AFM response to a new approach to financial regulation, Dec 12



AFM response to a new approach to financial regulation, Dec 12
Financial Regulation Strategy Team
HM Treasury
1 Horse Guards Road
18 December 2012
AFM Response to “A new approach to financial regulation”
1. I am writing in response to this consultation paper, on behalf of the Association of
Financial Mutuals. The objectives we seek from our response are to:
Comment on and support the proposals in Chapter four (Mutuals order).
2. The Association of Financial Mutuals (AFM) was established on 1 January 2010,
as a result of a merger between the Association of Mutual Insurers and the
Association of Friendly Societies.
Financial Mutuals are member-owned
organisations, and the nature of their ownership, and the consequently lower
prices, higher returns or better service that typically result, make mutuals
accessible and attractive to consumers.
3. AFM currently has 55 members and represents mutual insurers and friendly
societies in the UK. Between them, these organisations manage the savings,
protection and healthcare needs of 20 million people, and have total funds under
management of over £90 billion.
4. We welcome the consultation paper, and limit comments to sections dealing with
the Mutual Order in chapter 4. We appreciate the continued commitment from
the government to promote mutuals, and the steps it has taken in this paper to
ensuring future regulation takes proper account of the differences in business
5. Responses to certain questions raised in the consultation are attached.
6. We would be pleased to discuss further any of the issues raised by our response.
Yours sincerely,
Chief Executive
Association of Financial Mutuals
Responses to selected questions in Chapter 4
Questions on the policy approach of the Mutuals Order
What is your view on the high-level approach taken to splitting the functions
between the PRA and the FCA?
We agree with the approach.
What is your view on the approach taken to require and allow the FCA and the
PRA to effectively co-ordinate their actions under mutuals legislation?
For the allocation of functions to work effectively the two regulators must co-ordinate
their actions. This will help maintain confidence in the regulatory regime, and give
regulated firms and consumers certainty over their responsibilities, duties and rights.
It is particularly important that the two regulators co-ordinate properly in relation to issues
that have both a prudential and a conduct dimension. Take FSA’s proposals on
transposition of Solvency II for with-profits products in CP12/23: whilst this has a core
prudential impact there are necessary conduct implications, particularly as the FSA has
used this consultation to propose moving some of the current prudential (INSPRU and
GENPRU) rulebooks into the conduct (COBS) rules. As the policy statement to follow
this consultation has now been delayed to post legal cut-over it must be clear in the
feedback how the then regulator’s roles interplay, so that even though the ensuing policy
statement may be lead by the PRA, there must be a basis for review and input from
FCA. We await consideration of how this will be handled.
What other comments do you have, on principles or issues that you think should
be considered with regards to the policy approach of the Order?
The draft Financial Services Bill includes a veto in Part 2, section 3F for the PRA over
FCA on conduct issues relating to appropriate protection ‘relating to the making of
payments under with-profits policies at the discretion of the insurer’. This is an important
safeguard in the system, and though not specifically relevant to the Order, does mean
there is an exception to the general delineation of duties.
Questions on the applicability of the PRA’s objectives and the FCA’s objectives to their
respective mutuals functions
What is your view on the proposal to apply the PRA’s objectives to its mutuals
What is your view on the proposal to not apply the FCA’s objectives to its mutuals
What other comments do you have, if any, on any issues that should be
considered with regards to the application of the PRA’s objectives to its mutuals
AFM response to a new approach to financial regulation, December 2012
We agree that the PRA’s objectives should be applied to its mutuals functions. This is
important in ensuring a consistent approach, and emphasises to the PRA the importance
of recognising differences in the mutual business model, to better avoid the long-held
criticism of the FSA that they have failed to understand, or accommodate, differences in
business model.
It is not entirely clear from the text of the consultation why the government intends to
take a different approach to the mutuals functions of the FCA, compared to those of the
PRA. The consultation implies that as the functions passed to the FCA are mainly
administrative, this should not have an effect.
However it is unclear from the consultation why the proposal for the PRA in paragraph
4.10 (covering “contributing to the securing of an appropriate degree of protection for
those who are or may become policyholders”) is necessarily different in impact to the
FCA objective of “promoting effective competition in the interests of customers”.
There is a risk that applying different approaches would be unnecessarily complicated to
monitor, and runs the risk of diluting FCA’s commitment to supporting the government’s
objective of fostering diversity. This concern might be more acute for mutual insurers (as
opposed to friendly societies) as they have no individual primary legislation. We would
appreciate further clarity on the reasons for the difference and the practical
Questions on the proposed amendments to the mutuals legislation on Friendly Societies
21. What are your views on the proposed amendments?
22. What other comments do you have, if any, on any issues that should be considered
with regards to one or more of the proposed amendments?
We accept the amendments are consistent with the legislation in the Bill.
We note there is no section in the paper on mutual insurers, who have no specific
Questions on the proposed transitional arrangements
25. What are your views on the proposed transitional arrangements?
We agree with the transitional arrangements and consider they provide helpful clarity.
As regards the inter-relationship of the two regulators, we recognise this is also covered
by their general Memorandum of Understanding (MoU). Recently FSA placed a draft
MoU for with-profits on its website, indicating this would be finalised once the final Bill
was published. Whilst that paper was not released for consultation, we have reviewed
the draft MoU and this appears to be consistent with the approach taken here. However
we believe the approach taken presupposes the outcomes of issues which are still
subject to further consultation with regards to mutuals, and will take this up with FSA
when their consultation is issued.
AFM response to a new approach to financial regulation, December 2012 3

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