The Financial Conduct Authority: Approach to Regulation, June 2011 Lloyd s comments and feedback

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1 The Financial Conduct Authority: Approach to Regulation, June 2011 Lloyd s comments and feedback Introduction This document sets out Lloyd s response to the FSA document released in June 2011 outlining how the Financial Conduct Authority (FCA) will approach the delivery of its objectives and inviting comments by 1 September Lloyd s is a society of underwriters that operates as an insurance and reinsurance market. Its aggregate gross written premium income in 2010 was 22bn, 80% of which came from outside the UK 1. Lloyd s is at the heart of the London insurance market, the world s leading international insurance and reinsurance centre, estimated to employ 50,000 people across the UK as well as many others in support services 2. The Society of Lloyd s and Lloyd s managing agents will be subject to prudential supervision by the Prudential Regulatory Authority (PRA) once the UK s new financial regulatory structure is in place. The FCA will regulate the conduct of business by the Society and by firms within the Lloyd s market, as well as acting as the prudential regulator of Lloyd s brokers and members agents. We are keen to ensure that the FCA has a detailed understanding of Lloyd s structure and operations, so that it can make informed assessments of the extent to which Lloyd s and firms within the Lloyd s market may pose risks to the FCA s objectives. The UK s new regulatory structure, Lloyd s international trading operations and Lloyd s controls over market participants make it particularly important to avoid duplicative requirements. Firms operating at Lloyd s are already subject to rules imposed by the Corporation of Lloyd s, the FSA and at EU level, as well as to the extensive regulatory requirements of the many jurisdictions in and from which they carry on business. The new structure should take this into account and seek to avoid imposing a further level of control. Lloyd s seeks positive, constructive engagement with the FCA and would welcome further interaction with FCA management and those charged with conduct supervision of Lloyd s. It hopes that the FCA will be reassured that Lloyd s oversight of the conduct of business within the Lloyd s market ensures that consumers are fully protected. Scope Lloyd s brokers Most business placed at Lloyd s comes via registered Lloyd s brokers. Since 2008 non- Lloyd s brokers may place business at Lloyd s, but only if they meet the same prudential standards as Lloyd s brokers, so Lloyd s brokers remain of fundamental importance to the market. There are registered Lloyd s brokers. 1 Lloyd s Annual Report 2010 see 2 The CityUK: Trends in UK financial and professional services June as at 31/08/11

2 If a firm wants to become a Lloyd s broker it must apply to Lloyd s for registration under the Lloyd s Act Registration requires a firm to satisfy Lloyd s criteria, including: The firm is subject to suitable regulation; The firm is capable of transacting business in the Lloyd s market; Insurance monies are properly protected; and The firm has adequate levels of professional indemnity insurance. The registration process recognises the important role that Lloyd s brokers play at Lloyd s and the benefits that high quality intermediation brings to the market. FCA s prudential regulation of insurance intermediaries will cover a wide variety of different firms, operating in different ways and posing different risks. In line with its proposed differentiated approach, the FCA must regulate insurance intermediaries such as Lloyd s brokers engaged in the wholesale insurance sector in a different way from its regulation of UK personal lines intermediaries. Most Lloyd s brokers handle large international commercial insurance and reinsurance business rather than UK retail personal lines and require regulation that recognises the differences. To reflect the importance of appropriate and proportionate regulation of wholesale insurance intermediaries, the FCA should ensure that its rulebook recognises this differentiation and that it employs senior personnel who understand this particular sector. Lloyd s members agents The FCA will be responsible for the prudential regulation of Lloyd s members agents. It is important that it has a proper understanding of these firms and the role that they play within the Lloyd s market. The table on page 11 of this document refers to four managing agents as among the legal entities for whom the FCA will have regulatory responsibilities. If this is a reference to Lloyd s members agents, it demonstrates how easy it is for misperceptions and inaccurate descriptions of members agents to arise. As members agents perform a particular role within the Lloyd s market, their functions do not, at first sight, look similar to those of other firms that the FCA will regulate. Members agents provide valued services to Lloyd s members: advice on underwriting activity, representing members interests in negotiations, particularly with managing agents and the provision of various administrative services. As a general rule, members must appoint a Lloyd s members agent to advise them on membership and represent them at Lloyd s. There are currently three members agents, with permission from Lloyd s to be appointed by a Lloyd s member to provide services and perform duties of the kind and nature set out in Lloyd s standard members agent agreement. In view of this specialised role and the small number of entities performing it, Lloyd s and members agents are interested to understand how the FCA proposes to supervise members agents and whether it intends to change the FSA s existing approach to them. The FSA has always viewed members agents as low-risk authorised firms and we believe that this should continue. The FCA should ensure that its regime is proportionate and does not entail the imposition of unnecessary or inappropriate requirements on members agents. 2

3 The FCA must coordinate its prudential regulation of members agents with the PRA s prudential regulation of Lloyd s and this is one an issue that the PRA / FCA Memorandum of Understanding (referred to later) should take into account. It is important that matters such as the basis for regulatory fees charged to members agents and their inclusion in the FSCS are dealt with fairly and cross-subsidisation is avoided. Objectives and powers General Earlier consultation documents on the reform of the UK s financial regulatory system suggested that the conduct regulator (now the FCA) should have a single objective, to avoid in-built tensions between different objectives and to provide greater clarity. Nevertheless, the FCA will have one strategic objective, three operational objectives and six regulatory principles, as well as two further issues (promoting competition and minimising financial crime) which it must take into account. We can understand the reasons why the FCA has been given this list of different aims, but we question how easy it will be to satisfy them all. The FCA will sometimes need to reconcile different and possibly conflicting principles, issues and objectives and should develop a culture enabling it to do so fairly and transparently, so that financial customers and firms alike know what to expect. At the same time, the FCA should expect its behaviour to be measured against the full list of objectives and principles and should not disregard particular principles on a regular basis in pursuit of its objectives. Lloyd s, like other regulated entities, is interested in ensuring that the FCA s supervisory regime is cost effective and proportionate. We therefore particularly welcome the regulatory principles recognising: The need for the FCA uses its resources in the most efficient and economic way; and Proportionality the principle that a burden or restriction imposed on a person or activity should be proportionate to the benefits that are expected to result. We think that the FCA s proper application of these principles in particular will immensely strengthen the effectiveness of its supervisory regime. Securing an appropriate degree of protection for consumers We agree that it is important for the FCA to adopt differentiated approaches to firms and markets, particularly in view of the proposed very broad statutory definition of consumer. For Lloyd s, consumer will include policyholders and Lloyd s members. Policyholder protection The Lloyd s market offers a wide variety of insurance products. Nearly all of them are nonlife: although life insurance is available from Lloyd s underwriters, it is simple term life assurance only and represents less than half a percent of the market s total premium income. The Lloyd s market does not offer the sort of investment products associated with the conduct problems referred to in the paper s Overview. 3

4 Over one-third of Lloyd s aggregate premium income is derived from reinsurance, for which the clients are insurance companies located around the world. Lloyd s other policyholders are for the most part corporate entities, although Lloyd s syndicates offer some personal lines insurance in the UK and overseas. The diversity of the policyholder base makes it important that the FCA does adopt a differentiated approach, as the degree of regulatory protection expected by different types of policyholder varies widely. Lloyd s policyholders should, of course, be protected to the same standards as the policyholders of other UK non-life insurers. For UK personal lines policyholders, this entails a significant level of regulatory protection. On the other hand, purchasers of reinsurance are mostly experienced insurance professionals, with access to legal and professional advice. They do not expect the process of entering into reinsurance contracts to be subject to consumer protection measures. Personal lines policyholders outside the UK for the most part have their own, local, regulatory protections with which Lloyd s underwriters must comply. Lloyd s has an extensive international compliance advice system, to ensure that underwriters meet at all times the regulatory standards of the jurisdictions in which they transact insurance. It is important that FCA rules are framed so that they do not duplicate or contradict other applicable requirements. Existing consumer protection measures recognise the different levels of protection appropriate for different types of client. For example, EU pre-contractual disclosure requirements apply only where the policyholder is a natural person 4. This approach is necessary not just to avoid the imposition of unnecessarily onerous regulatory requirements, but to retain the efficacy of consumer protection measures. Protection of Lloyd s members Lloyd s members are the risk carriers in the Lloyd s market and provide capital to support their underwriting. In 2011 there are 2,163 active Lloyd s members. Over time, there have been dramatic changes to the profile of Lloyd s membership. Until 1994 all members were private individuals, accepting insurance business on an unlimited liability basis. In that year corporate members were first permitted to join and since 2003 Lloyd s has not admitted any new unlimited liability members. In 2011 there are 1,530 corporate members, responsible in aggregate for 96.7% of Lloyd s capital. The number of unlimited liability members has fallen from 3,270 in 2000 to 634 today. They now provide 3.3% of the capital in the Lloyd s market. Lloyd s corporate members take a number of different forms. Many are parts of integrated Lloyd s operations owned by large multi-national insurance groups such as ACE, XL and QBE. In addition there are smaller, private companies or limited liability partnerships owned by private investors. Members of Lloyd s are not currently directly regulated by the FSA and the Government does not propose that they be regulated by the PRA or the FCA. Members are subject to the regulatory oversight of the Corporation of Lloyd s and, in particular, must meet Lloyd s financial requirements. New corporate members of Lloyd's must provide, on admission to 4 Article 31, Directive 92/49/EEC 4

5 membership, funds with a minimum value of 350,000 to support their underwriting. Private members of Lloyd s are high net worth individuals. Participation in the Lloyd s market as a Lloyd s member is subject to Lloyd s rules, including Byelaws made by the Council of Lloyd s under Lloyd s Acts These byelaws and rules are subject to the FSA s oversight and include measures to ensure that Lloyd s members have appropriate protection, including: Lloyd s membership compensation scheme, which complies with FSA Handbook COMP 1.5.8R. It applies in respect of losses caused by reason of an underwriting agent s fraud, dishonesty, lack of probity or a failure to account; an arbitration scheme to handle most disputes between members and their members and managing agents; Lloyd s members ombudsman scheme, to investigate complaints against the Corporation by members who believe that they have suffered injustice in consequence of maladministration; a statutory enforcement process (referred to below), which includes an ability to make an order of restitution against persons subject to Lloyd s enforcement jurisdiction (such as managing agents) to require them to repay losses to other persons (such as members), if the loss is caused by misconduct; a requirement that managing agents enter into a prescribed form of agency agreement with the members for whom they act that clearly sets out the obligations and duties of the agent; and provisions to ensure that a member has security of tenure to remain on a syndicate and the ability to transfer their participation to another member for value. In limited circumstances a managing agent may seek to terminate an appointment, but it can only do so with Lloyd s consent. Lloyd s has appointed a body, the Capacity Transfer Panel, to exercise Lloyd s powers on mandatory offers to purchase syndicate capacity and compulsory buy-outs of minority syndicate capacity. For Lloyd s members, as for Lloyd s policyholders, regulatory protection is differentiated on the basis of the type of entity involved. For example, the members compensation scheme applies in relation to individual members only, including private individuals underwriting via limited liability partnerships or corporate members. It does not apply to corporate members owned by commercial interests: the FSA does not consider that such entities, staffed by insurance professionals, often with substantial market presence and frequently underwriting via syndicates managed by managing agents in the same corporate group, warrant the same level of protection as individual members. FSA approaches to Lloyd s regulation and interaction with policyholders and members are applied on appropriately differentiated bases. We believe that the FCA should adopt broadly similar methods. 5

6 Lloyd s auction process Lloyd s auction process is a means by which members on unaligned syndicates can realise any value attaching to the surrender of all or part of their right to participate on the syndicate for a subsequent year of account. Members can therefore gain access to unaligned syndicates on which capacity is available. Conduct of the auction process is subject to pre-defined rules established pursuant to the Lloyd s Auction Byelaw. Lloyd s Auction Official is responsible for managing and supervising the auctions. Capacity transfer at Lloyd s is also subject to oversight by Lloyd s Capacity Transfer Panel, a committee of Lloyd s Franchise Board. Membership of the Panel is balanced and comprises a nominated member of Lloyd s Council as chairman, two independent members, two third-party capital nominee members and two nominees from Lloyd s Market Association, representing Lloyd s managing agents. The FSA regulates the auction process and the relevant FSA rules are set out in the FSA s Prudential sourcebook for insurers (INSPRU Rule 8.4 (the Capacity Transfer Market)). Lloyd s consults members agents and the FSA on any proposed material changes to the auction rules that are published ahead of each annual auction season. The auction season comprises four auctions held between September and November each year and results are publicly announced on lloyds.com following each auction. Lloyd s sends a report on the auctions to the FSA after the completion of each auction season. In the 2010 auction season, 167m of capacity was transferred. The volume of capacity transferred annually has steadily declined over time: for comparison, in the 2001 auction season over 1bn of capacity was transferred. The auction process has worked well since its introduction in the mid 1990s. Neither Lloyd s members nor the FSA have had any cause to complain about the process. Lloyd s believes that the auction process and other methods of transferring capacity to which INSPRU Rule 8.4 applies should continue to be supervised by Lloyd s Market Supervision team in its new role as part of the PRA. The appearance of these rules in INSPRU reflects the FSA s judgement that supervision of the auction process and capacity transfer generally form part of the prudential regulation of the Lloyd s market, rather than conduct of business rules, supporting the contention that the process should be supervised by the PRA. Promoting efficiency and choice in the market for financial services Lloyd s operates in an extremely competitive global non-life insurance and reinsurance market. For Lloyd s, the UK is one of over 150 national insurance markets from which insurance business is obtained. Many areas of insurance important to Lloyd s, such as reinsurance, energy or marine, aviation and transit, are best viewed as international, rather than national markets. They entail the provision of more complex contracts than personal lines insurance, and the clients are mostly large commercial entities with access to professional advice within and outside their organisations, able to access a wide range of insurance providers across the world. 6

7 We do not think that consumers cannot exercise informed choice in the UK non-life market. In the UK, 744 companies are authorised to carry on non-life insurance, writing total premiums of 30.5bn in UK policyholders consequently have a wide range of different providers from which to choose. They also have a wide choice of different routes through which to purchase non-life insurance, including directly from insurers, via brokers and intermediaries and through banks and building societies. Non-life insurance products commonly purchased by private individuals and small commercial enterprises are reasonably straightforward, the products of different providers are broadly comparable and cover is usually given for a period of one year only. It is therefore easy for consumers to make comparisons between different products and to make appropriate selections, a process that has been enhanced by developments such as comparison websites. We hope that the FCA agrees that non-life insurance markets, particularly those in which Lloyd s is most active, are not sub-optimal and exhibit significant competitive features. Protecting and enhancing the integrity of the UK financial system This objective will have particular significance for the FCA s prudential regulation of certain financial markets. Lloyd s will be prudentially regulated by the PRA, so this objective will be of lesser importance to the FCA s supervision of Lloyd s. Regulatory approach Preventative action We note that the FCA will build on the FSA s approach to the way firms bring financial services to the retail market. We welcome the Government s statement that the the new product intervention power is unlikely to be appropriate in relation to the protection of professional or wholesale customers. 6 Credible deterrence We note that the FCA will adopt a more interventionist stance, with lower tolerance for consumer detriment. The Society of Lloyd s has enforcement jurisdiction over persons operating within the Lloyd s market under the Lloyd s Acts These powers are further specified in Lloyd s Enforcement Byelaw. Sanctions that may be imposed include bans from the market, unlimited fines, powers to make orders of restitution (see above) and public notices of censure. In order to maintain an effective working relationship and to minimise duplication, Lloyd s and the FSA have a Co-operation Arrangement, covering enforcement actions against firms and individuals, amongst other matters. A copy is attached. We note that the Memorandum of Understanding between the FCA and the PRA will make specific provision for Lloyd s. In addition, the Government is committed to ensuring that the cooperation that currently exists between the FSA and the Corporation of Lloyd s in overseeing the market is carried forward to the new structure through the establishment of a 5 ABI UK Insurance Key Facts, September A new approach to financial regulation: the blueprint for reform HM Treasury, June 2011, para

8 new written tripartite cooperation agreement between the PRA, the FCA and the Corporation of Lloyd s. This will be crucial in ensuring that the oversight of the market is effective and avoids unnecessary and duplicative regulatory burdens. We remain concerned about the FCA publishing information on warning notices issued in relation to individual financial firms, where the outcome of the case has not been determined. This may have severe reputational implications for firms in the event that the enforcement action is later discontinued or unsuccessful. Regulatory activities Wholesale conduct We note that the FCA will put greater emphasis on wholesale conduct and the risks attached to activities in wholesale markets, including the transmission of risks to retail markets and whether participants in the wholesale markets can cause damage to the wider market and the economy at large. We believe that the Lloyd s market s wholesale activities - the provision of insurance and reinsurance cover principally for corporate entities - strengthen and stabilise the economy and are not a source of risk to retail markets. During the economic crisis, the Lloyd s market operated normally, indeed recorded record profits, and continued to provide vital support to the functioning of the global and national economies. It was not a source of systemic risk to the economy or the retail sector. The paper refers to the design, marketing and mis-selling of high risk mortgage-related securities. The Lloyd s market is engaged in providing core non-life insurance and reinsurance products and is not involved at all in quasi-banking activities or securitisation. Lloyd s controls over conduct of business Although Lloyd s is a market of competing underwriting businesses, their ability to trade and to sell insurance globally depends on Lloyd s collective reputation and brand. This in turn depends on perceptions of the ways in which firms and individuals within the market carry on business and the extent to which they are viewed as acting honestly, fairly and with due consideration for the interests of their customers. To protect Lloyd s collective reputation, the Society of Lloyd s exercises oversight of the market to ensure that business is conducted with a high degree of integrity. In addition to complying with the FSA Handbook, Lloyd s managing agents are expected to comply with Lloyd s performance framework of minimum standards, including a requirement that every managing agent has in place effective arrangements to protect Lloyd s reputation and brand. A managing agent must demonstrate that: It has an appropriate code of business ethics with which it complies. It has appropriate arrangements and processes in place for managing the risk of financial crime. It treats policyholders fairly. It deals with Lloyd s and with regulators in an open and cooperative way. 8

9 Lloyd s monitors compliance with its minimum standards through the business planning process. Managing agents develop business plans for every syndicate they manage and submit them to Lloyd s for approval, for which demonstrating compliance with the minimum standards is a pre-condition. Compliance with the standards is underpinned by Lloyd s risk management framework, which covers risks arising from both the market and the Corporation, and by activities such as the management of financial crime risk and the handling of consumer complaints, described elsewhere in this document. Protection of policyholders also encompasses the efficacy of the processes by which business is transacted within the Lloyd s market, including the delivery of contractual documentation and the payment of premiums and claims. Lloyd s is a strong supporter of, and is represented in, the London Market Group (LMG), a market-wide body acting as a focal point for modernisation projects within the London insurance market. Initiatives led by the LMG include the contract certainty project, which aims to ensure that the terms of an insurance contract are completely and finally agreed at the time it is entered into and contract documentation is provided promptly thereafter. Lloyds managing agents are required to act in accordance with contract certainty principles and guidance. On claims, Lloyd s is implementing its Claims Transformation Project, intended to make changes to processes so as to enhance customer experiences. From 1 January 2012 Lloyd s is introducing Claims Management Principles and Minimum Standards for implementation by managing agents. It has also set up a Claims Talent Programme: an intensive 12-month training course, intended to provide high potential claims practitioners in the early stages of their careers with the opportunity to enhance their skills and claims knowledge. These and other initiatives sit alongside the LMG s work to speed up claims processing through use of electronic claims files. The range and depth of Lloyd s activities in these areas indicate that Lloyd s is well placed to continue to deal with detailed conduct issues within the Lloyd s market, under the regulatory oversight of the FCA. Supervision of client assets The paper places emphasis on the safety of client assets and says that the client asset unit will continue its drive for higher standards. The FCA can take comfort from Lloyd s rules designed to ensure the safety of client assets. This is achieved by Lloyd s capital structure, often referred to as the chain of security, which provides financial security to policyholders as well as capital efficiency for members. The Corporation is responsible for overseeing member and central capital levels, to achieve a level of capitalisation that is robust yet allows members the potential to earn superior returns. The Chain of Security provides the financial strength that ultimately backs insurance policies written at Lloyd s and the common security that underpins the market s ratings, licence network and overall reputation. There are three links in the Chain of Security: Syndicate level assets Members funds at Lloyd s 9

10 Central assets First link: Syndicate level assets The premiums received by a particular syndicate are kept in trust and are its first resource for paying policyholder claims. They are generally held in liquid assets to ensure liabilities can be met as they fall due. Profits are not released until future liabilities are fully provided for. Each syndicate s reserves for future liabilities are subject to annual independent audit and actuarial review. Second link: Members funds at Lloyd s Every member, whether corporate or individual, must provide capital to support its underwriting at Lloyd s. In accordance with FSA regulations, each syndicate produces an Individual Capital Assessment (ICA) stating how much capital it requires to cover its underlying business risks at a 99.5% confidence level. The Corporation reviews each syndicate s ICA to assess the adequacy of the proposed capital level. When agreed, each ICA is then uplifted (by 35% for 2011) to ensure enough capital is in place to support Lloyd s ratings and financial strength. This uplifted ICA is known as the syndicate s Economic Capital Assessment and drives member capital levels. This capital is held in trust as readily realisable assets and can be used to meet any Lloyd s insurance liabilities of that member, but not the liabilities of other members. Third link: Central assets The Corporation s central assets are the third link of security. The Central Fund is available, at the discretion of the Council of Lloyd s, to meet any valid claim that cannot be met by the resources of a member. It is funded by members annual contributions and subordinated debt issued by the Corporation in 2004 and Central assets may be supplemented by a call on syndicates of up to 3% of overall premium limits, known as the callable layer. The Corporation regularly undertakes detailed analysis to determine the optimum level of central assets, seeking to balance the need for financial security against members desire for cost-effective mutuality of capital. In particular, the Corporation s sophisticated modelling tests each member s underwriting portfolio against a number of scenarios and a range of forecasts of market conditions. The Corporation s central assets at the end of 2010 were billion. Members contributions to the Central Fund remain at 0.5% of gross written premiums for The Council of Lloyd s periodically reviews the central assets target and the level of contributions in light of the current financial position and forecast needs, and adjusts the contribution levels as required. Authorisation and approvals We support the overall approach for the authorisation and approval of individuals for dual regulated firms, set out in HM Treasury s June 2011 White Paper A new approach to financial regulation: the blueprint for reform to which the FCA Paper refers. 10

11 Lloyd s itself operates an internal procedure to satisfy itself about, and oversee notification of, appointments to senior positions within the Lloyd s market. Amongst other safeguards, this requires firms intending to appoint new senior officials to discuss the appointments with Lloyd s Head of Risk Management and, in the case of new active underwriters or run-off managers, with Lloyd s Performance Management Department. Firms must also demonstrate that they have received FSA notification of an individual s approval. The Co-operation Arrangements between the FSA and Lloyd s set out procedures for cooperation and collaboration in respect of the authorisation of firms and approval of individuals within the Lloyd s market. These arrangements have worked well and we would hope that their substance will be replicated in the Lloyd s section of the new Memorandum of Understanding between the FSA and the PRA. Policy/Rule making We welcome the intended approach to policy and rule making, in particular its emphasis on early and rigorous market analysis; the importance of understanding commercial drivers; the intention that it is open, listening, consultative and sensitive to market impact; reliance on principles, rules and guidance; maintenance of strong traditional disciplines under the principles of good regulation; and rigorous post-implementation reviews. Lloyd s follows a similar philosophy in its approach to the management and superintendence of the affairs of the Lloyd s market and via the various detailed rules and requirements it issues to govern the market s operation. We have consistently provided detailed feedback to FSA consultation documents and intend to continue to contribute to FCA requests for input on policy-making, where it relates to matters that potentially affect the Lloyd s market. Financial crime We welcome the statement that the FCA will build on the FSA s intensive and intrusive supervisory approach and its emphasis on credible deterrence in supervising the management of financial crime risk. This is an area that Lloyd s views very seriously. The Corporation manages both internal and external financial crime risks. Financial crime includes staff fraud, money laundering, sanctions non-compliance, bribery and corruption. Lloyd s defines internal financial crime as financial loss and reputational damage resulting from financial crime committed by UK and overseas Corporation employees and by those acting on the Corporation s behalf. External financial crime is financial crime committed by third parties where the controls to mitigate such risk sit within the Corporation. Whilst Lloyd s Managing and Members Agents have overall responsibility for their financial crime risks and are directly responsible for meeting any external financial crime legal and regulatory requirements, the Lloyd s Corporation provides market oversight in this area. There is a dedicated team within the Corporation, namely the International Regulatory Risk team, to deal with financial crime and sanctions issues. It has the following objectives: 11

12 to provide managing agents with information about anti-financial crime legislation and developments; to ensure that the Corporation adequately monitors the market s financial crime risk; and to report on a regular basis to Lloyd s management, (the Money Laundering Reporting Officer, the Executive Risk Committee, Corporation Risk Committee, Audit Committee, Franchise Board and others) the assessed level of internal and external financial crime risk and issues impacting the risk, against Lloyd s defined risk appetite. The team is responsible for identifying and mitigating financial crime risk at Corporation level. It supports other departments by reviewing the adequacy and effectiveness of their controls on financial crime risk and, where appropriate, developing or assisting the development of policies for departments required to ensure compliance. The Department supports Lloyd s Operational Risk Team with reviews of managing agency controls, including assessment against best practice guidance, to mitigate external financial crime risk to Lloyd s. In addition, it is responsible for ensuring that the Market is sufficiently educated about anti-financial crime compliance. It has issued Market bulletins on antimoney legislation, international sanctions compliance, anti-bribery compliance and compliance with legislation governing the movement of controlled military goods from one country to another (the Export Control Order, which carries criminal penalties for noncompliance). As well as educating the market on these matters the bulletins serve to inform on how to report financial crime incidents to Lloyd s and relevant authorities and regulators. Coordination FCA coordination with other authorities in the UK We welcome the arrangements set out in the paper on how the FCA will co-ordinate its activities with other UK authorities. We believe such an approach should help to lessen the risk of unnecessary duplicative supervisory oversight of firms by the authorities. As mentioned above, we believe that, for Lloyd s, this co-ordination will be further enhanced through the inclusion of a section on Lloyd s in the proposed MoU between the FCA and the PRA. In addition, we note the Government s commitment to ensuring that appropriate cooperation arrangements exist between the PRA, the FCA and the Corporation of Lloyd s and we look forward to further discussions on these with FCA and PRA officials. Complaints handling The FCA will take over the FSA s functions in relation to the ombudsman service. Lloyd s has its own complaints handling regime, which is set out in 1.11 of the Dispute Resolution (DISP) Rules of the FSA Handbook. It also has arrangements for handling complaints from policyholders in other jurisdictions, in accordance with local legal and regulatory requirements. 12

13 Recent changes to the FSA s complaints handling rules have not included amendments to We therefore understand that the FSA is comfortable with the way Lloyd s handles complaints and this has recently been confirmed by the FSA. If the FCA has any plans to review the way that complaints are handled by Lloyd s, we would appreciate early notification of this. Coordination with EU and global stakeholders Lloyd s closely monitors and is an active contributor to debates at EU and global level on insurance and reinsurance issues in areas such as prudential supervision, market conduct and market access. We welcome the FCA s commitment to playing an active and constructive role in shaping the development of the common framework for regulation and supervision at the global level and in the EU, and we will be pleased to support the FCA in these endeavours. Under the new arrangements, there will be many different UK persons and entities engaging in the EU on issues of fundamental importance to the UK s financial services sector. We support the intention to establish a Memorandum of Understanding between the Treasury, the Bank of England, the PRA and the FCA on overall international coordination. Effective UK engagement will require these organisations to go further than reaching agreement on coordinating their activities. They need to share a broadly similar vision of desirable approaches and ultimate outcomes, so that the points they make and the arguments they develop on different subjects are underpinned by a common understanding of essential regulatory issues. When involved in EU issues, the FCA should consider the extent to which it will take account of the UK s competitive position. Maintaining this is will not be among its objectives: the discharge of functions in a way which promotes competition is a different issue. Nevertheless, other national supervisors do recognise the desirability of their own national competitiveness, sometimes because their objectives explicitly require them to. Furthermore, the particular size and structure of the UK s financial services sector means that regulatory proposals may have a very significant impact in the UK and a much lesser or different impact in other EU member states. The FCA will need to decide whether it takes into account such impacts on the UK financial sector in other words, its international competitiveness or concurs with regulatory outcomes that other EU member states consider appropriate, notwithstanding the potentially disproportionate damage that may be caused to the UK financial sector. 13