Our Changing Future Unit Linked Fund Governance George McCutcheon FIA MSc– Director, Financial Risk Solutions 18 Sep 2013

Unit Linked Funds Business Critical ComplexityRegulated Risk ControlsEfficiency

Nightmare Scenario It could be you! “… Company X Reprimand and fine The Regulator reprimanded the Firm and required it to pay a monetary penalty of Y Breaches The breaches identified are ….”

Fines Non-Compliance with Investment Mandates Inadequate Systems & Controls Breaches of Fund Governance Lack of Board Oversight Securities Lending

Regulators Auto enrolment Complexity Funds Governance Competition Counterpartie s

UK Reference Sources FCA Handbook COLL Provisions 2012 ABI Guide

European Perspective (EIOPA)

EIOPA Guidelines Guidelines on preparation for Solvency II NCAs, Undertakings NCA progress reports to EIOPA CP 13/08 to CP 13/11

EIOPA -CP13/08 Preparation for Solvency II (b) Effective Risk Management System (c) Supporting Qualitative Information Focus on managing processes and procedures Effective 1/1/2014 (a) Effective System of Governance

EIOPA –CP13/08 Articles 40-49, 93, 132 & 246 Proportionate Application Guidelines on System of Governance Also part of the Insurance Core Principles published by the International Association of Insurance Supervisors

EIOPA -CP13/08 General Governance Internal Audit, Internal Controls Actuarial Outsourcing Group Specific Fit and Proper Risk Management

Compliance Risk Management Committees AMSB Actuarial Senior Management Internal Audit

Internal Reviews Document Decisions Monitoring & Reporting AMSB Risk Management Qualifications, Experience, Knowledge Align with Business Strategy

Operational Risk Identification & Mitigation Activities & Processes & IT Systems Risk Tolerance Limits

Investment Risk Quantitative Limits Securities Lending Valuation, Monitoring Performance Security, Quality, Liquidity

Solvency II (2009/138/EC) Article 132 : Prudent person principle Security, quality, liquidity & localisation Best interests of policyholders (disclosed policy objectives) UL – Technical provisions closely represented by units Non-UL: Derivatives, not on RFM, diversification, concentration Risks identify, measure, monitor, manage, control & report (IMMMCR)

CP13/08 Documentation (1.24) Policies (1.28) Outsourcing (1.35 & 1.36) Risk Management Policy & Function (1.40 & 1.41) Operational Risk (1.44) Asset Liability Matching (1.49) Investment Risk (1.50) Liquidity Risk (1.51) Scope and Frequency of Internal Review (1.25 & 1.27)

Guideline 27 Investments selected in best interest of policyholders Takes into Account & Manages Constraints

Custodial Investment Activity Valuations Funds Governance Unit Liability Matching Counterpartie s Systems Procedures Compliance Reporting Data Validation Risk Management Controls

Custodial Investment Activity Valuations Funds Governance Unit Liability Matching Counterpartie s Board Board Committee s Compliance Operational Management Risk Management Senior Managemen t

Fund Mandates Fund MandateMonitoring Portfolio Realignment Mandate Reconfiguration Customer Communications

FCA Thematic Review of Unit Linked Funds

UK Regulatory Structure FSA Prudential Regulation Authority Financial Conduct Authority 1 April 2013

FCA Thematic Review: Assessment of Risks Adequate Systems and Controls Appropriate Assets Accurate and Fair Calculation

FCA Thematic Review: Key Emerging Issues Securities Lending Stated Investment Objectives Counterparty Credit Risk

Assessment Process Step 1: Desk Based Analysis of Governance & Control Step 2: On-site Visits Interviews and Walkthroughs of Processes Testing of Issues on Specific Funds Step 3: Feedback

Desk Based Analysis

Overarching Governance Governance Structure Strategy & Approach Risk Management Breaches Conflicts of Interest Outsourcing

Investment Management Mandate Asset Matching Reinsurance Fund Mergers & Closures Stock Lending

Fund Administration Valuations Pricing Taxation Charges & Expenses Unit Allocation

Interview Subjects

Overarching Governance Operational Governance Compliance Investment Management Valuations Pricing & Tax Administration of Policies

Process Walkthrough

Process ValuationsPricing ErrorsPricing & Unit Appropriation Fund Closures & Mergers Other

Conclusions

Themes Risk & RewardCommunicating Investment Risks Fund Mandates Control Environment & Risk Controls Regulation

Conclusions Increased Regulatory Focus Greater Operational Challenges Importance of Documentation Adequate Systems and Controls Communicating Investment Risk Implementation of Guidelines Greater Incidence of Sanctions

Action Points Prepare for System of Governance Review Fund Mandates Communicating Investment Risks Control & Compliance Culture Other

Governance for Unit Linked Funds : Scottish Actuarial Society 18 September 2013