Aviva 2009 Annual Report Download - page 123

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Performance review
Aviva plc Additional information for Shareholders continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
However, the FSA also recognises, and indeed expects, that
Aviva’s regulated subsidiaries operate within an overall
framework of Group governance and controls. Its rules expressly
provide that any systems and controls which operate on a
Group basis will be taken into account in determining the
adequacy of a regulated subsidiary’s systems and controls. The
robustness of these Group controls, from the operation of the
Aviva plc board and its committees down, is thus very much
within its regulatory remit.
The FSA regulates the acquisition and increase of control
over Authorised Firms. Under FSMA, any person proposing to
acquire control of or increase control over certain thresholds
over an Authorised Firm must first obtain the consent of the
FSA. The Authorised Firm must also inform the FSA of any such
proposed acquisition or increase. In considering whether to
grant or withhold its approval to the acquisition or increase of
control, the FSA must be satisfied both that the acquirer is a fit
and proper person and that the interests of consumers would
not be threatened by this acquisition or increase of control.
Control over a UK Authorised Firm (“A”) is acquired if the
acquirer holds 10% (or 20% if the Authorised Firm is an
insurance intermediary) or more of the shares in A or a parent
undertaking of A (“P”); is able to exercise significant influence
over the management of A or P by virtue of his shareholding in
that company; is entitled to exercise, or control the exercise, of
10% (20% in the case of an insurance intermediary) or more
of the voting power of A or P, or is able to exercise significant
influence over the management of A or P by virtue of his voting
power in that company. Increases in “control”, once they reach
thresholds of 20%, 33% and 50% of the shares or voting
power of an Authorised Firm or one of its parent undertakings,
also requires the consent of the FSA.
In order to determine whether a person or a group of
persons is a “controller” for the purposes of FSMA, the holdings
(shares or voting rights of the person and his ‘associate’), if any,
are aggregated.
FSA conduct of business rules
The FSA’s Conduct of Business (COB) Rules apply to every
Authorised Firm carrying on regulated activities and regulate
the day-to-day conduct of business standards to be observed
by Authorised Persons in carrying on regulated activities.
The COB Rules are principle based and the scope and
range of obligations imposed on an Authorised Firm will vary
according to the scope of its business and range of the
Authorised Firm’s clients. Generally speaking, however, the
obligations imposed on an Authorised Firm by the COB Rules
will include the need to classify its clients according to their level
of sophistication, provide them with information about the
Authorised Firm, meet certain standards of product disclosures
(including fee and remuneration arrangements), ensure that
promotional material which it produces is clear, fair and not
misleading, assess suitability when advising on certain products,
controls on the range and scope of advice given, manage
conflicts of interest, report appropriately to its clients and
provide certain protections in relation to client assets.
Day-to-day supervision
The FSA’s day-to-day supervision of Aviva is conducted by a
dedicated team within its Major Retail Groups Division. The
FSA takes a risk-based approach to its regulatory activity,
concentrating its resources on those firms and activities which
it assesses pose the greatest potential threats to its four
statutory objectives of:
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— maintaining confidence in the financial system
— promoting public understanding of the financial system
— securing the appropriate degree of protection for consumers
— reducing the extent to which it is possible for a business to
be used for a purpose connected with financial crime
Given our size, and the extent of our share of the UK retail
market, a major issue within our business which causes concern
for the FSA could have a very significant impact on these
objectives. The FSA therefore aspires to have a ‘close and
continuous’ relationship with us. In practice, this means that
a wide range of Group, Regional and UK Business Unit senior
managers have regular scheduled ‘close and continuous’
meetings with the FSA, and other meetings and discussions on
specific issues take place as the need occurs. This adds up to
weekly or even daily FSA interaction at both UK Business Unit
and Group level, although contact at a Regional level would be
less frequent.
The FSA also periodically conducts a formal ARROW review
of Aviva (which stands for Advanced Risk-Responsive Operating
framework), to assess the level of risk that the Group poses to
each of the FSA objectives. The last full risk assessment was
conducted in 2009 and the next full risk assessment is due to
start in the first half of 2011. The resulting risk mitigation
programme (RMP) itemises those areas of potential risk or
weakness where the FSA particularly wishes us to focus
attention. The risk assessment and RMP are updated on an
on-going basis between each ARROW review.
Along with other firms in the insurance industry, our
relationship with the FSA has recently gone through another
significant stage in its development with the roll out of the
individual capital assessment (ICA) regime. This is shifting
emphasis from managing issues after the event to better
assessing the adequacy of up-front governance, risk
management and prevention. It has also increased focus
on risk, controls and governance at individual entity level.
The FSA has highlighted in its 2009 Business Plan that it
expects to focus on:
— Ensuring firms are soundly run and in particular that they
adjust their business models to ensure they can remain well
capitalised and securely funded.
— Maintaining pressure on firms to treat customers fairly.
— Playing a full role in modernising the global regulatory
framework.
— Completing the planned programme of improvements to its
supervisory processes.
Outside of the UK, each Aviva business is regulated by its own
national regulator(s). However, overseas operations are also
within the remit of the FSA for two main reasons:
The structure of the Group means that the great majority
of the overseas operations are owned, ultimately, by Aviva
International Insurance (AII), a UK regulated insurance company.
In its regulation of AII, the FSA has a legitimate interest in the
systems and controls by which the Group manages its overseas
businesses, to ensure that financial shocks do not flow through
to the UK.
Our activities within the EU are subject to the Insurance
Groups Directive (as discussed in more detail below). This gives
the FSA the additional formal responsibility of acting as lead
regulator (ie the cross sector supervisory co-ordinator) for the
Group within the EU.
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