The majority of the regulated business of the AA Group is UK insurance intermediation business carried on through AAISL and, to a lesser extent, DISL. There is also a small amount of regulated insurance business written by AAUL and AAUSL, although both of these companies are now in run-off. AA Developments Limited also 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. In addition, TAAL conducts certain insurance intermediation activities, predominantly in the UK, as an appointed representative of AAISL and as a registered person in Jersey under the Financial Services (Jersey) Law 1998. AA Ireland is also regulated in respect of insurance intermediation services by the Central Bank of Ireland.
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.
Subject to certain exemptions, no person may carry on insurance business in the UK unless authorised to do so by the PRA (acting with the consent of the FCA). The PRA and FCA, in deciding whether to grant permission, are required to determine whether the applicant satisfies the threshold conditions set out in Schedule 6 of the FSMA to be engaged in insurance business and, in particular, whether the applicant has and will continue to have appropriate resources, and that it is and will continue to be a fit and proper person having regard to the objectives of the PRA and the FCA (including in both cases whether those who manage the applicant's affairs have adequate skills and experience and are conducted soundly and with probity). A permission to carry on insurance business may also be subject to such requirements as the PRA (with the consent of the FCA) considers appropriate.
In specific circumstances, the PRA and/or FCA may vary or cancel an insurer's FSMA permission to carry on a particular class or classes of business or insurance business generally. The circumstances in which the PRA and/or FCA can vary or cancel a FSMA permission include a failure to meet the threshold conditions or where such action is desirable in order to protect the interests of consumers or potential consumers.
The AA Group has two authorised insurance underwriting companies in the UK, AAUL and AAUSL. These companies are, however, closed to new business and are now in run-off, AAUL having ceased underwriting in 1998 and AAUSL in 2009. Both these companies are regulated by the PRA as insurers, however, the PRA and FCA have agreed that the lead regulator for the group is the FCA on the basis that it is responsible for the larger and ongoing regulated business of the insurance intermediaries, in particular, AAISL.
Insurance 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 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 intermediary companies, AAISL and DISL, 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). Both AAISL and DISL have capital resources in excess of their minimum capital requirements.
Supervision and Enforcement
The PRA and FCA have extensive powers to supervise and intervene in the affairs of an authorised person under the FSMA. For example, they can require firms to provide information or documents or prepare a "skilled persons" report (a power which has recently increased in scope under the FSMA and is likely to be increasingly used). They can also formally investigate a firm. The PRA and FCA have the power to take a range of disciplinary enforcement actions, including public censure, restitution, fines or sanctions and the award of compensation. From recent publications of the PRA and FCA, the method of supervision will shift to a key risks approach by each regulator and the "ARROW" supervisory process will change to a form of continuous supervision. Such ongoing supervision is intended to become more intrusive, for example, in the FCA's remit, by analysis of an insurer's product development and a new business model assessment procedure.
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.
The FSMA (as amended by the Act) gives the FCA and the PRA powers and responsibilities over individuals carrying on certain roles within the UK financial services industry. These roles are described as "controlled functions" and the individuals performing them are described as "approved persons". Approved persons are typically individuals. However, a body corporate can be an approved person, for example, if the body corporate is a director of an authorised firm.
The controlled functions which an approved person performs are functions which have been identified by the FCA and PRA as being key to the operations of the approved persons regime in accordance with the provisions of Part V of the FSMA. They are divided between "significant influence functions" and "the customer dealing function". Significant influence functions include governance functions, required functions, systems and controls or any significant management function. They are typically relevant to a firm's directors, non-executive directors, chief executive officer, compliance officer, chief risk officer and heads of significant departments, among others. The customer dealing function covers persons dealing with an authorised firm's customers or property. However, it does not apply to general insurance business and therefore is not relevant to the authorised entities in the AA Group. A person must have regulatory approval before they can perform any of these controlled functions.
All relevant persons in AAUSL, AAUL, DISL and AAISL (being the authorised firms in the AA Group) are approved persons. As such, they are subject to certain ongoing obligations for which they are personally accountable to the FCA and/or the PRA. They are expected to be fit and proper persons, they must satisfy standards of conduct that are appropriate to the role they perform and, in particular, they must comply with the Statements of Principle and Codes of Practice issued by the FCA and the PRA and contained in APER in both the FCA and PRA Handbooks. As a result of the Act, the scope of the Statements of Principle in APER now extends to conduct expected of approved persons not just in relation to the controlled functions that they perform, but also in relation to other functions they perform in connection with their firms' regulated activities. The FCA and PRA have wide-ranging powers under the FSMA to act against any person who fails to satisfy these standards of conduct or who ceases to be fit and proper, including withdrawal of their approved status, granting a prohibition order, disciplinary action and/or fines.
The Solvency II Directive (2009/138/EC), an insurance industry directive adopted by the EU in November 2009 ("Solvency II") and to be amended shortly by the Omnibus II Directive, will provide a new prudential framework for insurance companies. The new approach is based on the concept of three pillars – prudential requirements (minimum capital requirements, investment of assets, quality of capital) supervisory review of firms' assessment of risk, and enhanced disclosure requirements (to supervisors and public disclosure) – and will cover asset and liability valuations, governance arrangements, the treatment of insurance groups, the definition of capital and the overall level of capital requirements. A key aspect of Solvency II is that the assessment of risks and capital requirements will be aligned more closely with economic capital methodologies, and will allow insurers to make use of internal capital models, if approved by the PRA. There remains considerable uncertainty surrounding the interpretation of the provisions of Solvency II with more detailed level 2 implementing measures, binding technical standards and non-binding standards, guidance at level 3 and/or delegated acts yet to be finalised. The Omnibus II Directive was approved by the European Parliament on 11 March 2014 and will, among other things, amend Solvency II in respect of the powers of the European Insurance and Occupational Pensions Authority ("EIOPA"), the new European Supervisory Authority, responsible for insurance.
Full implementation of Solvency II has been delayed until 1 January 2016 and the industry is now in preparation for the regime under EIOPA guidelines applicable from 1 January 2014. The PRA has also issued a Supervisory Statement on the PRA's expectations of UK firms from 1 January 2014 as they prepare for Solvency II. One particular aspect of the PRA's supervision of insurance is its current expectation that all capital instruments meet Solvency II criteria regarding the definition of capital, and that, until Solvency II criteria are fully implemented, insurers should anticipate the enhanced quality of capital that will be needed, when issuing or amending capital instruments. The insurance business of AAUSL and AAUL is, however, in run-off with relatively few remaining liabilities and the FCA has previously agreed to limit the minimum capital requirements for AAUL. Therefore the impact of Solvency II on the AA Group's capital solvency requirements should be minimal.
TAAL Jersey Regulatory Overview
TAAL is incorporated in Jersey and holds a consent (the "COBO Consent") issued by the Jersey Commission pursuant to the Control of Borrowing (Jersey) Order 1958 to issue up to 50,000 shares of a nominal value of £1.00 each. As such, TAAL must comply with statutory requirements under the Companies (Jersey) Law 1991 and the conditions of its COBO Consent.
TAAL is currently regulated by the Jersey Commission as a registered person under the Financial Services (Jersey) Law 1998 to carry on general insurance mediation business (including incidental general insurance mediation business). However, TAAL ceased writing new business in September 2013 and intends to cancel its licence under the Financial Services (Jersey) Law 1998 and de-register within the next 12 months.
Fanum House, Basing View, Basingstoke, RG21 4EA.
Company number: 5149111
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