Being better informed: April 2014

The UK life insurance industry was shaken by a trio of regulatory announcements in March that temporarily knocked billions off the market value of insurers. These developments may have long-term consequences for the industry, raising doubts over the viability of certain business lines.

First, UK Government announced in the Budget that buying an annuity will no longer be compulsory and instead savers will be able to take the cash and invest or spend as they see fit. This change represents one of the biggest adjustments to the UK pension regime for almost a century and will pose a significant challenge to firms that are heavily reliant on annuity business.

Second, the UK Government announced a cap on the charges that companies can impose on workplace pensions (auto enrolment). The cap is lower than what many companies currently charge, and some may struggle to make profits at this level.

Third, the press reporting of an FCA review into legacy products caused panic in markets, especially for the closed book consolidators. The FCA subsequently clarified that the review was much less intrusive than had been reported, and the markets recovered.

The idea of treating customers fairly is a central thread to the FCA’s philosophy which pervades its supervisory approach to all financial firms. The FCA reiterated its commitment to this principle in the annual Risk Outlook and Business Plan which was published on 31 March 2014. While headlines focused on the FCA’s review of legacy business it represents only a small part of the FCA’s agenda for the year ahead.

Crowdfunding became the latest financial activity to come under regulatory scrutiny when the FCA finalised its rules in March. The crowdfunding rules apply to both loan-based and investment-based crowdfunding activities. Some firms will be subject to FCA regulation for the first time, when the OFT transfers consumer credit regulation to the FCA.

Our feature article this month reviews the European legislative agenda as we gear-up for the European Parliamentary elections in May. We expect a number of big ticket reforms such as MiFID II, UCITS V, and Basic Bank Account Regulation to all clear EP at first reading before the elections, leaving the way clear for them to be adopted by mid-summer. Some other texts like IMD2 and the revised Payment Services Directive will be adopted in first reading but the trilogue negotiations on these measures will be postponed until the autumn when the new European Parliament is in place.

The UK consumer credit industry changed forever on 1 April 2104, when the FCA took over regulating 50,000 firms previously regulated by the OFT. These firms will have to prepare themselves for a new style of regulation – a big sea change for many of them. This month we cover a few final measures that have come through from FCA in March, and we’ll cover the new consumer credit regime in more detail in our April edition.

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