Aviva 2013 Annual Report Download - page 296

Aviva plc
Annual report and accounts 2013
294
Shareholder information continued
Markets in Financial Instruments Directive (MiFID)
MiFID, which superseded the earlier Investment Services
Directive, builds on the home country control principle,
extending the range of ‘core’ investment services and activities
that may be passported from one member state to another,
clarifying the allocation of responsibilities between home
and host country jurisdictions, and introducing greater
harmonisation governing the organisation and conduct of
business of investment firms.
Solvency II
The Solvency II Level 1 Directive was published in November
2009. Solvency II represents a fundamental change in European
regulation and will result in a more sophisticated economic risk
based capital approach. Its objectives are to establish a solvency
system that is better aligned to the true risks of insurers, and
aims to enable supervisors to protect policyholder interests as
effectively as possible in accordance with common principles
across the EU. An amending directive (Omnibus II) was agreed in
Trilogue between the EU Commission, Council and Parliament
in November 2013 which is scheduled to be voted on by the EU
Parliament on 11 March 2014. This will set the implementation
date for Solvency II as 1 January 2016. The next steps in the
development of Solvency II will be the completion of level 2
and 3 Delegated Acts, implementing technical standards and
supervisory guidance.
Systemic Risk
In July 2013 the Financial Stability Board (FSB) designated nine
insurance groups as Global Systemically Important Insurers
(G-SIIs). As an international insurer, Aviva is one of the firms
that has been designated as a G-SII. Alongside the FSB’s
designation the International Association of Insurance
Supervisors published policy measures that will apply to
G-SIIs. The policy measures include enhanced supervision,
recovery and resolution planning, the preparation of systemic
risk management and liquidity risk management plans. The
policy measures also include higher loss absorbency
requirements (HLA). In the absence of a global capital
framework for insurers, the International Association of
Insurance Supervisors (“IAIS”) is developing a Basic Capital
Requirement (BCR) to provide a comparable foundation for the
application of HLA to G-SIIs. The development phase of the
BCR is planned to conclude during 2014. The IAIS will then
develop its approach to HLA which will be applicable to G-SIIs
from 2019.
Insurance Capital Standard (ICS)
The Financial Stability Board (FSB) has stated that a sound
capital and supervisory framework for the insurance sector is
essential for supporting financial stability. In this respect the IAIS
will develop a work plan to develop a comprehensive, group
wide supervisory and regulatory framework for Internationally
Active Insurance Groups (IAIGs), including a quantitative capital
standard. The ICS will be incorporated into the global
framework for the supervision of internationally active insurance
groups (ComFrame) that the IAIS is developing. The IAIS has
indicated that it will develop the ICS by 2016 for
implementation in 2019 along with the rest of ComFrame.
Future EU developments
During 2013 the European Commission undertook a review of
the European System of Financial Supervision (ESFS). The ESFS
includes the three sector specific European Supervisory
Authorities (ESAs) that have powers to make binding rules and
drive supervisory consistency and convergence through a single
rule book. It is anticipated that the Commission will publish its
conclusions of its review during 2014.
There are a number of European dossiers that are expected
to progress during 2014, including Packaged Retail Investment
Products (PRIPs) that will introduce common product disclosure
standards, the review of the Insurance Mediation Directive (IMD)
and MiFID, and the Directive for Institutions of Occupations
Retirement Provisions (IORP) that sets rules for occupational
pension schemes.
The European Market Infrastructure Regulation (EMIR) that
introduces central clearing of standard Over the Counter (OTC)
derivatives came into force in 2013. This is subject to transitional
provisions and actions that the European Securities and Markets
Authority (ESMA) must complete before central clearing can
commence later this year.
United Kingdom
The new regulatory structure
On 1 April 2013 the Financial Services Authority was replaced
by the Prudential Regulation Authority (the “PRA”) and the
Financial Conduct Authority (the “FCA”). The reforms were
implemented under the Financial Services Act 2012 (the “FS
Act”) which made extensive amendments to existing legislation
including the Financial Services and Markets Act 2000
(“FSMA”). The FS Act also contains some standalone provisions.
The PRA is a subsidiary of the Bank of England and is
responsible for the micro-prudential regulation of banks,
building societies, credit unions, insurers and major investment
firms. The PRA has two statutory objectives:
 to promoted the safety and soundness of regulated firms;
and
 in the case of insurers, to contribute to securing an
appropriate degree of protection for policyholders.
The FCA is a company limited by guarantee, accountable to the
UK Treasury, and through the Treasury, to the UK Parliament. It
is operationally independent of government and entirely funded
by the firms it regulates. The FCA’s strategic objective as set out
in the FS Act is to ensure that markets “function well” and it is
responsible for the conduct regulation of all financial services
firms (including those prudentially regulated by the PRA, such as
insurers). In addition, the FCA prudentially regulates those
financial services firms not supervised by the PRA, including
most asset managers. The FCA has three operational objectives:
 securing an appropriate degree of protection for consumers;
 protecting and enhancing the integrity of the UK financial
system; and
 promoting effective competition in the interests of
consumers in the markets for financial services.
Within their respective jurisdictions, the PRA and FCA have
authority to make rules and issue guidance, taking into account
relevant EU directives, impacting individuals and firms
authorised to conduct regulated activities (“Authorised Persons”
and “Authorised Firms”).
Under the FSMA no person may carry on, or purport to carry
on, a regulated activity by way of business in the UK unless he is
an Authorised Person or an exempt person. A firm granted
permission to carry on regulated activities becomes an
Authorised Person for the purposes of FSMA. ‘Regulated
activities’ are prescribed in the FSMA (Regulated Activities)
Order 2001 and include banking, insurance and investment
business, stakeholder pension schemes, insurance mediation
and certain mortgage mediation and lending activities.
Authorised Firms must at all times meet specified threshold
conditions, including possession of adequate resources for the
carrying on of their business, and being fit and proper to
conduct that business, having regard to all the circumstances.
Authorised Firms must also operate in accordance with the
FCA’s Principles for Business if solo regulated and the PRA’s and
FCA’s Principles for Business if dual regulated. The FCA has 11
high level principles for conducting financial services business in
the UK, including maintenance of adequate systems and