ABI response to the FSA s consultation on Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision (CP12/24)

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1 ABI response to the FSA s consultation on Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision (CP12/24) The UK Insurance Industry 1. The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital part of the UK economy, managing investments amounting to 26% of the UK s total net worth and contributing 10.4 billion in taxes to the Government. Employing over 290,000 people in the UK alone, the insurance industry is also one of this country s major exporters, with 28% of its net premium income coming from overseas business. 2. Insurance helps individuals and businesses protect themselves against the everyday risks they face, enabling people to own homes, travel overseas, provide for a financially secure future and run businesses. Insurance underpins a healthy and prosperous society, enabling businesses and individuals to thrive, safe in the knowledge that problems can be handled and risks carefully managed. Every day, our members pay out 147 million in benefits to pensioners and long-term savers as well as 60 million in general insurance claims. The ABI 3. The ABI is the voice of insurance, representing the general insurance, protection, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK. 4. The ABI s role is to: Be the voice of the UK insurance industry, leading debate and speaking up for insurers. Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally, driving effective public policy and regulation. Advocate high standards of customer service within the industry and provide useful information to the public about insurance. Promote the benefits of insurance to the government, regulators, policy makers and the public. 5. The ABI welcomes the opportunity to respond to the Financial Services Authority consultation CP12/24 PRA and FCA regimes relating to aspects of authorisation and supervision. We have focussed our response on two main issues raised by this consultation regulatory status disclosure (Chapter 3) and Skilled Person Reports. Executive summary The disclosure wording for dual regulated firms is lengthy and complex and will not be meaningful for consumers. We recommend that either the reference to the Prudential Regulation Authority (PRA) is removed or that reference is made to the appropriate regulator rather than spelling out both the PRA and the FCA. We have significant concerns about the proposed six month transition period for changing the regulatory status disclosure. The imposition of such a restricted time period will have a disproportionate impact on firms, particularly those who are dual regulated, with little obvious benefit to consumers.

2 The costs to firms of making these changes are significantly higher than the estimates of set out in the cost benefit analysis. Firms estimate that costs could run to upwards of 500k. Firms should be given 12 months from legal cutover to make the necessary changes. This balances the costs and the resources required to make the changes with the limited potential consumer detriment. This is consistent with timescales given to firms for the transition to the FSA in We have concerns about the increased use of skilled person reports (S166) as part of the supervisory process. The scope, cost and number of these reviews has increased considerably. The effect of its increased use is to shift significant regulatory costs from the FSA (and in future PRA and FCA) to the firm with no corresponding reduction to regulatory fees payable by firms. The FSA should incorporate more transparency into the S166 process and demonstrate accountability on the use of these powers as part of the supervisory tool kit. Chapter 3: Proposed changes to regulatory disclosure and use of the regulators logos Q3: Do you have any comments on any of the proposed updated status disclosure wording? The disclosure wording proposed for dual-regulated firms is lengthy and complex. We question how meaningful the proposed wording will be for consumers, particularly the reference to the Prudential Regulation Authority (PRA). Many consumers may not have heard of the FSA, let alone understand references to the PRA and FCA. In the FSA survey Consumer awareness of the FSA and financial regulation February 2012, the level of awareness of the FSA was found to be just over one third of respondents. This level has remained relatively static since the existence of the FSA. It is a hard enough task to raise awareness of a single regulator, and brings into question the benefit of mentioning both the PRA and the FCA. The length of the statement for dual-regulated firms will create design and printing problems, particularly for systems-generated material. This will affect document formats and require IT systems to be changed. All of which will increase costs and the time needed to make the changes. We suggest that the same disclosure is used for all regulated firms. This could be achieved by removing reference to the PRA, for example : Regulated by the Financial Conduct Authority As all firms will be regulated in some capacity by the FCA, the disclosure should only make reference to the FCA. This will also be the most meaningful for retail consumers who are the audience the disclosure is aimed at. Another alternative could be the following: Regulated by the appropriate regulator under the Financial Services Act Either of these disclosures would avoid the difficulties set out above whilst conveying the essential point to customers - that the firms in question appropriately regulated. Our preference is for the reference to the PRA to be removed entirely. 2

3 Simplifying the wording would ease the impact of disclosure changes on firms and provide a workable one size fits all approach to disclosure that works for solo and dual regulated entities. This approach would also resolve problem of complex disclosures in documents that refer to more than one regulated entity within a group as described (see further detail in response to Question 5. Q4: Do you have any comments on our proposal to remove the option for firms to use either the logo of the FCA or PRA? We have no comments. Q5: Do you agree with our proposal for a six month transitional period from legal cutover? We have significant concerns about the proposed six month transition period for changing the regulatory status disclosure. The imposition of such a restricted time period will have a disproportionate impact on firms, particularly those who are dual regulated. A period of 12 months is more proportionate, minimising the impact and cost on firms (as the changes could be absorbed during the annual review process) without creating consumer detriment. This is consistent with timescales given to firms for the transition to the FSA in 2000 and we see no reason why this approach couldn t be adopted for this transition. The proposal significantly underestimates the complexity and volume of work that firms will have to undertake to make the necessary changes, and the time this will take. Changes will be required to a wide variety of documentation on each product, ranging from regular customer communications (such as annual statements, terms and conditions and policy documents), marketing material, web pages and call centre recorded messages. The volume of documents involved will be considerable for many financial services providers. For example, one of our members has over 250 products and each product has a series of documents associated with it. The majority of these types of documents are created using system generated templates. These templates are set up to incorporate the current regulatory disclosure requirements. Alterations will be required to accommodate the proposed changes with the outputs then tested and reviewed. As the proposed wording for dual regulated firms is much longer than the existing disclosure text, the templates will require significant re-engineering as the additional lines of text will distort layouts, for example, moving text across the page or distorting tables. Insurers have a variety of business models which will result in a number of different interactions with the regulators. Within groups there may be certain legal entities that are solely regulated by the FCA whilst others will have dual regulation. Having to use different sets of status disclosure wording for dual or FCA-only regulated firms will prove challenging on literature or in areas where more than one of the regulated firms in the group is mentioned. For example, a firms website or some covering letters could mention different firms within the group, some of which will be dual regulated and some FCA-only regulated. To include both sets of disclosure wording will require a significant increase in space, which will impact on templates and overlays that are currently used. This will increase the implementation costs. Also, where more than one type of regulated firm is mentioned in a communication, requiring more than one type of disclosure wording to be used, it is questionable how useful this will be to customers if, for example, a third of a page is dedicated to status disclosure wording. 3

4 The changes required to IT systems will take more than six months unless disproportionate expense is incurred. The changes will not be a simple cut and paste - the project will require a mapping phase (identifying all the documents and systems, including legacy ones), development phase (making the changes to the programmes, coding, webpages etc) followed by a testing phase to ensure the changes are correct and clear for consumers. The costs to firms of making these changes are significantly higher than the estimates of 100-2,500 set out in the cost benefit analysis. For many firms it is not unlikely that these changes will cost upwards of 500k, and for some firms considerably more. For example: A firm that recently underwent a Part 7 transfer (requiring changes to their documentation) incurred costs of approximately 500,000. Another firm has estimated that for the Life, Protection and Investment arm of their business it will cost circa 1.7m to make the necessary changes to IT systems and between 500k - 1m for changes to customer communications, marketing material as a result of destroying and replacing stock. However, in the latter example above, if the timescales are increased to 12 months, the marketing / communications costs will be halved as the changes could be incorporated into the annual business review cycle. A longer timescale would also help to reduce the amount of obsolete material which would need to be destroyed. The costs and resources required to make the changes within the proposed time limits are disproportionate when weighed against the lack of consumer detriment caused if longer were taken to make the changes. It is questionable to what extent consumers are actually aware of the FSA and its role so they are unlikely to differentiate between financial services authority and financial conduct authority (at least not in the short term). The FCA should focus on real risks to consumers and appreciate that firms are investing significant resources (financial and non-financial) in other major projects such as RDR implementation, Retirement Choices, Solvency II and regulatory reform generally. The consultation recognises that the Bill is still undergoing parliamentary scrutiny and that final rules and guidance may still be subject to change. The final wording regarding status disclosure will not be finalised until the policy statement is issued and it is possible that changes will be made in response to feedback received during this consultation process. As such, it is difficult for firms to initiate any substantive development work in this area until the process is finalised. Additionally, there is still uncertainty about the regulation of investment firms. The HMT consultation A new approach to financial regulation: draft secondary legislation signals that the decision whether to designate an investment firm for prudential regulation will not be fully resolved until next year. We also observe that the proposed approach does not reflect the FSA s commitment to sound environmental management and prudent use of resources as set out in the FSA s Environmental Policy. The proposals will result in the destruction of large volumes of literature which would be reduced if the time period to make the changes were lengthened as firms will be able to wind down stocks. We believe that a sensible proposition is for firms to be given 12 months from legal cutover to make the necessary changes. To minimise any possible consumer confusion there are relatively simple steps that could be taken by the regulator to allow firms to more efficiently transition outputs and literature e.g. FSA/FCA web-pages re-directing consumers to the FCA 4

5 (and explaining the change of regulator) and similar messages on provider/distributor webpages. Chapter 4: Changes to the Supervision Manual (Sup 5): Reports by Skilled Persons Q6: Do you have any comments on our proposals to amend Sup 5? We recognise that this consultation reflects changes to the Skilled Persons powers as a result of the Financial Services Bill, and that this is not the place to comment on the appropriateness of, or necessity for, the new powers. However, we believe this is an opportunity for the FSA to incorporate more transparency into the process and demonstrate accountability on the use of these powers as part of the supervisory tool kit. The ABI has previously expressed reservations about the FSA s increased use in recent years of skilled person reports (s.166) as part of the supervisory process. The scope, cost and number of these reviews has increased considerably, and the FSA s Journey to the FCA document signals the importance of s.166 as a tool for the FCA. The effect of its increased use is to shift significant regulatory costs from the FSA (and in future PRA and FCA) to the firm. This is in the context of a marked increase in regulatory fees for insurance firms over recent years. FSA fees for insurers have risen from 59.9m in 2007/08 to the 127.1m being proposed for 2012/13. We believe there needs to be a stronger commitment by the regulatory authorities over future cost control, and s.166 s should not be used where in-house supervision or enforcement practices can reasonably be deployed. Over-use of this tool also contradicts the second regulatory principle; to ensure that any burden imposed on a person should be proportionate to the benefits. In addition, we are concerned that if this trend continues under the FCA this may exacerbate the risk of a loss of in-house understanding of individual firms. The regulators should be more transparent about the s.166 process, particularly surrounding the assessment of the appropriateness of a s.166 report for a particular interaction with a firm. We are also concerned about what appear to be an increased use of quasi s.166 requests. Members have reported that, in some circumstances, it has been recommended to a firm that they obtain evidence of independent assurances about a particular issue. This is interpreted as an expectation on the firm to commission and pay for, an independent review with the implication being that if they don t do so a s.166 report will be commissioned by the regulator. In addition to the data the FSA publishes on the number of s.166 s commissioned the FCA/PRA should report on: the number of occasions they directly appointed a skilled person the number of occasions s.166 is used to collect information from a firm what circumstances the s.166 was used in (enforcement/diagnostic/monitoring etc) objectives of review and whether achieved breakdown of costs The criteria for when a s.166 can be commissioned is extremely broad, making it difficult to ascertain in what circumstances the regulator will use the tool. Overall, we would expect s.166 powers to be used very rarely, and the new powers to be used even less frequently. The FSA (and in future the FCA) has a number of regulatory tools at its disposal, and the majority of regulatory oversight should be well within the capability of the supervisory teams. For example, if there is a need for the regulator to check adherence to a remedial action plan 5

6 the regulator could require Significant Influence Function (SIF) attestation / specific assurances from the relevant approved person, or require detailed evidence from the firm rather than commission a s166. If the use of s166 continues to increase, the FCA should seek to increase internal capability to ensure the majority of supervision can be kept inhouse. The proposed guidance in SUP 5 sets out the circumstances in which the regulator may choose to directly appoint a skilled person. The criteria are extremely broad and should be more tightly drawn. For example, what circumstances do the FSA envisage being too sensitive for the firm to appoint a skilled person themselves? The FSA should develop these criteria further in consultation with the financial services industry, as we know the growing concerns about the use of s.166 powers extend beyond insurers. We are aware that the FSA is in the process of developing a Skilled Persons Panel for use when the FCA directly appoints a Skilled Person. We understand the FSA s expectation is that members of the panel should be used by all firms when they nominate a Skilled Person. The intention is to deliver an open and transparent approach to the appointment and approval of Skilled Persons, and a consistent and efficient process. Firms understandably have concerns around about the panel as there has been no stakeholder involvement in its development. It would be helpful for firms to receive reassurances about the framework for panel membership. For example, how will the quality of panel members be assessed, what controls are in place to prevent conflicts of interests and how will the on-going effectiveness of the panel will be monitored? As part of any monitoring process, we believe there should be a formal feedback mechanism for firms who have used the panel to provide their views on the effectiveness of the process and the quality of the Skilled Person. As the intention is to provide a more efficient process we would expect to see analysis from the FSA/FCA on the impact on the total costs of s.166 reports as a result of the appointment of the panel. If the overall costs of s.166 reports do not fall it would bring into question the effectiveness of the panel. We would welcome further engagement with the FSA (and FCA) on this issue and how it fits with the overall supervisory approach for the FCA, including the objectives of the Skilled Person Panel. It is challenging for firms to gain a full picture of the intended approach as it has been spread across a number of FSA publications. Providing a joined up narrative may help to alleviate many concerns around how and when the process will be used. We also hope that our concerns surrounding the transparency of the process are also considered as part of the FSA s discussion paper on transparency, which we understand will be published in the new year. 6