Regulation  

Toward Solvency II

The last few weeks have seen flurries of activity by both the PRA and the FCA as they ready themselves for Solvency II.

In October the FCA released the response to the FSA’s consultation paper (CP) 12/13, focusing on the changes necessary to the COBS rules when Solvency II comes into force. At the same time the PRA issued a complementary note on the prudential regulation of with-profits business under the Solvency II directive.

This links to the earlier PRA supervisory statement (SS) 1/14, which clarified that each with-profits fund is likely to be considered ring-fenced under Solvency II. The PRA followed this with a consultation paper on the processes for firms to apply for some of the key approvals under Solvency II.

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These are the latest in what will be a fairly steady stream of statements and consultations by the regulators – the PRA especially – over the next few months, and CP23/14 notes that a further communication from the PRA on transitional measures for technical provisions and the risk-free interest rate as well as the volatility adjustment will emerge later this month.

Feedback statement (FS) 14/1 – conduct of business rule changes

The FCA has issued a feedback statement (FS) in order to give advance notice of how the conduct of business (COBS) rules for with-profits business (COBS 20) and unit-linked business (COBS 21) are likely to be developed. This will give firms time to put processes in place to ensure that they are compliant when the final rules expected early in 2015 come into force on 1 January 2016.

The FCA is continuing to amend and update the existing rulebooks to bring them into line with Solvency II. The main changes are in respect of with-profits business in COBS 20 and unit-linked business in COBS 21, but there are also consequential changes required in SUP, GENPRU and INSPRU.

Highlights

Some of the key changes are highlighted below

COBS 20: With-profits business

• Distributions of surplus – These are only permitted when there is a surplus after allowing for the regulatory duty to treat customers fairly

• Governance – Here firms will potentially have new requirements:

to identify and account for each separately identifiable with-profits sub-fund,

to include full details of any support arrangements in the PPFM, and

for the terms of reference of the with-profits committee – or the advisory arrangement – to include consideration of the treatment of with-profits sub-funds and the support arrangements.

COBS 21: Unit-linked business

A small number of changes and clarifications are proposed in FS 14/1 in respect of the management and conduct of unit-linked business. These include:

• Revisions to permitted links are proposed to cover:

approved money market instruments, and

permitted derivative contracts.

• Rules for stock lending in respect of unit-linked funds:

requirement regarding counterparties,

risk and rewards for unit-linked policyholders, and

collateral arrangements.

• Treatment of reinsurance arrangements for unit-linked business.

Consultation paper 22/14 – with-profits insurance business

The PRA’s consultation paper (CP) 22/14 covers those aspects of the management of with-profits business in COBS 20 which fall under its remit, and these tie in very closely with the material in the FCA’s FS 14/1.