Insurance Regulation & Accounting

Sarah Jolly

Document

Coming your way…

IR&A ’s timetable is regularly updated to cover as many new developments as possible while also keeping an eye on events as they unfold. The first table is dedicated to the FSA’s agenda for consultations, discussion documents, thematic work or events of interest to insurers for the year ahead. A second table lists developments elsewhere in the UK, Europe and internationally.

Table1: Forthcoming FSA papers and events of interest to insurers

Development	Commercial insurance commission disclosure – new consultation
Date	Early 2008
Detail	The FSA has been troubled by the industry’s response to its concerns over commission disclosure in commercial insurance deals and while it confirmed in December 2007 that it will not introduce mandatory rules to require brokers to disclose commission received to its clients for now, it said further work on the subject would continue in 2008. Independent analysis by CRA International found that the costs of mandating for commission disclosure exceeded the benefits. However, the FSA said it would open a new period of consultation with the industry on measures to improve the quality and consistency of disclosure to commercial insurance buyers and plans to publish a discussion paper in Q1 2008 on the cost-benefit analysis of mandatory disclosure, taking into account wider issues of market efficiency, the potential benefits of more standardised disclosures and the scope for an industry solution. The FSA said it will also begin thematic work looking specifically at conflicts of interest that arise from commission paid by insurers to their brokers. The regulator said it will consult on any changes to the handbook in Q4 2008 with a view to publishing final rules in Q1 2009.
Development	Travel insurance – extension of FSA scope consultation paper
Date	18 March 2008
Detail	Following Treasury confirmation of its decision to extend the regulation of travel insurance to travel agents at the end of 2007, the FSA published a consultation paper on how it will regulate travel agents. The FSA said it aims for a “lighter regime” than IMD requirements as travel insurance sold as part of a holiday package is not covered by the directive. Under the proposed rules, travel agents will be required to have one “approved person” and comply with the FSA’s requirements on client money, professional indemnity insurance and new conduct of business rules for general insurance. Responses to the consultation paper are open until 18 March 2008 and a policy statement is expected in May/June 2008. The FSA said it expects to start accepting applications for new authorisations from 30 June 2008 in time for the new rules to take effect from 1 January 2009. Applications received before 30 September 2008 will qualify for a 30% reduction on application fees. Under an interim authorisation regime provided by the Treasury, firms applying by 15 November 2008 will be able to continue selling travel insurance from January 2009.
Development	International Financial Reporting Standards
Date	Q2 2008
Detail	The FSA has delayed its review of the practical application of IFRS and the implications to its prudential regimes. Originally due to be published at the end of 2007, the FSA will now release a consultation paper in the second quarter of this year, which it said would give it more time to consider “current accounting issues”.
Development	Treating Customers Fairly
Date	March 2008 and December 2008
Detail	The FSA has set two deadlines for retail insurance firms to comply with its Treating Customers Fairly requirements under Principle 6. By March 2008, retail firms selling policies to customers must have the appropriate management information in place to test whether they are treating customers fairly and by December 2008 firms must be able to demonstrate that they are consistently treating customers fairly.
Development	Financial Ombudsman Service – changes to funding
Date	April 2008
Detail	Radical changes to the way the FOS is funded to make it fairer for firms were shelved last year with the FSA and FOS deciding to defer any serious changes until the FOS’s case load stabilizes. A consultation paper, following a review in May 2006 when firms favoured a case fee based approach, was abandoned in favour of dealing with changes in a more modest form as part of the FOS annual budget. Published in January 2008, the annual budget consultation says moving to a funding system based more on case fees “places a greater premium on the ability to predict fairly accurately the number and trend of future cases”. As a result of an expected period of volatility in case numbers, the FOS says it will move “incrementally” towards collecting a greater proportion of its income from case fees. As a first stage, from April 2008, the case fee will rise from £400 to £450 after three free cases per firm, up from the current two.
Development	Disclosure – discussion paper
Date	First quarter 2008
Detail	In October 2007, David Kenmir, managing director of regulatory services at the FSA, revealed that the FSA is interested in “the extent to which we could better achieve our statutory objectives by disclosing more about what we know or think about individual firms”. It wants to look at how increasing disclosures could improve regulatory outcomes across authorisation, supervision and enforcement. The regulator said it expects to come across some “difficult issues”, given the constraints of legislation on disclosure. It will talk to the industry in the coming months with the prospect of publishing a discussion paper in the first quarter of 2008.
Development	Financial Services Compensation Scheme – new retail funding pool
Date	1 April 2008
Detail	New funding arrangements following a two-year review were published in March 2007 and confirmed in November 2007 to pool the resources of all sectors when a loss exceeds the individual sector’s capacity. The total annual capacity of the scheme will be £4.03bn, lower than the proposed £4.4bn owing to reductions in the thresholds for some groups. The new funding arrangements will be in force from 1 April 2008. The FSA has scrapped the idea of a separate pool for wholesale financial services, opposed by the industry, despite what it said were “sound policy reasons” for such a scheme.
Development	Retail Distribution Review – discussion paper feedback
Date	April 2008
Detail	The FSA published a discussion paper in June 2007 on the future of retail distribution after a year of deliberation. It proposed a three-tier system of advisers: two categories of advisers for more complex needs (professional financial planners and general financial advisers) and one group for less complex needs (primary advice service). Its suggestion that professional financial planners should only receive remuneration from customers and not product providers has already caused controversy as has discussion over the use of the term “independence”. The response period closed at the end of 2007, and the FSA has said it now plans to issue an interim statement in April, given the weight of responses, before a full feedback statement in October 2008.
Development	General insurance regulation – new ICOB rules
Date	5 July 2008
Detail	The regulator published a policy statement in December 2007 confirming changes to the Insurance Conduct of Business sourcebook that take effect from 6 January 2008. The FSA says the new regime “is a significant step forward in our programme of principles-based regulation” with the removal of many of the more detailed rules for low risk general insurance products that are not required under the EU Insurance Mediation Directive but the addition of new rules for higher risk protection products: term assurance, critical illness, income protection and PPI. Providers and intermediaries of protection insurance products have six months – until 5 July 2008 – to comply with the new rules. The FSA first announced that it would review the effectiveness of general insurance regulation in September 2005. A consultation paper was published in June 2007 proposing a differentiated regime for low and high risk general insurance products.
Development	Travel insurance regulation
Date	1 January 2009
Detail	HM Treasury has requested that the FSA authorise and regulate travel agents selling insurance as part of its general insurance regime from the beginning of 2009.

Table2: Timetable of major UK, European and global regulatory and accounting developments

Development	European Commission - Insurance Guarantee Schemes
Date	Spring/Summer 2008
Detail	The EC said it will launch a public consultation on the findings of an independent report on the feasibility of mandating for insurance guarantee schemes across Europe in the Spring/Summer of this year. A public hearing is scheduled for 2 June 2008. The Oxera study, published in January 2008, said it is “unlikely” that an EU-wide insurance guarantee scheme will be proposed but said it had identified areas where some of the differences between existing guarantee schemes could be minimized to improve consumer protection. The EC put a decision on whether to raise new legislation (due in the first half of 2006) on hold until the study was completed.
Development	European Commission – Framework directive for Solvency II
Date	2008
Detail	The EC published its framework directive for Solvency II in July 2007, kick-starting the political process that will now ensue. The Council of Ministers and the European Parliament will look at the framework, and the timetable for now estimates about 12-18 months (from mid-2007) before the project hands back to Ceiops to develop implementing measures which the Commission hopes will be in place by 2010 to give firms until 2012 before the measures become effective. Ceiops has begun work on QIS 4 which will be a key target for 2008.
Development	HM Treasury High Level City Group on Competitiveness
Date	During 2008
Detail	The London Insurance Market Review Group, set up as part of the Treasury’s High Level City Group and headed by Lloyd’s chairman Lord Levene, updated the Treasury on its work on the modernisation of the wholesale insurance sector at a special Insurance Summit in November 2007. The High Level Group met for the third time and economic secretary Kitty Ussher said she will hold another meeting with MPs in 2008 to discuss the UK’s principles-based regulatory approach.
Development	Financial Ombudsman Service external review
Date	Early 2008
Detail	The FOS has commissioned Lord Hunt of Wirral to conduct a review on whether it should be doing more to be visible and accessible to the community it serves and whether it is making the most effective use of the information and experience gained from its work.
Development	IASB - Phase II of IFRS accounting for insurance
Date	First quarter 2008
Detail	Work on Phase II started in 2004 and after several delays a discussion paper was published in May 2007, the first output from the IASB on Phase II. The date for responses closed on 16 November, and the period of debate has been nothing if not lively. The IASB will consider the responses during the first quarter of 2008. An exposure draft is expected to follow in 2009 and an insurance standard is not on the cards until at least 2010.
Development	Comité Européen des Assurances – Solvency II conference
Date	6 March 2008
Detail	The CEA is hosting a conference on Solvency II entitled “A window of opportunities for European consumers and industry” with speeches from CEA president Gérard de La Martinière and Charlie McCreevy.
Development	Competition Commission - Inquiry into Payment Protection Insurance
Date	May 2008 (provisional findings)
Detail	The Competition Commission opened a case on PPI at the beginning of 2007, looking at whether any features of the PPI market have an adverse effect on competition, following a referral by the OFT. A final report is due Aug/Sept 2008.
Development	Davidson Review of Implementation of EU Legislation
Date	By end 2007 and by July 2008
Detail	Lord Neil Davidson QC’s review of the UK’s implementation of EU legislation identified the Insurance Mediation Directive as over-implemented in the UK. It recommended that the Treasury should consult on reducing the scope of activities caught by the FSA’s regulatory regime by the end of 2007. In addition, it recommends that the FSA should simplify rules on product disclosure, remove the requirement for insurers to check the authorisation status of intermediaries, reduce and simplify client money rules and reduce prescriptive rules in areas such as training and staff competence - all by July 2008.
Development	EC and Ceiops – review of Insurance Mediation Directive
Date	Changes scheduled for 2008/9
Detail	In its green paper on retail financial services (published at the end of April 2007) the European Commission said it is to review the Insurance Mediation Directive “to make sure it is achieving its objectives of protecting consumers while promoting the single insurance market”. As a first step, Ceiops has been asked to look at the way the directive has been implemented. Ceiops said it intends to develop best practices and/or recommendations to the EU Commission in preparation of any overhaul of the IMD and/or the Luxembourg Protocol. The EC said the IMD could be revised as a result of the review and that these changes could take place in 2008/9. On publishing its report into the competitive practise of business insurance, the commission said it would include disclosure of fees and commission within the IMD review.

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