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TheConsumerPerspective

ChairedbyStephenMann,PoliceMutual

• BobMartin, FinancialConductAuthority• JamesDaley,FairerFinance• DavidJackman, IntoTheClearing• MajorGeneralSirSebastianRobertsand

PaulKoronka,TheMilitaryMutual

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

• 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

4

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?

• 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

6

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

7

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.

What is covered by PS15/21• 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

8

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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10

Implementation timelineSenior

Insurance Managers Regime

commences 7th March

2016Grandfathering

notifications to be submitted by

8th February 2016

Final rules published

13th August 2015

AprilJune July Aug. Sept. Oct. Nov. Dec.

2016

Jan. Feb. March

May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. March

2017

All SIFs/SIMFs grandfathered into the new regime must have a documented

Scope of Responsibilities by 7th September 2016

April

Governance Maps to be in place 1st Jan 2016

SIMF/SIF Controlled Functions in the new regime

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Grandfathering of SIF holders

• 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

12

13

Grandfathering Mapping Rules Current APR Functions

Eligible Grandfathering: PRA functions

Eligible Grandfathering: FCA functions

CF1 Executive Director SIMF2 Chief Finance FunctionSIMF4 Chief Risk FunctionSIMF5 Head of Internal AuditSIMF7 Group Entity Senior ManagerSIMF20 Chief ActuarySIMF22 Underwriting FunctionSIMF23 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 ManagerSIMF9 ChairmanSIMF10 Chair of the Risk CommitteeSIMF11 Chair of the Audit CommitteeSIMF12 Chair of the Remuneration CommitteeSIMF14 Senior Independent Director

CF2a Chair of Nomination CommitteeCF2b Chair of With Profits

CF3 Chief Executive SIMF1 Chief Executive

SIMF19 Head of Third Country Branch (Third country branches only)

N/A

CF5 Director of an unincorporatedassociation

SIMF2 Chief Finance FunctionSIMF4 Chief Risk FunctionSIMF5 Head of Internal AuditSIMF7 Group Entity Senior ManagerSIMF20 Chief ActuarySIMF22 Underwriting FunctionSIMF9 ChairmanSIMF10 Chair of the Risk CommitteeSIMF11 Chair of the Audit CommitteeSIMF12 Chair of the Remuneration CommitteeSIMF14 Senior Independent Director

CF5 Director of an unincorporated associationCF2a Chair of Nomination CommitteeCF2b Chair of With Profits

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Grandfathering Mapping Rules (Cont.)

Current APR Functions Eligible Grandfathering: PRA functions

EligibleGrandfathering: 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 ActuarySIMF23 Underwriting Risk Oversight Office (Lloyd’s)

N/A

CF28 Systems and Controls SIMF2 Chief Finance FunctionSIMF4 Chief Risk FunctionSIMF5 Head of Internal Audit

CF28 Systems and Controls (ISPVs and Third Country branches only)

CF29 Significant Management SIMF7 Group Entity Senior ManagerSIMF20 Chief ActuarySIMF22 Underwriting FunctionSIMF23 Underwriting Risk Oversight Office (Lloyd’s)

CF29 Significant Management

CF30 Customer Function N/A CF30 Customer Function

Our approach to Non-Executive Directors

• The PRA and the FCA have taken a policy decision to only designate certain non-executives as Senior Management Insurance Functions/Significant Influence Functions.

• These roles are collectively referred to as Approved NEDs (A-NEDs) as they have specificresponsibilities.

• They are subject to FCA pre-approval.

• All other non-executives are referred to as Standard NEDs (S-NEDs) as they have nospecific responsibilities and are not in the FCA regime. They are “Notified NEDs” for PRApurposes.

• 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).

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Governance Maps and Scope of Responsibilities• 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 1st January 2016.

• 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 7th September 2016

• A Scope of Responsibilities must be submitted with all new applications for approval for SIMF and SIF roles under the new regime.

16

Changes to APR for NDFs [1 of 2]

• 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

• Large NDFs subject to same regime as S2 firms

• All NEDs removed for the scope of reformed SIF regime

• Scope of responsibilities to be in place for all SIFs by 7th March 2017

• 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

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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:

– 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 7th 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

18

Questions?

19

Corporate MaturityAssociation of Financial Mutuals

David Jackman

www.intotheclearing.com

David Jackman

Regulation

ICT/ICTAtutorVisitingProfessorCEOSkillsCouncilFSAHeadofT&CHeadofStaffTrainingIMROAwardedIIP+setupMScHeadofEducationCISIStockExchangeexamsTeacher11-18DoubledistinctioninEducation,Cambridge

- assessment

- Industrytraining

Ethics / Culture

BBCTV +RadioTheEthicalSpaceconsultingTheEthicsFoundationTheEthicsMark®EthicsFramework- TCF/RDRHeadofEthicsFSAChairofFSAEthicsCommittee

Governance

Boardevaluations3NEDs

- Pensions- DebtManagement- Insurance

IOD/MBAsGovernanceIndexinFTResourcesConsultingHiggs/WalkerReviews

Sustainability / Outcomes / Community

CambridgeJudgeInst.TheComplianceRevolution2015ISOConferenceISO37101LeadChair/authorofBS8900/4LondonOlympics2012

Banking

5 stages of regulationStart-upCrisesExpansionSustainable Outcomes

1986-19921992-1998 1998- 20072008- 2013 2013- future

5 recent themes in regulation

Effectiveness/maturity

1.EthicsValues/principles/intent

2.CultureTCF/Conduct

3.GovernanceWalker

4.Outcomes

5.CommunityVulnerableconsumers

3.Governance

2.Culture

1.Ethics

4.Outcome

5.Community

CorporateMaturity

• Soundethics/values…• embedded incorporatecultureand

conduct…• ledandoverseenby‘good’ governance…• ensuring positiveconsumeroutcomes…• contributing tosustainablecommunities

Corporate Maturity

Maturity – a direction of travel

Valuesandcultureoffirms

MinimumStandards§ Hopesnevercaught§ Doesaslittleascangetawaywith§ Costcontrols over-rule§ Triestoabdicatedecisionsandresponsibilities toconsultants

Complianceculture§ Unthinking, mechanical compliance§ Bythebook– blackorwhite§ TellmewhatIhavetodo§ Businessprevention§ Bureaucratic costly§ Culture ofdependency

Businessimprovement§ Riskfocused, selfpolicing§ Somebuyinginatseniorlevel§ Ethosintegrated intomostbusinessprocesses§ Seenasassistingbusinessandreputation

Values-led§ Internalizecore values§ Spirit notjustletter§ Valuesfocused, goesbeyondrules,notjustcompliance§ Welldevelopedindividualresponsibility andasenseof

involvementby(all)staff§ Focusonprevention§ Continued reassessmentandlearningculture§ Awarenessanddiscussion ofethicalconsiderations atsenior andall

levels

Compliance role

§ Replytoqueries§ Relationship armslength§ Somemonitoring files§ Firefighting§ Useenforcement fear

§ FSAinterpreter§ Boxticking§ Updating /doingreadingforfirm§ Coreprocessing§ Stickingplasters

§ Consulting andeducating§ Facilitatingthedevelopment ofcompetence andefficiencies§ Convergingbusinessandregulatoryoutcomes§ Proactive

§ Partnership relationship§ Benchmarking§ Reinforce goodpractice§ Focusonstrategy§ Shareresources§ Sustainablecompliance

•open, honest, responsive and accountable; •committed to acting competently, responsibly and reliably; •relating to colleagues and customers fairly and with respect.

FSADiscussionpaper182002

Ethics

Ethics

HBOS– ‘Anaccidentwaitingtohappen’

•‘This culture was brash ... the effects of theculture were all the more corrosive whencoupled with a lack of corporate self-knowledge at the top of the organisation,enabling the bank’s leaders to persist in thebelief ... that HBOS was a conservativeinstitution when in fact it was the veryopposite.’

Barclays- Saltz Review

•... Values drive everyday behaviour, helping todefine what is normal and acceptable,explaining how things ought to be (forexample, staff ought to put customers first).Values provide a framework through whichthe natural and often difficult conflicts thatarise in people’s day-to-day work can beresolved.•.... It takes a great deal of finesse to translatethe same common values into credibleexpectations

Culture

Governance framework

Governance

EthicsDotreatothersasweliketobetreated?Dowedowhatwesay?Howdoweactunconditionally?

CultureWhobenefitsandwholosesout?Should they?WhatisOKforotherstosee?Howdowedealwithmistakesandpressure?Howareweaccountable?

GovernanceDowecreatespace?Whatisthe‘toneatthetop’?Whatreallydrivestheorganization?Isourpurposeworthwhile?

OutcomesWhatisthe‘long-term’impact?Howdowebuildcapacity,qualityoflifeandopportunity?Howarewecustodians?

CommunityWhoorwhatisourcommunity?Wherearewerooted/belong?Howdowebuildmutualbenefits?Howdowe‘actlocal’?Whendoweco-operate?

Service'levels' Customer'experience'

TCF' Outcomes'

Calls%answered%per%hour%

Call%response%time%‘One4touch’%

Fair%resolution%in%timescale%%%

Good%result%in%terms%of%life%outcomes%/%expectations%%

Sales%targets%met% Clear,%no%small%print%Courteous%%

True,%fair%and%not%mis4leading%%

Low%barriers%to%entry%and%exit%No%‘fat%profit’%%

%%market%share%increased%

Choice%of%product%options%Attractive%rates%

Fair%dealing%%Wake%up%packs.%

Services%for%excluded%%

Complaints%down% Follows%complaint%handling%rules%%

Root%cause%Less%legalise%%

Write4off%for%vulnerable%%%

%

What exactly is consumer outcome ?

Outcomes

Consumer outcome - judgment

!! ! ! ! ! ! ! ! Maximum!outcome!!+Outcome!!!! ! ! ! ! ! ! ! %!desirable!outcomes!!!!!!!Time!!!! ! ! ! ! ! ! ! %!financial!loss!7!Outcome!! ! ! ! ! ! ! ! Minimum!outcome!!

• Mutuality – better able to act for their mutual benefit

• Connectedness and sense of place – rootedness, distinctive locale. Shared experiences andcultural 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. accessto 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 andbouncing back from adverse situations and respond to the changing circumstances, seekingopportunities, 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 integratingnew and existing links and traditions, not limited by boundaries

Community Principles

FromISO37101SustainableandresilientcommunitiesandBS8904

Community

Product/service Keyissues Outcomes fromminimalcomplianceregime

Outcomes fromconservativetickboxcompliance

Outcomes frombusiness-ledcompliance

Outcomes fromaconfidentvalues-ledculture

Mortgages Accesstolendingforvulnerablegroupsandcommitmentunderpressure

Basicproducts;lowpersistencydislocationinhousingmarket repossessionaggressive

Only‘safe’customerseligibleonpointssystem;dis-empowerment ofcommunity.HomelessnessorParentshome

Tailoredproducts,widerrange,competitiverates,greaterchoiceandflexibility

Customerneedsmet,evenwhennon-standard,sameoffertoexistingcustomers,ethicaloptions

Insurance Premiumsnotprohibitive,reasonableconditions,effectivecompetition

Targetinghighmargin,Poorserviceandfollowup,price‘following’

Tickboxapproval,websupermarkets,‘Hidden’exclusionsinsmall print

Marginalmarketstailoredtospecifichard-to-meetneedsE.g.:health

Flexiblepayments,periodsetc.Nosmall printOpenconditions

Deposits Rangeofservices,security,rates

Limitednumberofstandardaccounts

HighlevelofKYCLowinterestInflexible

Morecreativeratesandservices

Somethingdifferent:inservices,charging,access

Creditcards Flexibilityofpayment,charging,access

…

Maturity matrix

• Measures maturity• Diagnostic / learning tool• Outcomes focused

www.ethicsfoundation.com

Ethics Mark

governanceindex

ethicsandculturesurvey

communityoutcomes

Company Community

Corporatepurpose• Assumptions• Values- priorities• Beliefs- strategies• Views– risk• Structures• Incentives• Roleandpurpose

Maturity

Corporate purpose

• New regulatory expectations• How compliance needs to change• Embedding values• Conduct risk • Good governance• Outcome changes everything • Community place• Corporate Maturity pays

The Compliance Revolutionby David Jackman

Wiley 2015

http://eu.wiley.com/WileyCDA/WileyTitle/productCd-111902059X.html

TheMilitaryMutual

A new Mutual for an Affinity Market

AFM Conference October 2015

Major General Sir Sebastian Roberts and Paul Koronka

Requirements for a new Mutual

GlueMembers needsEfficiencyMutual ethosScalePrecedentsSound Financial structureSupport InfrastructureEnterprise.

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.

TheMilitaryFamily- Scale

Whatwethoughtitwas:

Serving

Veterans

Up/Downonegeneration

Total

Whatitactuallyis:

Serving

Veterans

SecondCareer

Up/Downonegeneration

Total

190,000

2,900,000

6,910,000

10,000,000

190,000

2,900,000

1,900,000

16,600,000

21,590,000

2.4xhigherthanoriginal

Doubletheoriginaltargetmarket

Haveserved,notretired

Scale

Serving: 157K

Serving Family: 564K

Transitioning/Reservist: 137K

Second Career: 1,911K

Retired: 2,900KNon-serving Family: 16,008K

‘Military’ Product

‘Military’ Ethos

Values

Precedentinthesector- USAA

USAAbeganin1922andhasgrownintoarespectedinstitution offeringafullrangeoffinancialproductsandservicestoitsmembers fromthemilitaryfamily.

Keyfacts;

9.8millionmembers

25,000employees

5thlargesthomeownerinsurerand6thlargestautoinsurerintheU.S

Networthof$22.9bn

40mpoliciesandproductsinforce

USD$21bnofannualincome.

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 C

ost p

er C

laim

Aggregate Cost

EXCESS COVER

MUTUALRETENTION

MEMBER’S EXCESS

STOP LOSS

Structures Used

Military Mutual uses three structures:

Discretionary Product

White labelled insurance product

Hybrid – blended Discretionary Mutual and insurance.

100%MUTUAL

Discretionary Cover

White labelled

100%Insurance

Hybrid

Insurance

MutualAggregate cover

Aggregate Cover

Eg Kit CoverEg Motor

CoverEg Home and

Contents

THE MILITARY MUTUAL STRUCTURES

THE END