FCA confirms proposals to prohibit “price-walking”

The FCA’s Final Report on general insurance pricing practices concludes that retail home and motor insurance markets are not working well for all consumers and confirms proposals to prohibit “price walking”.

The FCA’s reforms include the following key changes:

  • Firms will be prohibited from imposing a “loyalty penalty” on customers at renewal of their policy.
  • This prohibition will extend to products sold alongside insurance cover.
  • Manufacturers and distributors will be required to consider whether their products represent “fair value” for customers.
  • Further measures will aim to stop practices that act as barriers to switching.
  • New regular reporting requirements will be introduced to help the FCA’s ongoing supervision of home and motor insurance markets.

The period for responding to FCA Consultation Paper (CP20/19), which sets out its detailed proposals, closed at the end of January and the FCA intends to publish its response in Q2 2021. New rules are planned to take effect four months later.

Our summary of the FCA’s findings, proposed remedies to address failings in these markets and practical points for firms can be found here.

Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633

 

Beyond Brexit – what now for insurers’ legacy business?

As expected, the terms of the trade deal agreed between the UK and the EU on 24 December 2020 mean that Solvency II passporting rights are no longer available to UK insurers wishing to conduct insurance business in the EEA.

For UK insurers with policyholders in EEA States, this creates a particular concern that they will no longer be licensed to service those policies, including paying claims, unless they have established an authorised branch in each country. An alternative approach, and that which has been adopted by many insurers, has been to transfer the policies to an EEA carrier.

Post-Brexit, the risk to EEA policyholders of being unable to claim under policies held with UK insurers highlights the importance of understanding limits on individual state discretion in this area.

Summary

In our view, the argument that “expat business” (i.e. policies that were sold in the UK to policyholders who subsequently move to the EEA) is not cross-border business, and so is not affected by loss of passporting rights remains a valid one. This means that an EEA authorisation should not be required to continue servicing this type of policy.

However, it is also important to understand that EIOPA’s February 2019 recommendations to the insurance sector on Brexit (see our blog post for discussion) are not binding. Individual states are free, therefore, to apply the rules differently, to the extent that it is possible to diverge from other states under EU law. For example, our blog post dated 15 November 2019 describes the approach taken by France to the post-Brexit servicing of policies held by UK expats.

Finally, a number of EEA States have introduced run-off regimes to mitigate the impact of UK insurers’ loss of passporting rights from the end of the transition period. Each state’s regime is different, though, requiring specific legal advice to be taken in each case as to their effect.

EIOPA recommendations – February 2019

EIOPA’s Brexit recommendations contained the following guidance on legacy business:

  • EEA States were encouraged to apply a mechanism for the run-off of EEA business by UK insurers who lose their passporting rights or require those insurers to take immediate steps to become authorised.
  • EEA States were also encouraged to recognise that, whilst UK insurers should not be able to write new business (including any renewals, extension or increase of cover) without obtaining a suitable EEA authorisation, policyholders who exercise an option or right in an existing policy to start taking their pension should not be prejudiced.
  • Where a policyholder is habitually resident in the UK at the date of entering into a life insurance contract but moves to the EEA afterwards, national authorities should take this into account in their supervisory review.
  • National authorities should take the same approach to those classes of non-life business where the risk is treated by Solvency II as situated in the state of an individual’s habitual residence (or the state of a legal person’s establishment).

The recommendations suggested that a distinction should be drawn between legacy business that was written from the outset on a cross-border basis (“cross-border business”) and expat business.

 Expat business

It is implicit in EIOPA’s recommendations that it takes the view that the state of the risk/commitment under an insurance contract is fixed from the date a policy incepts and does not change if a policyholder subsequently moves his habitual residence (or establishment) from the UK to an EEA State. Applying this approach, a UK insurer that continues to pay claims after a UK policyholder relocates from the UK to an EEA State is not carrying on cross-border business and, under the pre-Brexit regime, did not rely on passporting rights to make those payments. Post-Brexit, the same insurer should, therefore, be able to continue to pay claims into that EEA jurisdiction without needing to obtain a local authorisation.

Equally, a UK insurer that meets its obligations to expat policyholders who exercise an option existing under their policy e.g. to exercise drawdown rights should not require an EEA authorisation to do so.

In our experience, most, if not all, UK insurers take the same view on this as EIOPA. They have not, as a consequence, included policies held by UK expats in Brexit-driven Part VII schemes transferring policies to an EEA carrier. The same issue arises, of course, in relation to moves by UK policyholders to non-EEA countries and it would certainly come as a surprise to UK insurers to find that they were unable to continue paying claims in those cases.

Cross-border business

By contrast, EIOPA’s recommendations suggest that the servicing of policies that were written before Brexit on a cross-border basis will require an EEA authorisation to replace passporting rights that are currently relied upon. In practice, consistent with this view, we understand that most policies in this second category have been transferred to an EEA insurer before the transition period came to an end on 31 December 2020.

Where a Part VII transfer completed before the end of the transition period, a UK insurer has no need to rely on any of the run-off regimes that have been put in place by a number of EEA states. The transitional relief provided by these regimes may, however, be important for:

  • firms who have begun the Part VII process but not completed the transfer of policies before 31 December 2020; and
  • firms who have decided not to transfer their cross-border business to an EEA-authorised insurer, perhaps because there are very few of these policies involved or the policies have a very short tail.

One remaining concern, though, is that firms falling into these two categories may end up with a “gap” in authorisation arising from the limited nature of the run-off regimes established by EEA authorities.

PRA guidance – February 2020

In February 2020, the PRA published guidance for UK insurers on their ability to service EEA liabilities once the Brexit transition period came to an end on 31 December 2020. In our view, the guidance is consistent with the view that expat business can continue to be serviced from the UK without an EEA authorisation.

However, the PRA did warn firms that do need an EEA authorisation to service their cross-border business that run-off regimes established by a number of EU authorities to ensure ongoing service continuity in relation to EU liabilities in a “no deal, no transition” scenario may not also apply from the end of the transition period. Firms who were intending to rely on those transitional regimes (as a temporary or permanent solution) were, therefore, advised to undertake a thorough analysis of their expected run-off profile, and to discuss their proposed approach with the relevant EU authorities. (The letter expressly referred to EU authorities and EU liabilities but should, in our view, have applied more widely to EEA authorities and EEA liabilities, consistent with the scope of the Solvency II regime.)

In practice, a number of EEA States have introduced run-off regimes to enable UK insurers to continue paying claims now that the transition period has come to an end. In Ireland, for example, UK insurers and intermediaries that satisfy conditions for entering into its temporary run-off regime are permitted to service their existing portfolio of contracts for a maximum of 15 years. The equivalent regime in Italy is not time-limited.

FCA guidance – December 2020

More recent FCA guidance for life companies and for general insurers (again issued before the end of the transition period) noted the approach taken by EIOPA to expat business but recognised that EIOPA’s recommendations were not binding on EU states. The FCA urged UK insurers with legacy business to engage with relevant national regulators whilst being guided in their decision-making by the need to secure appropriate outcomes for consumers.

It is far from clear what an insurer should do if regulation and customer interests conflict although the FCA’s comment that it would be “a bad outcome for a consumer not to receive the payment of a valid claim or any other payments they’re entitled to” suggests that firms must find a way of fulfilling their obligations to policyholders if at all possible. Other options for firms include compensating policyholders for the loss of benefits caused by local law restrictions or removing exit charges if a policyholder chooses to end the policy because of limitations e.g. on exercising rights or options.

For new business written after the end of the transition period, the FCA suggested that firms may need to spell out any limitations of the contract at sale.   This may include making it clear to new policyholders that moving to the EEA may affect their ability to benefit fully from their cover albeit that the position may change from state to state. For example, customers in some EEA states may lose the benefit of rights or options under their contract because an insurer lacks a local authorization.

What is clear in relation to both legacy and new business is that firms need to communicate with customers and keep them informed of any new developments that may affect their enjoyment of their policies.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

FCA consults on approach to authorising international firms

The FCA has published a consultation paper (CP20/20) describing its approach to the authorisation of international firms.  In the context of Brexit, the FCA’s comments will be relevant to firms (including insurers and insurance intermediaries) who have established EEA hubs to mitigate the loss of passporting rights, while continuing to conduct some of their activities through a UK branch.  In most cases at least, these firms will maintain their authorisation in the UK from the end of the Brexit implementation period by entering the Temporary Permissions Regime.  After that, they will require full authorisation in the UK which will bring the FCA’s guidance into play.

Key points for firms include:

  • UK presence: The FCA expects firms to have an establishment or physical presence in the UK (i.e. a UK “branch”).  This will, of course, be a relevant consideration for EEA firms that currently operate on a services-only basis in the UK but whose activities in the UK nonetheless will require authorisation once passporting rights fall away.  The need for a UK branch is, of course, consistent with the practice adopted by the PRA to international insurers.
  • Branch vs subsidiary: The FCA will be looking to see how firms mitigate heightened risks that come with conducting business through a UK branch, as compared with establishing a UK-incorporated subsidiary. We can expect the FCA to put pressure on an international firm to convert its branch to a subsidiary where it believes that operating through the branch poses an unacceptable level of risk.  Again, of course, this would be consistent with the approach that has already been taken by the PRA to insurers.
  • Cross-border services:  In assessing the risks of harm, the FCA will look at both (a) risks associated with activities being undertaken through a branch, for example, because it is more difficult for the FCA to take action or because of overlapping regulatory regimes in the home state and the UK; and (b) the nature and scale of activities the international firm intends to conduct from outside the UK which may raise different concerns e.g. FSCS cover may not be available.
  • Risks of harm: Three broad categories of harm identified in the paper are retail harm, client asset harm and wholesale harm, although the FCA will also consider sector and business specific risks as part of its assessment. The FCA will also consider home state regulation and supervision, together with international co-operation.
  • Limitations and requirements: The FCA may impose limitations or requirements as part of any approval given to an international firm if it believes it necessary to ensure that the firm will meet conditions for authorisation on an ongoing basis.  For example, it may limit the number or category of customers a firm can deal with.

Our longer briefing on CP20/20 can be found here.

The consultation will be of particular interest to insurance intermediaries that are only regulated by the FCA in the UK.  For insurers, the FCA’s comments supplement PRA guidance already issued on this topic (see SS44/15 and SS2/18).  The deadline for commenting on CP20/20 is 27 November 2020.

Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

 

 

 

Upcoming webinar: Financial services – Update and preparations for no-deal

With UK/EU deal negotiations in the balance and a no-deal scenario still possible, a panel of experts from Herbert Smith Freehills, the Financial Conduct Authority and McCann FitzGerald (for the Ireland perspective) will review the current state of play on Brexit and what comes next for the regulation of cross-border financial services.

The webinar will take place between 2-3pm on 23 July 2020. Topics covered will include:

  1. Free trade agreement negotiations and equivalence assessments: stocktake
  2. UK and EU – no deal impact:
    • Equivalence and cooperation agreements
    • Position for EU27 firms and UK  – TPR, temporary transitional powers
    • Position for UK firms and EU27
    • FCA expectations for firms
  3. Ireland:
    • Position for UK firms operating in Ireland
    • Concerns for Irish firms in UK market
  4. What firms should be doing next

WHAT DO I DO IF I AM INTERESTED?

REGISTER – Please register here. We will then send you an email with a link to join the webinar and confirmation of your log-in address.

If you have queries about the webinars or the registration process please contact webinars@hsf.com.

UNABLE TO ATTEND ON THE DAY?

Please note this webinar will be delivered in a live format only and will not be available on demand.

If you would like to keep up-to-date with our latest Brexit analysis, please subscribe here to our Beyond Brexit blog.

Speakers:

Greg Sachrajda – Head of International Delivery, Financial Conduct Authority 
Zertasha Malik – Head of International, Financial Conduct Authority
Darragh Murphy – Partner, Financial Services Regulation, McCann FitzGerald
Clive Cunningham – Partner, Financial Services Regulation, Herbert Smith Freehills
Lode Van Den Hende – Partner, Competition, Regulation and Trade, Herbert Smith Freehills
Katherine Dillon – Of Counsel, Financial Services Regulation, Herbert Smith Freehills
Emma Reid – Associate, Financial Services Regulation, Herbert Smith Freehills

COVID-19: Governance: PRA and FCA confirm expectations for regulated firms under SMCR (UK)

The PRA and FCA have set out their expectations for UK-regulated firms under the Senior Managers and Certification Regime (“SMCR“) in the light of the COVID-19 outbreak.

A joint statement from the PRA and FCA applies to dual-regulated firms (the “Joint Statement“), while the FCA has published a separate statement for solo-regulated firms (the “FCA Statement“).

Some differences in expectations as between solo and dual-regulated firms are highlighted below.

Next steps

Firms should:

  • Ensure responsibility for the response to COVID-19 disruption is clearly allocated to one or more appropriate Senior Managers.
  • Document internally all decisions relating to the interim re-allocation of Senior Management Functions (“SMFs“) and Prescribed Responsibilities (“PRs“) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
  • Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
  • Keep contingency plans under review to ensure they remain up-to-date.
  • Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.

Key expectations

Allocating responsibility for COVID-19 response

  • Firms are not required to allocate responsibility for their response to the disruption caused by COVID-19 to a single Senior Manager. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
  • In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of Senior Managers becoming temporarily absent. Solo-regulated firms should consider doing the same.

Temporary arrangements for SMFs and PRs

SMFs

  • Where a Senior Manager is unexpectedly absent due to illness (or other COVID-19 related circumstances), firms may choose to allocate SMFs to existing Senior Managers. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
  • For solo regulated firms, the FCA intends to issue a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).

PRs

  • The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved Senior Managers wherever possible. Where this is not possible (for example due to other Senior Manager absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
  • All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.

Furloughing staff

  • Both statements confirm that furloughed Senior Managers will retain their approved status during their temporary absence and will not need to seek re-approval.
  • Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for Solvency II insurers) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
  • Firms have greater flexibility in furloughing Senior Managers whose functions are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.

Notification requirements during this period

All firms

All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:

  • unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
  • Senior Managers have been furloughed.

Firms are not required to submit Forms C, D or J in connection with these temporary absences.

Solo-regulated firms

  • Solo-regulated firms will not be required to submit an updated SoR for approved Senior Managers if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.

Dual-regulated firms

  • Dual-regulated firms are still required to update and submit SoRs if there are significant changes “as soon as reasonably practical”. It is acknowledged that this may take longer than usual due to current operational challenges.

No change to the obligation to certify staff as fit and proper

  • Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
  • While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.

Our blog post on the PRA and FCA’s guidance on key workers in financial services is available here, and our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633

COVID-19 Governance: Regulatory impact for insurers

The COVID-19 pandemic is creating significant health, social and economic challenges world-wide, forcing governments and businesses to assess the impact on their people, operations and governance.

Our latest “at a glance guide” considers some of the announcements made to date by EIOPA, the PRA and the FCA.  These cover a range of issues including actions that insurers should be taking to protect customers and employees, encouragement to firms to preserve capital and the extension of reporting deadlines.

Our COVID-19 crisis hub aims to help our clients navigate their way through the many legal and regulatory issues that COVID-19 creates for their businesses.

For regular insurance sector updates, please also subscribe to HSF Insurance Notes.

If you would like to discuss arrangements for support on any of the issues raised by COVID-19, please ask your regular Herbert Smith Freehills relationship contacts, or one of the following members of our insurance team.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

COVID 19 – PRA and FCA guidance on key workers in financial services

The UK Government has published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles, including in the insurance sector, that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).

The PRA and FCA have now published their own guidance, setting out the steps that firms should take.

Identifying KFWs

  • A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets.  The guidance provides a list of example KFWs (PRA) (FCA).
  • KFWs could work for any categorisation of financial institution, including insurance companies and intermediaries
  • Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
  • In the insurance sector, KFWs are likely to include individuals essential to the processing of claims and renewal of insurance policies.

Outsourced functions

  • When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.

 Process

  • The PRA/FCA recommend that the individual designated as Chief Executive Officer under the Senior Managers and Certification Regime (SMF1) (or, if not applicable, an equivalent senior member of the management team) should be accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
  • Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.

Our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621

FCA review of outsourcing by life insurers

This post was first published on our Digital TMT and Sourcing Notes blog.

On 4 March 2020, the FCA published a short set of findings from its review of outsourcing in the UK life insurance sector. Despite the review’s narrow scope, the FCA’s findings are readily applicable to other outsourcing contexts, so regulated firms outside the life insurance sector should be aware of these. The FCA has tied in this review with its current focus on the operational resilience of regulated firms and the customer impacts caused by disruptions. Continue reading

FCA warns CEOs to tackle non-financial misconduct

The FCA has warned CEOs that how a firm handles non-financial misconduct is indicative of a firm’s culture. It is the FCA’s view that embedding healthy cultures includes, therefore, taking steps to address the discrimination, harassment and bullying that remains “prevalent” in firms.

In a ‘Dear CEO’ letter (the Letter), which follows recent incidents in the wholesale general insurance sector, the FCA considers the need for fundamental change in firms’ culture and calls on leaders to bring about that change. Continue reading

FCA publishes finalised guidance on GI distribution chain

The FCA has published final guidance for insurance product manufacturers and distributors involved in the general insurance distribution chain (see FG19/5). The guidance builds on existing FCA rules and clarifies its expectations in respect of product development, distribution and review.

Our latest “at a glance” guide (which can be found here) provides a summary of the guidance, including actions for manufacturers and distributors to consider.

This latest publication is just one of many addressing the FCA’s cross-sector priority of ensuring fairness in pricing and product value. The FCA’s earlier thematic review (TR19/2) (see our previous “at a glance” guide here) warned firms that they needed to do more to protect customers from harm in the way that they design and distribute products. The accompanying Dear CEO Letter was framed as “an immediate call to action” to firms to ensure that customer outcomes were at the heart of every firm’s business model.

 

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2067
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158
Caroline Hagg
Caroline Hagg
Associate, London
+44 20 7466 6311