FS regulatory affairs newsletter – Q4 2023
In this instalment of the FS regulatory affairs newsletter, our experts present their analysis of regulatory developments of the fourth quarter of 2023.
Smarter Regulatory Framework - the Insurance Distribution Directive (IDD)In our Q3 update, we covered the FCA’s consultation (CP23/19) on the proposed changes to its sourcebooks to replace provisions of EU regulations that were due to be repealed. The consultation closed and the final rules have now been confirmed in the FCA’s policy statement (PS23/18). The changes cover:
The changes will come into force on 5 April 2024. |
What management should considerThe Handbook changes are mainly style-related changes needed to ensure the current regulatory regime remains in place following the repeal of certain EU regulations. Firms that are already compliant with the IDD will not need to take any specific action. Management may need to consider differing requirements for products distributed outside of the UK if there are any changes in the future. Management should refer to the current version of the Handbook when changing distribution arrangements or product information to make sure they remain compliant. |
Solvency II – Considerations for year-end 31 December 2023The final decision on the Solvency UK regime is anticipated in 2024, with a staggered approach to implementation. The PRA has now confirmed the changes to be implemented on 31 December 2023 ahead of the final decision. These include:
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What management should considerFor further information on how best to prepare for the implementation of Solvency UK refer to our article on Solvency II Reforms – what to do next. The Matching Adjustment reforms will be implemented in June 2024, giving firms time to prepare and take advantage ahead of year end 2024. The remaining reforms such as internal models, TMTPs, and reporting templates will be implemented on 31 December 2024. Therefore, managing your time effectively over the next 12 months is crucial in the successful implementation of the Solvency II reforms. |
Third-country branch authorisation and supervisionIn October 2023, the PRA issued CP21/23 aimed at consolidating and providing improved transparency on the authorisation and supervision of overseas insurers that write business in the UK through a third-country branch (TCB). The PRA proposes to introduce a new statement of policy to consolidate and formalise existing policy for the authorisation of TCBs. When assessing the risk of a TCB the PRA considers whether:
Additionally, as part of these updated proposals, the PRA provided further clarity on their risk assessment approach towards TCB’s reinsurance arrangements with a focus on levels of intra-group reinsurance cessions and concentration of reinsurance arrangements. |
What management should considerManagement should consider the implications of the policy on existing and proposed TCB arrangements. The consultation period closed on 11 January 2024 with the issue of the final policy anticipated in Q2 2024. |
Fair value data and warning to actWhen the FCA published its insurance value measures data, it also issued letters to insurance firms warning them that action must be taken to deliver good customer outcomes. The letters sought to remind firms of the expectations to make sure they check their products provide fair value. The FCA’s data suggested that Guaranteed Asset Protection (GAP) products may be failing to provide fair value to customers. For GAP, only 6% of the amount customers pay in premiums was paid out in claims. The FCA also mentioned examples where 70% of premiums were paid in commission to parties in the distribution chain, such as motor dealerships. The FCA gave firms manufacturing GAP a three-month ultimation to act. Another product highlighted by the FCA was excess protection (for motor insurance), which also had a low proportion of claims costs to premium written. The FCA expects firms to meet the obligations set under PROD and the Consumer Duty and raised three concerns:
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What management should considerManagement should monitor and assess product governance regularly to meet the purpose of the price and value outcomes. GAP and excess protection firms should take the warning seriously and should have already taken action. Firms can use the FCA’s data in their benchmarking activities and low claims ratios and high commissions, such as those noted, should raise alarm bells. |
Appointed Representatives (AR) reporting and attestationsIn December 2023, the FCA gave a reminder that its AR reporting requirements had gone live, and Principals needed to log into RegData to check when their return was due. Principals need to confirm details of their ARs when completing the annual Firm Details Attestation. The FCA warned of the £250 fee for late returns and possible enforcement action. |
What management should considerManagement needs to make sure that they are up to date with the required returns to avoid any penalties. The information needs to be reported annually and will be a significant undertaking for firms with multiple ARs from which they need to gather information. After making their first submission, Management may wish to consider how they coordinate the submissions, verify the information, and streamline their processes. |
Critical Third Parties to the UK Financial SectorPlease see the Banking newsletter for an update on the proposed changes stemming from CP26/23 that are relevant across financial services. |
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