HANDLING FAILURES AND SAFETY NETS Edward Forshaw Manager, Insurance International Issues Prudential Standards Division

The FSA Created from 11 previous regulators Responsible for insurance, banking and securities regulation A company limited by guarantee Board of Directors appointed by the Treasury Funded by those it regulates or registers Standing Committee (FSA, HMT, BoE)

FSA’s regulatory objectives Maintain confidence in the UK financial system Promote public awareness Secure an appropriate degree of protection for consumers Contribute to reducing financial crime

Principles of good regulation Efficiency and economy Role of management Proportionality Innovation International character of markets/competitive position of UK Competition

Risk based supervision Coherent risk-based approach across financial services sectors Identify the risks to the FSA’s statutory objectives Prioritise the risks –Probability –Impact Determine resource allocation

Thematic regulation e-commerce implications of low inflation money laundering treating customers fairly

Existing systems EC solvency margin regime Appointed actuaries role and report Resilience testing Audited reports and transparency “Quick Solvency Test”

The new regime Risk assessment and prioritisation Probability and impact assessment process Priority = Impact x Probability Insurance review

Risks to our objectives the external environment consumer and industry wide developments regulated institutions

Regulatory toolkit Measures directed towards consumers Measures directed towards industry Measures directed towards specific firms –private warnings –public censure –financial penalties

FINANCIAL SERVICES COMPENSATION SCHEME The FSA is required under Part XV of the Financial Services and Markets Act 2000 to: –establish a body corporate to administer a compensation scheme; and –make rules establishing a compensation scheme Previous compensation scheme established under the Policyholders Protection Act 1975

SCHEME ADMINISTRATION Administered by the Financial Services Compensation Scheme Limited (FSCS) Board of FSCS appointed by the FSA (Chairman subject to Treasury approval) Scheme covers protected deposits, protected contracts of insurance and protected investment business in three separate sub-schemes

SCHEME FUNDING Management expenses levy Compensation cost levy –separate levies for the three sub-schemes –separate levies within the insurance sub- scheme for life and non-life failures –maximum levy 0.8% of net premium income in any one year no pre-funding

SCHEME COVERAGE Cover for private individuals and smaller commercial entities Geographical scope limited to customers of UK insurers where the protected risk or commitment is situated in the UK or EEA, or Customers of insurers authorised in another EEA state where the protected risk or commitment is situated in the UK.

COVERAGE - NON-LIFE Protection limited to 90% of liabilities Unless liabilities are subject to compulsory insurance (such as employers liability, motor third party) when protection is 100% And 100% cover available for the first £2,000 of a claim made

COVERAGE - LIFE (1) FSCS required initially to seek transfer of policies to another insurance company, or to arrange for substitute policies to be issued by another insurer so that policyholders will be entitled to 90% of the benefits earned under their old policy.

COVERAGE - LIFE (2) If this is not possible, FSCS required to pay 90% of the value of the policy (including declared future benefits). But 100% cover available for the first £2,000 of a claim made Also required to pay 90% of the claims that have fallen due.

PAYMENTS No maximum amount per policy No limit on payment to individual policyholders