults told us that the new names are significantly less likely to lead to consumers misinterpreting the type of funds they choose to invest in.
We found that consumers want simple information about the minimum and maximum amount of their money that an investment fund will put into shares. The new fund sector names do just that.”
The new sector names will apply from April 2011.
Source: Association of British Insurers
