On 31 January 2017, the Financial Conduct Authority (FCA) published a consultation paper regarding proposed Handbook changes to reflect the new regulatory framework for Insurance Linked Securities (ILS) (CP17/3).CP17/3 sets out the FCA’s proposals for the changes required to the FCA Handbook to incorporate the new regulated activity of “insurance risk transformation”. The FCA has based its proposals on the proposals HM Treasury consulted on in its November 2016 paper. The FCA stated that it will review the proposals contained in CP17/3 as necessary in light of any changes the Treasury may make as a result of its consultation.

The FCA proposes:

  • Principles for Businesses – to amend the application of the FCA’s Principles for Businesses to include activities directly arising out of the new regulated activity of insurance risk transformation, including the issuing of ILS.
  • Financial Services Compensation Scheme (FSCS) disclosure requirements – to create a rule that ISPVs must disclose to ILS investors the limitations of FSCS coverage in relation to these products.
  • Financial Ombudsman Service jurisdiction – to create a rule in the Dispute Resolution: Complaints (DISP) sourcebook to bring offering and issuing of ILS within the scope of the financial ombudsman service (FOS) compulsory jurisdiction. The FOS proposes to mirror the changes which the FCA is making to the compulsory jurisdiction in its voluntary jurisdiction.
  • Senior Management Arrangements, Systems and Controls sourcebook (SYSC) – to amend the Handbook so that ISPVs are subject to the requirements of SYSC 3 rather than SYSC 4 – 10. The FCA considers that it would be more appropriate for ISPVs to be subject to the same rules as reinsurers given their similarities. This will provide greater clarity because entities taking on reinsurance risks, whether traditional reinsurers or ISPVs, would be subject to the same part of SYSC.
  • Controlled Functions (CF) – that CF11 (Money Laundering Reporting Officer) should not apply to ISPVs and that, as currently required in SYSC 3, CF10 (Compliance) should only apply where life insurance business is involved.
  • Consequential changes – consequential changes to various parts of the Handbook, including the Glossary, to reflect the incorporation of the new regulated activity of insurance risk transformation. The FCA also proposes a change to the Decision Procedure and Penalties manual (DEPP) to introduce decision making procedures in relation to the FCA’s new registration functions.
  • New cell notification for PCCs – that PCCs be required to submit a new cell notification form to the FCA at the same time as they submit it to the PRA.
  • PCC registration fee – to introduce a new, one-off registration fee of £500, covering all registration and related administrative activities undertaken by the FCA in relation to PCCs.

The FCA invites comments on CP17/3 by 14 March 2017. It intends to publish a policy statement containing the final rules once the Treasury Regulations have been finalised.

View: FCA publishes consultation paper on changes to the Handbook for insurance linked securities