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Posted in European Union, Market developments, Regulatory and legislative updates, UK

UK: Corporate Insurance Newsletter – December 2018

The Hogan Lovells’ Corporate Insurance Newsletter for December has been published.  This provides a round-up of UK, EU and international regulatory developments relevant to UK based insurance market participants.  In this issue, amongst other items, we cover:

  • Latest Brexit related consultation papers and other material from the HM Treasury, PRA and FCA
  •  Regulation of claims management companies
  • Variety of publications from EIOPA covering the structure of the insurance intermediaries markets in Europe, use of capital add-ons and group supervision and capital management.

 

Posted in Regulatory and legislative updates, UK

UK: Latest on Credit Risk Mitigation

On 10 January 2019, the Prudential Regulation Authority released Consultation Paper (CP) 1/19, setting out certain proposed changes to Supervisory Statement (SS) 17/13 “Credit risk mitigation”.

SS 17/13 was produced to provide clarification on the PRA’s expectations with respect to the recognition of credit risk mitigation in the calculation of certain risk-weighted exposure amounts. The PRA has been reviewing firm practice in the capitalisation of certain secured financing transactions including non-recourse loans (that is, where the lender does not have full recourse to the assets of the beneficial borrower) and CP 1/19 aims to clarify the eligibility of financial collateral as funded credit protection under Part Three, Title II, Chapter 4 of the Capital Requirements Regulation 575/2013 (CRR).

Article 207(2) CRR states that where the collateral is financial collateral, “the credit quality of the obligor and the value of the collateral shall not have a material positive correlation”. However, as the PRA notes, for non-recourse loans the creditworthiness of the obligor can depend materially on the value of the financial collateral.

The PRA has noticed inconsistencies in how firms have interpreted the Article 207(2) requirement and as such, proposes a new chapter to SS 17/13 to clarify how firms should treat collateral with a material positive correlation for the purposes of credit risk mitigation. Continue Reading

Posted in Market developments, USA

US: Federal Reserve previews forthcoming insurance capital rules

In prepared remarks before the American Council of Life Insurer’s Executive Roundtable (Naples, Florida, 9 January 2019), Federal Reserve Board (FRB) Vice Chairman for Supervision Randal Quarles provided the insurance industry with a high-level overview of the FRB’s forthcoming proposal on consolidated capital requirements for insurers supervised by the FRB.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) gave the FRB regulatory responsibilities both for insurance holding companies that own a federally insured bank or thrift and for insurance companies designated as systemically important by the U.S. Financial Stability Oversight Council (so-called SIFIs), the former of which represent approximately 10 percent of the U.S. insurance industry. With Prudential’s de-designation in October 2018, no insurer currently has the SIFI label.

In June 2016, the FRB published an advance notice of proposed rule-making (ANPR) describing two potential regulatory capital frameworks for FRB-supervised insurers: a capital framework, styled as a “building block approach,” to be applied to savings and loan holding companies or bank holding companies with significant insurance activities and a “consolidated approach” applicable to insurer SIFIs.

Click here to read full Client Alert.

Posted in European Union, Regulatory and legislative updates, UK

No-deal Brexit: new publications from HM Treasury and the FCA

HM Treasury published guidance on 8 January 2019 for financial services institutions in a no-deal Brexit situation, updating HM Treasury’s 23 August 2018 technical notice on the financial services regulatory framework in the event of a no-deal Brexit. The guidance is limited to advising UK and EEA firms to take steps to ensure continuity of operations and services post-Brexit. Further detail is provided by way of links to existing FCA publications on preparing for Brexit and the temporary permissions regime (“TPR“).

The transitional no-deal Brexit financial services regulatory framework will consist of the TPR and the recently announced financial services contracts regime (“FSCR“). On 7 January 2019 the FCA and PRA announced that the period for firms to notify the FCA of their intention to enter the TPR had begun and would end on 28 March 2019. The following day, the FCA began consulting on the FSCR, a run-off regime which EEA passporting firms will automatically enter into if they do not enter the TPR or if they enter the TPR but fail to obtain full Part 4A authorisation once within it. The FSCR will last 15 years in respect of insurance contracts.

 

Posted in European Union, Regulatory and legislative updates, UK, Uncategorized

No-deal Brexit: reorganisation and winding up of insurers

Introduction

As part of its planning for a no-deal Brexit, on 30 November HM Treasury published a draft of the Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2018 (the “Draft Regulations“), which have been laid before Parliament, along with explanatory information.

The Draft Regulations will take effect on exit day in the event of a no-deal Brexit. They will amend the UK’s implementation of Solvency II provisions on reorganisations and winding ups of insurers in two ways. First, they will remove the present prohibition on such proceedings being brought in the UK against EEA insurers. Second, they remove the current reciprocal recognition of insolvency proceedings taken in other EEA states. Continue Reading

Posted in European Union, Regulatory and legislative updates, UK

Draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019 published by HM Treasury: Brexit SI

On 21 November 2018, HM Treasury published a draft version of the Insurance Distribution (Amendment) (EU Exit) Regulations 2019, together with an explanatory information document.

The purpose of the Regulations is to correct deficiencies in retained EU law relating to the Insurance Distribution Directive ((EU) 2016/97) (IDD) that arise from the UK leaving the EU, to ensure that the UK’s standalone insurance distribution regime will work effectively. The IDD will not be retained EU law as it is a directive that has already been implemented in the UK by way of domestic law and FCA rules. The Regulations intend to fix deficiencies in the directly applicable EU delegated regulations that have been made under the IDD (that is, Commission Delegated Regulations 2017/2358 and 2017/2359).

Continue Reading

Posted in European Union, Market developments, Regulatory and legislative updates, Spain

Too soon to harmonize EU Insurance Guarantee Schemes?

Insurance Guarantee Schemes (“IGS“) provide last resort protection to consumers in the event that their insurance company becomes insolvent or simply unable to fulfill their contractual commitments.

This sort of protection networks have been made effective through directives in other sectors, such as banking and securities. Nevertheless, a directive has yet to be implemented for the insurance sector and only a few EU countries have IGS systems in place; Spain being one of them, through the institution known as the Consorcio de Compensación de SegurosContinue Reading

Posted in European Union, Regulatory and legislative updates, UK

“No deal” Brexit: UK Government publishes details on draft regulations amending FSMA

On 22 November 2018, HM Treasury published Explanatory Information on the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (the “Draft FSMA Regulations“).

The Draft FSMA Regulations will make amendments to the Financial Services and Markets Act 2000 (“FSMA“) and related legislation to ensure that the UK’s financial services framework continues to operate effectively in a “no deal” scenario. The statutory instrument that will implement the regulations is still in development, but HM Treasury has confirmed that it intends to lay it before Parliament ahead of Brexit, although the changes would not take effect on 29 March 2019 (“exit day“) if there is an implementation period as part of the deal.

Key changes that the Draft FSMA Regulations will make in a “no deal” scenario include:

  • Approved persons/senior managers: the regulations will remove exemptions for EEA firms from elements of the Approved Persons Regime and Senior Managers & Certification where responsibility for that element falls to the EEA home regulator. EEA firms would instead be subject to the same framework as non-EEA firms.
  • Part VII business transfers: FSMA provisions permitting transfers of insurance business from the EEA to the UK or from the UK to another EEA state will be revoked. This will be subject to a saving provision for firms who have already initiated a transfer (which will require the firms to have paid the PRA transaction fee and had an independent expert appointed before exit day).
  • FCA and PRA supervision and enforcement: binding obligations on the UK regulators to consult with EU authorities in connection with changes of control over authorised firms and enforcement actions will be removed (although the UK regulators would retain a statutory ability to co-operate on a discretionary basis).
  • Consequential amendments to regulated activity definitions, including in connection with the proposed “temporary permissions regime”: the regulations will make various amendments to definitions relating to regulated entities, activities and permissions, working in conjunction with the proposed temporary regime that will allow EEA firms operating in the UK via a passport to continue their activities for a limited period after exit day (see our separate blog post here).

Read more here.

Posted in Regulatory and legislative updates, UK

UK: Operational resilience: a PRA priority for insurance

The PRA published an update on its approach to insurance supervision on 31 October 2018. In the update, it introduced a new section on operational resilience.

This comes off the back of the discussion paper published jointly in July 2018 by the PRA, FCA and Bank of England, in which the regulators were very clear that the operational resilience of firms is a priority and “viewed as no less important than financial resilience”.

Sam Woods, Chief Executive of the PRA, has stressed that operational resilience matters more now due to:

  • more consumers accessing banks and insurers digitally and operational failures becoming visible quicker in the age of social media; and
  • the increase of cyber attacks.

This message has been consistent from the regulators. In October 2018, the FCA fined Tesco Bank £16.4m (which would have been £33.56m, but for early settlement and co-operation) following a cyber attack that exploited deficiencies in Tesco Bank’s financial crime controls and debit card payments systems. The fine was issued for failing to exercise due skill, care and diligence in protecting its personal current account holders against a cyber attack – essentially a failure to ensure cyber resilience. In the FCA’s press release, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said that the fine showed the FCA “has no tolerance for banks that fail to protect customers from foreseeable risks.” It can be assumed that the same approach would be taken with insurers.

All firms – big or small – are expected to put plans in place to resume essential and systemically important functions in the event of major disruption. In particular, the regulators expect firms to develop “impact tolerances” and “acknowledge that disruptive events will happen”.

However, having documented plans and procedures in place is only one element of a resilience framework, and firms must ensure also that their personnel understand them and have been appropriately trained in how to implement them.

While the increased use of technology can lead to vulnerabilities if it is not properly implemented, maintained and managed, it is also the case that firms are looking to technology to provide solutions and facilitate resilience. For example, third party cloud solutions may provide a more modern, secure and resilient infrastructure than a firm’s own legacy IT systems, as long as any risks of outsourcing are understood and managed.

The insurance market has argued against proposals for substantially changing recovery and resolution rules for insurers. Insurance Europe, a trade body comprised of insurance associations, asserted current safeguards under Solvency II are sufficient and that overhauling the current rules is unnecessary. See here for full comment by Steven McEwan, partner at Hogan Lovells.

Notwithstanding this, it is clear from the PRA’s updated approach that it will be pushing forward with the development of its supervision of operational resilience for insurers into 2019.

If you would like to discuss this or any related issues, please contact Angela Greenough and Susan McKiernan.

Posted in European Union, Regulatory and legislative updates, UK

UK regulators prepare for ‘No Deal Brexit’ with a Temporary Permissions Regime

HM Treasury has proposed a Temporary Permissions Regime (“TPR“) as a temporary measure to replace the passporting regime in Schedule 3 and 4 of the Financial Services and Markets Act 2000 (“FSMA“) in the event of a no-deal Brexit. The legislative framework for the TPR is found in the EEA Passport Rights (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (SI 2018/1149), enacted on 6 November 2018.

Under the TPR, EEA firms which currently operate in the UK under the FSMA passporting regime may, after exit day, be treated as if they had domestic authorisation under Part 4A of FSMA to carry on the same regulated activities they currently carry on. The TPR is an opt-in regime: firms must, between 7 January and 28 March 2019, either make an application for authorisation under Part 4A of FSMA or notify the relevant regulator.

Notably, the TPR is a one-way street: it will enable EEA firms to continue to operate in the UK, but it will not enable UK firms to continue to operate in the EEA. At the moment there is no indication that the EU or individual member states generally are considering implementing their own reciprocal regimes.

In August, the Financial Conduct Authority (“FCA“) and the Prudential Regulation Authority (“PRA“) published papers outlining their approach to implementing the TPR.  On 11 October 2018 the FCA published a consultation paper on the TPR for inbound firms and on 25 October 2018 the PRA published a similar consultation paper and an information webpage.  Details of the proposed changes are described below. The FCA’s proposed changes will be relevant to both insurers and insurance intermediaries (“firms“) unless specified otherwise, but the PRA’s proposed changes will only be relevant to insurers.

To continue reading, click here.