Aviva 2013 Annual Report Download - page 309

Strategic report Governance IFRS Financial statements Other information
Aviva plc
Annual report and accounts 2013
307
Shareholder information continued
Regulatory and legislative risks relating to Aviva’s business
Our regulated business is subject to extensive regulatory
supervision both in the UK and internationally.
We are subject to extensive laws and regulations that are
administered and enforced by a number of different
governmental authorities and non-governmental self-regulatory
agencies, including the PRA and the FCA and other regulators.
In light of wider financial and economic conditions, some of
these authorities are considering, or may in the future consider,
enhanced or new regulatory requirements intended to prevent
future crises or otherwise assure the stability of institutions
under their supervision. These authorities may also seek to
exercise their supervisory or enforcement authority in new or
more robust ways. All of these possibilities, if they occurred,
could affect the way we conduct our business and manages
our capital, and may require us to satisfy increased capital
requirements.
Insurance regulation in the UK is largely based on the
requirements of EU directives. Inconsistent application of
directives by regulators in different EU member states may place
us at a competitive disadvantage to other European financial
services groups. In addition, changes in the local regulatory
regimes of designated territories could affect the calculation of
our solvency position.
Our insurance subsidiaries worldwide are subject to detailed
and comprehensive government regulation in each of the
jurisdictions in which they conduct business. Regulatory
agencies have broad administrative power over many aspects
of the insurance business, which may include premium rates,
marketing and selling practices, advertising, licensing agents,
policy forms, capital adequacy and permitted investments.
Government regulators are concerned primarily with the
protection of policyholders rather than our shareholders
or creditors.
The failure of any of our insurance subsidiaries to meet
minimum capital and surplus requirements could subject it to
further examination or corrective action imposed by insurance
regulators, including limitations on its ability to write additional
business, increased supervision by regulators or the
implementation of resolution plans. Any corrective action
imposed could have a material adverse effect on our business,
results of operations and financial condition. A decline in
minimum capital and surplus amounts may also limit the ability
of an insurance subsidiary to make dividend payments or
distributions to us and could be a factor in causing rating
agencies to downgrade the insurer’s financial strength ratings,
which could have a material adverse effect on our business,
results of operations and financial condition.
In the UK, our business is subject to regulation by both the
PRA and the FCA, which have broad powers, including the
authority to grant, vary the terms of, or cancel a regulated firm’s
authorisation, to investigate marketing and sales practices, to
make product intervention rules and to require the maintenance
of adequate financial resources. The PRA and the FCA have the
power to undertake a range of investigative, disciplinary or
enforcement actions, including public censure, restitution, fines
or sanctions and to require firms to pay compensation.
The PRA and the FCA may make enquiries of the companies
which they regulate regarding compliance with regulations
governing the operation of business and, similar to the other UK
regulated financial services companies, we face the risk that the
PRA or the FCA could find that we have failed to comply with
applicable regulations or have not undertaken corrective action
as required.
Issues and disputes may arise from time to time from the
way in which the insurance industry or fund management
industry has sold or administered an insurance policy or other
product or in the way in which they have treated policyholders
or customers, either individually or collectively.
There has been an increased focus in the UK on the fair
treatment of customers, in particular on the way in which the
insurance industry or fund management industry sells and
administers insurance policies or other products. This has
included the implementation of the recommendations of the
Retail Distribution Review (“RDR”) from 31 December 2012.
The RDR banned product providers from paying commission to
advisers on new sales and also required certain changes to the
way advisers describe their services to customers. The new
distribution landscape has altered the way in which retail
investment products are sold to customers and presents
challenges to our UK distribution and advisory activities in
adapting to the new rules.
Where larger groups or matters of public policy are
concerned, the PRA and the FCA may intervene directly. There
have been several industry-wide issues in recent years in which
the PRA or the FCA (or previously the FSA) has intervened
directly, including the sale of personal pensions, the sale of
mortgage-related endowments and investments in split capital
investment trusts and payment protection insurance.
Outside of the UK, our businesses are regulated by local
regulators that often have similar powers to the PRA and the
FCA and could therefore have a similar negative impact on
perceptions of our businesses or have a material adverse effect
on our business.
Furthermore, various jurisdictions in which we operate,
including the UK, have created investor compensation schemes
that require mandatory contributions from market participants
in some instances in the event of a failure of another market
participant. As a major participant in the majority of our chosen
markets, circumstances could arise where we, along with other
companies, may be required to make such contributions.
A determination that we have failed to comply with
applicable regulations could have a negative impact on our
results of operations or on our relations with current and
potential customers. Regulatory action against a member of
the Group could result in adverse publicity for, or negative
perceptions regarding, the Group, or could have a material
adverse effect on our business, our results of operations and
financial condition and divert management’s attention from the
day-to-day management of the business.
We will not always be able to predict the impact of future
legislation or regulation or changes in the interpretation or
operation of existing legislation or regulation on our business,
results of operations and financial condition. Changes in
government policy, legislation or regulatory interpretation
applying to companies in the financial services and insurance
industries in any of the markets in which we operate, which
may be applied retrospectively, may adversely affect our product
range, distribution channels, capital requirements, dividends
payable by subsidiaries and, consequently, results and financing
requirements.
We may face increased compliance costs due to the need to
set up additional compliance controls or the direct cost of such
compliance because of changes to financial services legislation
or regulation.
The Solvency II Directive (“Solvency II”), an insurance
industry regulation agreed by the European Parliament in 2009,
will require European domiciled insurers to move to more risk-
based capital requirements. The implementation date for
Solvency II has been extended to January 2016. There continue
to be material uncertainties around the impact of the more
detailed technical requirements of Solvency II and around the
approval of internal models and there is a risk that these could
lead to a significant increase in the capital required to support
our business.
In July 2013 the Group was designated by the Financial
Stability Board (“FSB”) as a global systemically important insurer
(“G-SII”). The initial list of nine insurance groups that have been