Insurance in Financial Services UK
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A focus on vulnerability and competition: What firms can expect from FCA following the publication of its Mission and Business Plan 2017/18
On 18 April 2017, the Financial Conduct Authority (FCA) published several important documents, including its Mission, Business Plan 2017/18 and – for the first time – Sector Views. Together, these documents are intended to provide a complete picture of the way the FCA identifies and assesses risks, and hence identifies its regulatory priorities, in the sectors that it regulates.
“Is your conduct framework adding enough value?” - How Lloyd’s and London market insurers are evolving their conduct frameworks
It’s the most frequent question I’ve been asking my Lloyd’s and London market clients since the turn of the year.
The question itself is testimony to the extent of work that the market has undertaken to design, implement and embed conduct frameworks over the last few years, particularly in relation to delegated authority business. These relatively new frameworks have been working in practice for long enough for the conversation to move towards efficiency and evolution.
Two recent public events, a speech to the ABI by PRA Executive Insurance Director David Rule, and an evidence session to the Treasury Select Committee (TSC) enquiry into Solvency II led by PRA Deputy Governor Sam Woods, with messages reinforced in a subsequent speech by Sam Woods on 20 March on the PRA insurance objective, provide important insights into the PRA’s latest view of Solvency II. But there were also a few straws in the wind as to how the PRA, if given a free hand post-Brexit, might want to adjust the UK prudential insurance regime. This would not involve any wholesale departure from Solvency II, which the PRA thinks is essentially working well, but might involve a limited move towards a less prescriptive, principles-based regime slightly more in the mould of its ICAS predecessor. Notable features of any adjusted regime might include:
- Some streamlining of data collection and transitional recalculation;
- More flexibility on matching adjustment eligibility, particularly on cash flow fixity;
- A continuing role for the risk margin (albeit using a much less interest rate sensitive calibration); and
- Continued application of the quantitative indicator (“QI”) actuarial framework, involving more granular sectoral coverage, to underpin future model approval and change judgements.
The implementation of the mandatory exchange of initial and variation margin for non-cleared OTC derivative trades in the EU commenced on 4 February for financial counterparties with the largest derivatives portfolios. The introduction of these rules – which was part of the G20’s mandate to reduce the systemic risk posed by the OTC derivatives trading – is expected to lead to an increase in the cost of trading for non-cleared trades.
The demand for IT risk management is rapidly increasing in response to the rise in threats and the unprecedented wave of innovation spreading across the financial services industry. Now is the time for senior financial services risk professionals to begin preparing for the array of changes that are altering the world in which we live.
In recent years, the regulatory and governance framework in financial services organisations has become increasingly complex. A key area of focus has been in the area of remuneration structures, policies and processes, where there has been a significant amount of regulatory development.
With the adoption of the IFRS 9 accounting standard into EU law, it is full steam ahead for banks to deploy credit models that estimate Expected Credit Loss (ECL) accounting values. The standard requires firms to account for lifetime ECL on loans that have experienced a “significant increase in credit risk” (SICR), but allows firms to reach their own conclusions as to just how much credit risk ought to be viewed as “significant”.
Biased Expectations: Will biases in IFRS 9 models be material enough to impact accounting values, as well as other applications such as pricing?
As European IFRS reporters enter 2017, the first generation of Expected Credit Loss (ECL) models have generally been developed, and granular transitional impacts quantified.
‘We want to ensure that the process of complaining is straightforward, transparent and fair to consumers, while allowing firms to handle complaints as efficiently as possible and for consumers to have effective access to the ombudsman service if they remain dissatisfied.’ Financial Conduct Authority (FCA)
Looking ahead to 2017, one of the most important areas of regulatory development that we see in financial services is rising supervisory expectations of firms’ cyber resilience. A spate of recent incidents of cyber-crime and IT failure have sharpened the focus of firms on their cyber preparedness, but management and boards should now also expect to be more routinely challenged by their supervisors on how well they understand and what they have done to limit their exposure to cyber and IT risks.