Regulatory Change

Key Developments During 2018

General Data Protection Regulation

  • The General Data Protection Regulation (GDPR) (Regulation (EU) 2016/679) came into force in May 2018. It imposes new obligations and stricter requirements on all organisations involved in the processing of personally identifiable data, emphasising transparency, security and accountability. The insurance, pensions and investment industries hold a large amount of personal data and sensitive personal data meaning insurers and pension administrators now need a greater awareness and command over the data they process and share and will also need to be able to justify why they must obtain and hold the data in question. The IFoA issued a Risk Alert in January 2018 highlighting considerations for actuaries such as whether an actuary holds an individual appointment which would lead them to be a data controller, data processor or joint data controller and alerting them to information available from the ICO.

Actuarial Monitoring Scheme

  • The IFoA consulted on proposals to introduce proportionate, appropriate monitoring of actuarial work in summer 2018. The proposal is to introduce a system to gather information about the work being carried out by IFoA members, to use that information to provide evidence of the quality of actuarial work, promote best practice and develop training, education, standards and guidance, when appropriate.

DWP consultations: The Pensions Regulator, Collective Defined Contribution pension schemes, Defined Benefit pension scheme consolidation and Pensions dashboards

  • During 2018, TPR has evolved into a more visible and proactive regulator and is working in a clearer, quicker and tougher way. In June, the DWP launched a consultation examining whether TPR should be given greater powers, including granting it the ability to levy civil penalties of up to £1m on companies that mismanage their defined benefit pension schemes.
  • The DWP has launched consultations into the design and management of Collective Defined Contribution (CDC) pension schemes (which allow contributions to be pooled and invested to give members a target benefit level) and into proposals for DB scheme consolidation through the use of ‘superfunds’ (commercial undertakings in which the protection given by the employer covenant is replaced by commercially invested capital). These will give rise to new areas of actuarial work in which actuaries will need to consider carefully the impact on different stakeholder groups.
  • In relation to the DWP’s consultation on “Pensions Dashboards” government has indicated that it will compel pension schemes to provide data for a dashboard provided initially by the Single Financial Guidance Body (SFGB). There remains uncertainty as to what information will be in the dashboard and therefore for the data, assumptions and models that actuaries will be required to provide.

IFRS 17 Insurance Contracts

  • In November 2018, the International Accounting Standards Board (IASB) proposed a one-year deferral of the effective date for IFRS 17, the new standard for insurance contracts, to 2022. It also proposed extending to 2022 the temporary exemption for insurers to apply IFRS 9 Financial Instruments, so that both IFRS 9 and IFRS 17 can be applied at the same time.
  • The IASB has been working proactively to support insurers and others with the transition to IFRS 17, including through establishing a Transition Resource Group (TRG) and providing education materials. It will consider whether any of the concerns and implementation challenges discussed by the TRG and other stakeholders, including those relating to costs and benefits, indicate a need to amend the requirements of IFRS 17. However, it agreed that any amendments would not result in significant loss of useful information relative to that which would otherwise be provided by IFRS 17 for users of financial statements; and amendments would not unduly disrupt implementation already under way or risk undue delays in the effective date of IFRS 17. The decision to propose a one-year deferral acknowledges the uncertainty that arises from the IASB’s continuing discussions, while being responsive to comments from stakeholders that implementation should not be unduly disrupted.
  • At its January 2019 meeting, the IASB continued its considerations of how to respond to the concerns and implementation challenges raised in relation to IFRS 17 and decided to propose targeted improvements in three areas (i.e. the recognition of contract costs, reinsurance contracts and the investment service elements of a contract). It expects to publish a consultation on proposed narrow-scope amendments around the middle of 2019.

Sir John Kingman’s review of the FRC

  • The UK Government conducted an independent review of the FRC, led by Sir John Kingman, that reported its findings in December 2018. The review recommends that the FRC should be replaced with a new independent regulator with clear statutory powers and objectives. The regulator should have an overarching duty to promote the interests of consumers of financial information, not producers, and should also have a duty to promote competition; a duty to promote innovation; and a duty to apply proportionality to all its work. It included reviewing the existing arrangements for the regulation of actuaries in the UK (put in place following Sir Derek Morris’ review of the actuarial profession in 2005). It identified a risk that stakeholders may assume that the FRC’s current oversight of the actuarial profession is a great deal more thoroughgoing and effective than, in the absence of credible powers, it actually is or can be.  Therefore, the review suggests that the Government, working with the PRA and TPR, should review what powers are required effectively to oversee regulation of the actuarial profession and recommends that neither the FRC, nor its successor body, is best-placed to be the oversight body. It suggests the PRA as an alternative repository of regulatory actuarial expertise.

CMA investigations: Competition in investment consulting, Citizens Advice Super-complaint

  • The Competition and Markets Authority (CMA) published a provisional report on the findings of their investigation into competition in investment consultancy and fiduciary management services. One proposal is that the FCA’s regulatory perimeter be extended to cover both investment consulting and fiduciary management. Some firms offering such services could be licensed under the Designated Professional Bodies (DPB) regime operated by the IFoA under the Financial Services and Markets Act 2000. The extension of the perimeter of the FCA might have an impact on those firms who provide investment advice incidental to their main business under the DPB regime.
  • In September 2018, Citizens Advice submitted a super-complaint to the CMA raising concerns about long-term customers paying more for goods and services (‘the loyalty penalty’). The CMA’s response sets out a package of reforms both across markets and specifically in relation to the five markets identified by Citizens Advice, which included household insurance. The report’s recommendations include publicising the loyalty penalties along with market surveys; targeted pricing regulations such as limiting price differentials or price caps; and other support to ensure customers, particularly vulnerable customers, get better deals. It also published market specific recommendations and in respect of household insurance, it welcomed the work of the FCA in reviewing pricing practices. Actuaries are likely to be involved in work that underpins the prices set in the market and in assessing price differentials for new and existing customers. As such they should be aware of the ongoing work of the CMA and FCA and its impacts on treating customers fairly.

Senior Managers and Certification Regime

  • The Senior Managers and Certification Regime (SM&CR) promotes the safety and soundness of regulated financial services firms and financial stability by strengthening the link between seniority and accountability. The PRA and FCA together with HMT developed the SM&CR which was rolled out to banking institutions from March 2016, and will be extended in full to insurers from December 2018, and to all other financial services providers by the end of 2019. The SM&CR comprises the Senior Managers Regime (SMR), Certification Regime, Regulatory references and Conduct Rules. It forms part of a broader set of measures to improve decision-taking and provide incentives for prudent risk-taking, and should therefore be viewed alongside assessments of board effectiveness, sustainable remuneration policies and strengthened market codes.

Users’ Expectations

  • Recent corporate failures have highlighted the public expectation gap between the actual and perceived work of auditors. There is a risk that similar issues in actuarial work arise in the future. For example, actuaries may be seen as responsible for the assumptions used in the valuation of insurance liabilities or pension schemes rather than the directors and trustees who are accountable for the decisions made. There is a risk that prior practices may be viewed with increased scrutiny or against new standards of ethics e.g. cross subsidies across policy holder groupings, expenses and commissions or product design and exclusions may no longer be deemed appropriate. These changes could lead to the invalidation of actuarial data, models and assumptions as well as reputational damage to actuaries and their employers.
  • The expectations of the user for whom the actuary is providing advice may impact the role of the actuary and could lead to commercial pressure or conflicts of interest e.g. pension actuaries advising employers in-house and those advising scheme trustees should both be aware of and apply the principles of TAS 100. Changes in the insurance value chain (consolidation, disintermediation and disaggregation) may increase the risk that concentrated expertise, or a lack of independence, leads to group think or undue commercial influence, asymmetry of understanding of complex products (e.g. insurance-linked securities) or a failure to ‘know your client’ may lead to poor decisions by users.

Interpretation and Application of new legislation and regulation

  • It is recognised that the interpretation and application of new legislation and regulation can lead to increased risk in actuarial modelling and assumption setting. When first published, uncertainty will remain for the interpretation by regulators, practitioners and auditors until market practice emerges e.g. application of the High Court ruling on GMP, finalisation of the personal injury discount rate or application of IFRS 17. Additionally, where there are new areas of legislation and regulation there may be a limited pool of knowledge and resource and a risk of conflicts of interest or group think.
  • Actuaries face a challenging environment for experts and are reminded of the standards expected of professionals acting in the public interest. In May 2018, the IFoA published changes to the Actuaries’ Code. The revised Code has six key principles and introduces ‘Speaking Up’ as a stand-alone principle, in order to emphasise its importance. It will come into force on 18 May 2019. The IFoA is developing non-mandatory Guidance to accompany the Code, which will provide information about each of the six principles contained within the revised Code, as well as its application, scope and status and purpose.

Summary of 2017 Discussion and Actuarial Implications

  • Recent changes to regulation impacting actuarial work (e.g. revised TAS, APS, Actuaries’ Code, Solvency II, Pension Freedoms and the Senior Managers and Certification Regime) may not be fully embedded. This could increase risk as changes often require interpretation and application of judgement, systems changes, new methods, models and data and of course can be resource intensive. Actuaries can play a role in helping firms form a strategic approach to implementing changes to comply with new regulation impacting actuarial work.
  • Regulators aim to follow the principles of good regulation to mitigate the risk of an inappropriate regulatory burden. There are risks both of over-regulation, which could place demands on actuarial resource, and under‑regulation, resulting in an overreliance on professionalism which could affect the quality of actuarial work. 
  • For actuaries, professionalism encapsulates technical competence, ethics and integrity and the skillset to apply these in real life circumstances. Actuaries may face challenges to acting in accordance with their professional values through commercial pressures such as the focus on short-term profit generation or because they do not have sufficient support within their organisations.
  • Actuaries as professionals acting in the public interest are required to comply with their obligations under the Actuaries’ Code and have due regard to a wider stakeholder group as well as the immediate user of their work. This could lead to conflicts of interest e.g. between shareholders and policyholders or pension scheme sponsors and members. A reluctance or inability to speak up in difficult circumstances could lead to an increased risk to high quality actuarial work as could risks arising from silo thinking or group think.
  • There is a risk that users of actuarial work may find less relevance in the actuaries’ professional skills if actuaries do not keep up to date with the changing social, political and business environment. In the current climate, where there is some mistrust of experts, actuaries and other professionals may be considered to be anti-competitive, too cautious or a barrier to innovation.

Further Reading

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