The abolition of the FSA is just one of several changes that will affect financial services. Others include a new law on bribery, tax increases and Solvency II. We present your regulatory round-up
UK financial services reform:
1. The abolition of the FSA
The government is pressing ahead with abolition of the FSA. The FSA will be wound up under the coalition government’s plans, outlined by chancellor of the exchequer George Osborne on 16 June. The Prudential Regulation Authority (PRA), a newly created subsidiary of the Bank of England, will take over prudential regulation of financial services companies, including insurers. Another new agency, the Consumer Protection and Markets Authority (CPMA), will regulate the conduct of every financial service business. It will oversee the Financial Ombudsman Service, the Financial Services Compensation Scheme and the new Consumer Financial Education Body. An economic crimes unit will take over fighting white-collar fraud.
The main hurdles facing the government are the scale and complexity of the legislation used to set up the FSA. Repealing existing provisions and passing legislation to set up new arrangements could take up to four years, experts have predicted. Another issue is that under the new arrangements, many insurers face having to report to both the CPMA and the PRA instead of just the FSA as happens now.
So what happens next?
The Treasury is due to publish a consultation paper, outlining how the new system will work, before parliament rises for summer recess on 29 July.
2. Class actions
The previous government dropped plans to allow class actions against financial institutions. Provisions in the Financial Services Act enabling class actions were dropped.
What happens next?
The government remains under pressure from consumer group Which? to allow class actions against financial services companies. The name of the new regulator of the conduct of financial services companies – the CPMA – indicates that the government is sensitive to consumer issues.
3. Bribery Act
The Bribery Act, which was passed in April by the previous government, extends the definition of bribery, creating a new strict liability corporate offence and a specific offence of bribing a foreign public official. A recent FSA report found that brokers need to do more to cut the risk of becoming involved in bribery. It concluded that broker firms’ due diligence on, and monitoring of, third-party relationships and payments is weak, leading to increased risk of corruption. The act unifies and strengthens previous legislation.
There are four main offences:
• bribing – the offering, promising or giving of an advantage;
• being bribed – requesting, agreeing to receive or accepting an advantage;
• bribing a foreign public official; and
• a corporate offence, where a commercial organisation fails to prevent persons performing services on its behalf from committing bribery.
The act applies to any bribery that takes place anywhere in the world by any individual or entity with some connection to the UK (including foreign companies with subsidiaries in the UK and foreign subsidiaries of British companies).
What happens next?
The Bribery Act is due to be implemented this autumn, although the timetable may slip depending on other new legislation put forward by the coalition.
European regulation
:1. Solvency II
The European Commission is currently drawing up Solvency II, its main directive covering insurers. The directive is designed to introduce a risk-based way to calculate the capital sums insurers set aside to ensure their solvency. The directive consists of three so-called pillars, covering companies’ capital requirements, risk management processes and disclosure processes. The technical specifications for QIS (Quantitative Impact Study) 5 – the latest in a series of exercises designed to test the impact of the proposed new framework on insurance companies’ day-to-day business – has just been published. The implications of this are that it:
• allows companies to diversify between different lines of business when calculating their capital requirement risk margins;
• allows geographical diversification so that capital can be set aside to cover risks on a cross-boundary basis;
• increases the allowances for non-proportional reinsurance like catastrophic losses; and
• reduces the amount capital insurers will have to set aside for volatility in the stock market.
What happens next?
In August, insurers will be invited to take part in QIS5. The overall Solvency II directive is due to be implemented at the beginning of 2013.
2. Insurance Mediation Directive
The European Commission is reviewing the Insurance Mediation Directive (IMD), which provides the framework for regulation of the broking sector. This exercise represents the first time that the IMD has been reviewed since it was introduced in 2003. The EC is seeking to create a level playing field between how different European countries regulate brokers. It has also said that it wants to achieve greater transparency regarding the disclosure of commission fees, on which the EU’s 27 member states have widely differing policies; in the UK, for instance, commissions need only be disclosed at the customer’s request, while in Scandinavian countries, commissions are banned outright.
What happens next?
A draft directive is scheduled to be published during the autumn for consultation, with a public hearing due in November. The revised directive is expected to go before the European parliament in the first quarter of 2011.
Tax:
1. Insurance Premium Tax
The government announced in the emergency budget on 22 June that the main rate of insurance premium rate will rise. The tax’s higher rate of 17.5% will be increased to 20% on the same date. The higher rate applies to certain specialised areas of insurance, notably travel and some cover for white goods purchases. The increase in the main rate is the first such change since 1999.
What happens next?
The increase in both rates is due to take effect on 4 January 2011.
2. Taxation of foreign branches
The government has promised legislation to reform the taxation of companies’ overseas subsidiaries. It says the changes to the Controlled Foreign Companies (CFC) rules, which govern the taxation of subsidiaries, are designed to boost UK competitiveness while protecting the government’s tax base. The spur for reform of the CFC rules is an exodus of UK companies, including insurers, to overseas jurisdictions. The government has also announced a review of the taxation of companies’ foreign branches.
What happens next?
Changes to the CFC rules will feature in the 2013 Budget. IT
