Regulatory overview

The majority of the regulated business of the AA Group is UK insurance intermediation business and consumer credit lending carried on through AAISL. The other main regulated business is conducted by AA Financial Services Limited (AAFSL) with the mediation of mortgage and consumer credit products, and Automobile Association Underwriting Insurance Company Limited (AAUICL) which is a motor and household underwriter, writing UK business and registered in Gibraltar. There are also two authorised insurers, AAUL and AAUSL, although both of these companies are now in run-off. AA Developments Limited (AADL) writes insurance business which would otherwise be regulated, however, as it writes breakdown assistance only it is exempt from the general requirement that firms carrying out insurance business in the UK be regulated. AADL is also an Appointed Representative of AAISL for the purpose of insurance mediation and regulated consumer hire activity.


Regulation of the financial services industry in the UK is set out in the Financial Services and Markets Act 2000 ("FSMA") which requires providers of financial services in the UK to be authorised and regulated by the relevant regulatory authority. In December 2012, under the Financial Services Act 2012 (the "Act"), the FSMA was amended with effect from 1 April 2013 to effect a new regulatory regime in the UK. Under the new regime, firms previously regulated by the Financial Services Authority were allocated to one of the two new regulators created by the new regime, the PRA and the Financial Conduct Authority ("FCA") for their prudential supervision. The PRA is responsible for the prudential regulation of all banks, insurers and some designated investment firms. Although the PRA is responsible for the prudential regulation of these firms, they are in fact dual-regulated as the FCA regulates their conduct of business and consumer protection. For other financial services firms, including insurance intermediaries, fund managers and investment firms, the FCA is the sole regulator in both prudential and conduct matters.

An authorised firm must comply with the requirements of FSMA as well as the supplementary rules made by the PRA and FCA, as the case may be, under powers granted by FSMA. There are a number of regulatory handbooks, but some important sources of the rules, and accompanying guidance, relevant to the insurance and insurance intermediary businesses undertaken within the AA Group include the General Prudential Sourcebook ("GENPRU"), the Prudential Sourcebook for Insurers ("INSPRU"), the Prudential Sourcebook for Mortgage and Home Finance Firms and Insurance Intermediaries ("MIPRU") and the Insurance Conduct of Business Sourcebook ("ICOBS"), as well as the PRA and FCA's principles for businesses.

Insurance and Home Finance Intermediaries

Insurance and home finance intermediaries are authorised and regulated by the FCA and, similarly to insurers, must comply with certain conditions relating to capital and liquidity, corporate governance and risk management and controls, among others. These requirements are set out in Schedule 6 of the FSMA and further supported by the provisions of the FCA Handbook. The PRA Handbook does not, however, apply to insurance home finance intermediaries. Due to the nature of intermediation business generally, lower prudential requirements apply than those for insurers. The FCA has the power to cancel or vary a firm's permission, or to withdraw a firm's authorisation, under the same regime applicable to authorised insurers.

The AA Group contains two insurance and home finance intermediary companies, AAISL (insurance only) and AAFSL (insurance and home finance), which are both authorised and regulated by the FCA. Both of the AA Group's UK insurance intermediaries are subject to relatively limited minimum capital requirements (the higher of £5,000 and 2.5% of annual income from the regulated activities of the intermediary). In addition, AAFSL is currently subject to an additional capital requirement of £59,000 required of a firm with a Professional Indemnity Insurance excess greater than the higher of £2,500 and 1.5% of annual income. Both AAISL and DISL have capital resources in excess of their minimum capital requirements.

Breakdown Insurance Exemption

AA Developments Limited ("AADL"), a subsidiary of the Company, is the entity responsible for the provision of our roadside assistance business. The Financial Services and Markets Act (2000) (Regulated Activities) Order 2001, which sets out activities which are regulated in the UK under the FSMA, contains an exemption under Article 12 for breakdown insurance providers from the general requirement of persons carrying on insurance business to be authorised by the PRA under Section 19 of the FSMA. AADL currently benefits from this exemption and is not therefore required to be, nor is it, an authorised insurer for the purposes of the FSMA.

The relevant conditions that must be satisfied in order to qualify for the exemption are that:

(i) the provider does not otherwise carry on any insurance business;
(ii) the cover is exclusively or primarily for the provision of benefits in kind in the event of accident or breakdown of a vehicle; and

(iii) the policy provides that the assistance: (a) takes the form of repairs to or removal of the relevant vehicle; (b) is not available outside the UK and Ireland, except where it is provided without the payment of additional premium by a person in the country concerned with whom the provider has entered into a reciprocal agreement; and (c) is provided in the UK or Ireland, in most circumstances, by the provider's own work force under its direction rather than through an outsourcing arrangement.