The Consumer Perspective Chaired by Stephen Mann, Police Mutual
• • • •
Bob Martin, Financial Conduct Authority James Daley, Fairer Finance David Jackman, Into The Clearing Major General Sir Sebastian Roberts and Paul Koronka, The Military Mutual
Changes to the Approved Persons Regimes for (re)insurers A presentation to:
AFM Annual Conference 12th October 2015 Presented by: Bob Martin Supervision Technical Specialist (Insurance Sectors)
3
Some background
4
•
Organisation charts
•
Employment contracts
•
Job descriptions – accountabilities and responsibilities
•
Performance Management/Appraisal documents – for individuals: objectives (including L&D), monitoring/on-going review and update, appraisal, for the firm: succession plans, L&D challenge
•
Personnel files
What firms do the revisions impact ? •
PS15/21 Changes to the Approved Persons Regime for Solvency II firms: final Rules published (13th August 2015) – applies to UK
insurance and reinsurance firms, including branch operations within scope of Solvency II (S2), and Lloyd’s Managing Agents
•
CP15/25 Changes to Approved Persons Regime for insurers not subject to Solvency II [NDFs] – (also published on 13th August 2015) - the consultation period closes 12th October 2015 - applies to UK insurance and reinsurance firms outside the scope of S2 with the exception of Large NDFs, i.e. Large NDFs are those with assets £25m or greater. Large NDFs are required to adhere to PS15/21.
In making the proposals for the NDFs as set out in the CP we aim to be consistent with our rationale for the changes to the regime for S2 firms, but to apply proportionality to recognise both the nature, size and complexity of the firms and the number of consumers they have in relation to the market as a whole
5
Why were changes necessary?
6
•
Important part of our overall drive to raise standards of individual conduct across the financial services industry
•
These rules take into account: –
Provisions in the Financial Services (Banking Reform) Act 2013 [“the Act”] that apply to insurers;
–
Changes that the PRA are making to their approval regime for these firms; and,
–
The requirements in S2 around the governance of firms and the fitness and proprietary of key function holders within them
Context for changes to APR for Solvency II firms •
In addition to provisions aimed at supporting the financial strength of firms, S2 directive includes provisions requiring firms to have a clear allocation of responsibilities, and to ensure key individuals are fit and proper to perform their roles
•
Our revised Approved Persons Regime (APR) supports fulfilment of these requirements, which in turn support our aim to ensure high standards of personal conduct and accountability in all areas of financial services
•
The Conduct Rules codify, basic, common sense standards of good conduct
The PRA has introduced its Senior Insurance Managers Regime (SIMR) in parallel and the FCA’s revised APR ‘dovetails’ with this. The SIMR provides a regulatory framework for similar standards of fitness and propriety, conduct and accountability to be applied to individuals in positions of responsibility at (re)insurers, as for banks and large investment firms.
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What is covered by PS15/21
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•
Changes to the scope of the FCA’s approved persons regime (“APR”)
•
Changes to our fitness and propriety assessments of candidates for FCA regulated Significant Influence Function (“SIF”) role
•
New Conduct Rules for approved persons in S2 firms
•
Changes in governance arrangements
How does the SIMR differ from the banking /RAP SMR? •
No presumption of responsibility for senior managers
•
No criminal sanctions for managers of failed institutions
•
No ‘certification’ required from firms for their employees
•
Not a condition of grandfathering for firms to submit Scope of Responsibilities* (SORs) for individuals. * The term Statement of Responsibilities is used for RAPs
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Implementation timeline
Final rules published 13th August 2015
June
July
Aug.
Sept.
Grandfathering notifications to be submitted by 8th February 2016
Oct.
Nov.
Dec.
All SIFs/SIMFs grandfathered into the new regime must have a documented Scope of Responsibilities by 7th September 2016
May
June
July
Aug.
Sept.
Oct.
Jan.
Feb.
March
April
2016 Governance Maps to be in place 1st Jan 2016
Nov.
Dec.
2017
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Senior Insurance Managers Regime commences 7th March 2016
Jan.
Feb.
March
April
SIMF/SIF Controlled Functions in the new regime
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Grandfathering of SIF holders
12
•
An individual who has been approved under the current APR and who is moving to an equivalent function will not need to apply for fresh approval, but the requirements of the new regime will apply to them
•
Where an individual has one of the new FCA functions but also has a new PRA function an overlap rule will apply
•
Where CF1s (Director) not otherwise grandfathered to any PRA SIMF role, they become an FCA CF1 and the grandfathering form treats that as an automatic notification unless a withdrawal Form C is submitted
Grandfathering Mapping Rules Current APR Functions
Eligible Grandfathering: PRA functions
Eligible Grandfathering: FCA functions
CF1 Executive Director
SIMF2 Chief Finance Function SIMF4 Chief Risk Function SIMF5 Head of Internal Audit SIMF7 Group Entity Senior Manager SIMF20 Chief Actuary SIMF22 Underwriting Function SIMF23 Underwriting Risk Oversight Officer (Lloyds) SIMF19 Head of Third Country Branch (Third country branches only)
CF1 Executive Director
CF2 Non-Executive Director
SIMF7 Group Entity Senior Manager SIMF9 Chairman SIMF10 Chair of the Risk Committee SIMF11 Chair of the Audit Committee SIMF12 Chair of the Remuneration Committee SIMF14 Senior Independent Director
CF2a Chair of Nomination Committee CF2b Chair of With Profits
CF3
SIMF1 Chief Executive
N/A
Chief Executive
SIMF19 Head of Third Country Branch (Third country branches only) CF5
13
Director of an unincorporated association
SIMF2 Chief Finance Function SIMF4 Chief Risk Function SIMF5 Head of Internal Audit SIMF7 Group Entity Senior Manager SIMF20 Chief Actuary SIMF22 Underwriting Function SIMF9 Chairman SIMF10 Chair of the Risk Committee SIMF11 Chair of the Audit Committee SIMF12 Chair of the Remuneration Committee SIMF14 Senior Independent Director
CF5 Director of an unincorporated association CF2a Chair of Nomination Committee CF2b Chair of With Profits
Grandfathering Mapping Rules (Cont.) Current APR Functions
Eligible Grandfathering: PRA functions
Eligible Grandfathering: FCA functions
CF10 Compliance Oversight
N/A
CF10 Compliance Oversight
CF10a CASS Oversight
N/A
CF10a CASS Oversight
CF11 MLRO
N/A
CF11 MLRO
CF12 Actuarial Function
SIMF20 Chief Actuary
CF51 Actuarial Conduct function (Third Country branches only)
CF12a With-profits Actuary
SIMF21 With-profits Actuary
N/A
CF12b Lloyd’s Actuary
SIMF20 Chief Actuary SIMF23 Underwriting Risk Oversight Office (Lloyd’s)
N/A
CF28 Systems and Controls
SIMF2 Chief Finance Function SIMF4 Chief Risk Function SIMF5 Head of Internal Audit
CF28 Systems and Controls (ISPVs and Third Country branches only)
CF29 Significant Management
SIMF7 Group Entity Senior Manager SIMF20 Chief Actuary SIMF22 Underwriting Function SIMF23 Underwriting Risk Oversight Office (Lloyd’s)
CF29 Significant Management
CF30 Customer Function
N/A
CF30 Customer Function
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Our approach to Non-Executive Directors
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The PRA and the FCA have taken a policy decision to only designate certain nonexecutives as Senior Management Insurance Functions/Significant Influence Functions.
•
These roles are collectively referred to as Approved NEDs (A-NEDs) as they have specific responsibilities.
•
They are subject to FCA pre-approval.
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All other non-executives are referred to as Standard NEDs (S-NEDs) as they have no specific responsibilities and are not in the FCA regime. They are “Notified NEDs” for PRA purposes.
•
Although the FCA is not prohibited from meeting S-NEDs there is no direct regulatory locus for the FCA and any concerns regarding such an individual’s competency or conduct would have to be raised with the firm (most likely the Chairman).
Governance Maps and Scope of Responsibilities
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Firms are required to draw-up Governance Maps for the business as a whole and Scopes of Responsibilities for each individual SIMF/SIF
•
We have not prescribed the format of the Responsibilities Map and would expect their complexity to vary according to the individual firm. Firms must have a Governance Map in place by 1 st January 2016.
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They are not required to submit Governance Maps to the PRA/FCA, but must be available on request.
•
We have drawn up a standard template that firms must use to construct their Scope of Responsibilities (SoRs). All grandfathered SIMFs/existing SIFs need to have SoRs in place by 7 th September 2016
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A Scope of Responsibilities must be submitted with all new applications for approval for SIMF and SIF roles under the new regime.
Changes to APR for NDFs [1 of 2]
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•
Proportional approach adopted in proposals that are in the consultation period – CP15/25 open until 12th October 2015 – so what follows still currently has the status of proposals
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Large NDFs subject to same regime as S2 firms
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All NEDs removed for the scope of reformed SIF regime
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Scope of responsibilities to be in place for all SIFs by 7th March 2017
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Conduct rules are same as for S2 firms but with references SM 1-4 being replaced by SIF 1-4 for the NDFs
•
Light touch approach to grandfathering
•
Changes to SYSC to reflect the PRA approach to apply S2 derived governance arrangements to large NDFs
Changes to APR for NDFs [2 of 2] •
PRA reducing scope of mandatory approval for (small) NDFs by requiring them to have a minimum of one individual approved as a Senior Insurance Manager
•
As FCA objectives are different our approach is broadly to maintain the current scope of FCA regulation for executive functions: – – – –
–
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Remove all NEDs from reformed SIF regime other than Chairman, SID and Chairs of key committees CF8 oversight and apportionment function dis-applied but responsibility for allocation of responsibilities to be given to a senior approved person SOR documents to be in place by 7th March 2017 at the latest Grandfathering of existing CFHs into the new regime on 7 th March 2016 – new approvals not required for these individuals provided they are moving to an equivalent function, however notification to be sent to regulators setting out which individuals will be moving to which functions SOR documents to be kept for 6 years, in line with the current rules in SYSC
Questions?
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Corporate Maturity Association of Financial Mutuals David Jackman www.intotheclearing.com
David Jackman
Regulation
- Industry training
Ethics / Culture Governance
Sustainability / Outcomes / Community ICT / ICTA tutor Visiting Professor CEO Skills Council FSA Head of T&C Head of Staff Training IMRO Awarded IIP + set up MSc Head of Education CISI Stock Exchange exams Teacher 11-18 Double distinction in Education, Cambridge - assessment Banking
BBC TV + Radio The Ethical Space consulting The Ethics Foundation The Ethics Mark® Ethics Framework - TCF /RDR Head of Ethics FSA Chair of FSA Ethics Committee
Board evaluations 3 NEDs - Pensions - Debt Management - Insurance IOD / MBAs Governance Index in FT Resources Consulting Higgs / Walker Reviews
Cambridge Judge Inst. The Compliance Revolution 2015 ISO Conference ISO 37101 Lead Chair /author of BS8900/4 London Olympics 2012
5 recent themes in regulation 5 stages of regulation Start-up Crises Expansion Sustainable Outcomes 1986 -1992 1992-1998 1998- 2007 2008 - 2013 2013- future
5. Community
Vulnerable consumers
4. Outcomes Effectiveness / maturity
3. Governance Walker
2. Culture
TCF /Conduct
1. Ethics
Values/ principles/ intent
Corporate Maturity 3. Governance
2. Culture
4. Outcome Corporate Maturity
1. Ethics
5. Community
• Sound ethics / values … • embedded in corporate culture and conduct … • led and overseen by ‘good’ governance … • ensuring positive consumer outcomes … • contributing to sustainable communities
Maturity – a direction of travel Values and culture of firms Minimum Standards
§ § § §
Hopes never caught Does as little as can get away with Cost controls over-rule Tries to abdicate decisions and responsibilities to consultants
Compliance culture
§ § § § § §
Unthinking, mechanical compliance By the book – black or white Tell me what I have to do Business prevention Bureaucratic costly Culture of dependency
Business improvement
§ § § §
Risk focused, self policing Some buying in at senior level Ethos integrated into most business processes Seen as assisting business and reputation
Values-led § Internalize core values § Spirit not just letter § Values focused, goes beyond rules, not just compliance § Well developed individual responsibility and a sense of involvement by (all) staff § Focus on prevention § Continued reassessment and learning culture § Awareness and discussion of ethical considerations at senior and all levels
Compliance role § § § § §
Reply to queries Relationship arms length Some monitoring files Firefighting Use enforcement fear
§ § § § §
FSA interpreter Box ticking Updating / doing reading for firm Core processing Sticking plasters
§ § § §
Consulting and educating Facilitating the development of competence and efficiencies Converging business and regulatory outcomes Proactive
§ § § § § §
Partnership relationship Benchmarking Reinforce good practice Focus on strategy Share resources Sustainable compliance
Ethics
•open, honest, responsive and accountable; •committed to acting competently, responsibly and reliably; •relating to colleagues and customers fairly and with respect. FSA Discussion paper 18 2002
Ethics
HBOS – ‘An accident waiting to happen’
Barclays - Saltz Review
•‘This culture was brash ... the effects of the culture were all the more corrosive when coupled with a lack of corporate selfknowledge at the top of the organisation, enabling the bank’s leaders to persist in the belief ... that HBOS was a conservative institution when in fact it was the very opposite.’
•... Values drive everyday behaviour, helping to define what is normal and acceptable, explaining how things ought to be (for example, staff ought to put customers first). Values provide a framework through which the natural and often difficult conflicts that arise in people’s day-to-day work can be resolved. •.... It takes a great deal of finesse to translate the same common values into credible expectations
Culture
Governance framework
Governance
Governance
Culture Who benefits and who loses out? Should they? What is OK for others to see ? How do we deal with mistakes and pressure? How are we accountable?
Do we create space? What is the ‘tone at the top’? What really drives the organization? Is our purpose worthwhile?
Ethics Do treat others as we like to be treated? Do we do what we say? How do we act unconditionally?
Outcomes What is the ‘long-term’ impact? How do we build capacity, quality of life and opportunity? How are we custodians?
Community Who or what is our community? Where are we rooted / belong? How do we build mutual benefits? How do we ‘act local’? When do we co-operate?
What exactly is consumer outcome ? Service'levels' Calls%answered%per% hour%
Customer' experience' Call%response%time% ‘One4touch’%
TCF'
Outcomes'
Fair%resolution%in% timescale%% %
Good%result%in%terms% of%life%outcomes%/% expectations% % Low%barriers%to% entry%and%exit% No%‘fat%profit’% % Services%for% excluded% % Write4off%for% vulnerable%% %
Sales%targets%met%
Clear,%no%small%print% True,%fair%and%not% Courteous% mis4leading% % %
%%market%share% increased%
Choice%of%product% options% Attractive%rates% Follows%complaint% handling%rules%%
Complaints%down% % Outcomes
Fair%dealing%% Wake%up%packs.% Root%cause% Less%legalise% %
Consumer outcome - judgment ! ! ! +Outcome!! ! ! ! ! ! ! ! ! Time! ! ! ! ! 7!Outcome! ! ! !
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Maximum!outcome!!
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%!desirable!outcomes!!
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%!financial!loss!
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Minimum!outcome!
Community Principles •
Mutuality – better able to act for their mutual benefit
•
Connectedness and sense of place – rootedness, distinctive locale. Shared experiences and cultural traditions, sense of identity, belonging
•
Intra-community equity - equity between and within different communities and groups, diversity, inclusiveness;; inequalities reduction, social mobility and unconditionality.
•
Intergenerational equity - equity between people alive today and future generations. access to opportunities; education; happiness; healthy environment; human capital improvement.
•
Custodianship – responsible use of resources and environment
•
Prosperous, resilient and adaptable -communities are capable of creating wealth and bouncing back from adverse situations and respond to the changing circumstances, seeking opportunities, taking risks. Investing in social capital and the power to create, prosperity; quality of life; celebration; security; welfare.
•
Shared external relationships - open to outside ideas, people and contributions integrating new and existing links and traditions, not limited by boundaries
Community
From ISO 37101 Sustainable and resilient communities and BS8904
Maturity matrix
Product/ service Key issues
Outcomes from Outcomes from minimal compliance conservative regime tick box compliance
Outcomes from business-led compliance
Outcomes from a confident values-led culture
Mortgages
Access to lending for vulnerable groups and commitment under pressure
Basic products; low persistency dislocation in housing market repossession aggressive
Only ‘safe’ customers eligible on points system; disempowerment of community. Homelessness or Parents home
Tailored products, wider range, competitive rates, greater choice and flexibility
Customer needs met, even when nonstandard, same offer to existing customers, ethical options
Insurance
Premiums not prohibitive, reasonable conditions, effective competition
Targeting high margin, Poor service and follow up, price ‘following’
Tick box approval, web supermarkets, ‘Hidden’ exclusions in small print
Marginal markets tailored to specific hard-to-meet needs E.g.: health
Flexible payments, periods etc. No small print Open conditions
Deposits
Range of services, security, rates
Limited number of standard accounts
High level of KYC Low interest Inflexible
More creative rates and services
Something different: in services, charging, access
Credit cards
Flexibility of payment, charging, access
…
Ethics Mark
• • •
Measures maturity Diagnostic / learning tool Outcomes focused
governance index
ethics and culture survey
www.ethicsfoundation.com
community outcomes
Corporate purpose
Maturity
Community
Company
Corporate purpose
• • • • • • •
Assumptions Values - priorities Beliefs - strategies Views – risk Structures Incentives Role and purpose
The Compliance Revolution by David Jackman Wiley 2015
• • • • • • • •
New regulatory expectations How compliance needs to change Embedding values Conduct risk Good governance Outcome changes everything Community place Corporate Maturity pays
http://eu.wiley.com/WileyCDA/WileyTitle/productCd111902059X.html
A new Mutual for an Affinity Market
Major General Sir Sebastian Roberts and Paul Koronka AFM Conference October 2015 The Military Mutual
Requirements for a new Mutual
Glue Members needs Efficiency Mutual ethos Scale Precedents Sound Financial structure Support Infrastructure Enterprise.
Glue
Important criteria for ideal retail mutual? How strong affinity? Do public understand mutuals? YouGov surveys reveal extend of general dissatisfaction Clearly disconnect with general Financial Service providers Has to be more than ‘it’s a mutual’ What do they want from an FS provider? Sense of common identity – ‘a club’ Discretion helps.
The Military Family - Scale What we thought it was: Serving
190,000
Veterans
2,900,000
Up / Down one generation
6,910,000
Total
10,000,000
What it actually is: Serving
190,000
Veterans
2,900,000
Second Career
1,900,000
Have served, not retired
Up / Down one generation
16,600,000
2.4 x higher than original
Total
21,590,000
Double the original target market
Scale
Non-serving Family: 16,008K
Retired: 2,900K Second Career: 1,911K Transitioning/Reservist: 137K Serving Family: 564K
Serving: 157K
‘Military’ Product
‘Military’ Ethos Values
Precedent in the sector - USAA
USAA began in 1922 and has grown into a respected institution offering a full range of financial products and services to its members from the military family. Key facts; 9.8 million members 25,000 employees 5th largest homeowner insurer and 6th largest auto insurer in the U.S Net worth of $22.9bn 40m policies and products in force USD$21bn of annual income.
The Military Mutual Not a short term project - 5 to 10 years Mutual owned by its members Board elected by members – specialist mutual managers Initial funding raised by way of subordinated debt Designed to provide a complete package to the Military Family Not just insurance related products Various structural techniques used for delivery Sophisticated delivery platform Dedicated call centre not outsourced to third party Further funding raised to bolster marketing effort.
The Military Mutual – Cover provided
Court Martial and Commander’s Protection – legal expenses Home and Contents Kit Landlord’s cover Motor Commercial Combined - by end of year Other lines in 2016.
Further developments envisaged
Other Financial services could be : Mortgages Discounted Legal services Establishment of a charity closely aligned with Mutual Tax Planning.
Types of Mutuals
Types of Mutual: Mutual Insurance Company Fully Discretionary Mutual Hybrid Mutual.
Discretionary Mutual
The Mutual itself is ‘discretionary’ This means: claims paid at discretion of Board Huge advantages: No regulation as insurer No capitalisation as insurer Advantageous tax position Well accepted structure eg Doctors & some Friendly Socs Need to use a different vocabulary.
Hybrid
Mutual takes first layer of risk (discretionary) Insurance policy arranged by mutual sits above Member is therefore ‘insured’ but with excess covered in Mutual Best of both worlds
Financial Structure – Hybrid
Cost per Claim
EXCESS COVER
MUTUAL RETENTION
STOP LOSS
MEMBER’S EXCESS Aggregate Cost
Structures Used
Military Mutual uses three structures: Discretionary Product White labelled insurance product Hybrid – blended Discretionary Mutual and insurance.
THE MILITARY MUTUAL STRUCTURES
Discretionary Cover
White labelled
100% MUTUAL
100% Insurance
Insurance
Mutual
Aggregate cover
Eg Kit Cover
Hybrid
Eg Motor Cover
Aggregate Cover
Eg Home and Contents
THE END