The FCA has a trustpilot page! Summary: could do better.
Actuaries and equity release mortgages
The Institute of Actuaries’ “Review Team” has launched an Equity Release Mortgages thematic review, “which will consider the work carried out by actuaries in this area – in particular their role in propositions and pricing activity. The market for equity release mortgages continues to grow, and actuaries have an important role to play in this broad and complex area.”
The review includes a questionnnaire for lenders and a questionnaire for consultants. (Academic researchers apparently are not included).
The questionnaires are focused on the governance of ERM work. Example: “In addition to providing documentation, please describe what examples of documentation are subject to APS and/or TAS assessment (in either valuation/capital functions or propositions/pricing functions) at your organisation.”
Which reminds me, if the TAS (Technical and Actuarial Standards) were any use at all, they would have picked up the massively incorrect valuation method used by most (if not all) firms. This suggests they are not any use at all.
Just saying.
Financial stability implications of IFRS 17 Insurance Contracts
This memorandum from the European Systemic Risk Board highlights discount rates as a key risk in IFRS 17.
IFRS 17 allows two methods (bottom-up and top-down) to calculate discount rates which, in turn, determine the ultimate amount of insurance contract liabilities. In practice, the bottom-up and top-down methods may result in different discount rates. Furthermore, IFRS 17 is going to be applied in an environment of low interest rates, with increased importance of unobservable components (expected and unexpected credit losses, as well as an illiquidity premium). Together with the level of discretion in the requirements of IFRS 17, the behavioural response of insurers may have consequences for financial stability, mainly as a result of large cross-sectoral heterogeneity in the computation of discount rates and ultimately in the valuation of insurance liabilities.
See also:
The significant weight of the unobservable component of discount rates under IFRS 17 may require close attention from audit firms, accounting enforcers and microprudential supervisors. Potential actions could include setting audit expectations, issuing guidelines on how to compute the unexpected components of the top-down and bottom-up methodologies, a benchmarking exercise across European insurers, and setting out expectations on adequate disclosures.
Rip off policyholders to save the planet
Reported in InsuranceERM
On investment in green finance, Evans [Huw Evans, on his last day as director general of the Association of British Insurers] said a useful debate about how the Solvency II Matching Adjustment can be improved has been somewhat overtaken in the UK by a series of Bank of England/PRA interventions. According to Evans, these are seeking to force changes to the fundamental spread element of the Matching Adjustment.
“Not only is this an issue that wasn’t even included by HM Treasury when it set the remit for the review, any changes are almost guaranteed to increase insurer capital levels and make the UK less competitive than insurers based in the EU. And any chance of a significant boost to green investment will almost certainly be lost.”
Loving it!
The Crisis to End all Crises
The Financial Times reports:
In a letter to UK bank chief executives, the BoE said its analysis of the circumstances of the Archegos failure had found “significant cross-firm deficiencies” in the way bank prime brokerage businesses allowed the fund to build up huge loans that it ultimately defaulted on.
Interesting. Perhaps our UK Shareholders’ letter had some effect! Or was it Eumaeus, who wrote.
We should also keep in mind that the regulatory models are calibrated to give a 1 in 1,000 years probability of default, so the suspicion arises that the models might not have been calibrated properly. In any case, it would be wise for Bailey and his fellow regulators overseas to look into this issue. Granting a little time to investigate, Bailey then needs to make a statement that he is either confident in the effectiveness of UK regulation in this regard or he is not: the Archegos/Credit Suisse episode is a warning shot across the bow.
?
It now looks as though he is not “confident in the effectiveness of UK regulation in this regard “. Oh dear. We thought the new and improved system of regulation would make the GFC the “crisis to end all crises”. But I am sure they will sort it all out.
[EDIT] The corresponding Dear CEO letter from Nathanaël Benjamin is here.
A failing, bloated, defensive organisation
The All Party Parliamentary Group (APPG) on Personal Banking and Fairer Financial Services (members) has just published some testimonies about the FCA as part of its call for evidence about the FCA.
This testimony from an anonymous FCA employee is particularly striking (though to me, as a previous FSA staffer, not surprising.
Overall, a negative and depressing time in working at the FCA. The FCA has developed a toxic culture and spends huge resources, time and effort on self-protection, of itself, at the expense of supporting consumers. The FCA appears to operate in a malicious and vindictive way and is not willing to accept any kind of constructive criticism from staff. The FCA is a wasting money and staff effort on self-protection which is quite sickening when set against the context of its failures in recent years to regulate firms properly. Based on the evidence I have seen, the FCA is simply not doing its job and has become a failing, bloated, defensive organisation – with most of its efforts and resources going on self-promotion and trying to counter the many criticisms of it.
Quite. The whole unstated purpose of a regulator is to protect itself. When I worked there, you had to suffer all these ridiculous initiatives about ‘learn and change’, ‘vision and values’, ‘making a real difference’ and (at the Bank) ’20 20 vision’, which come across as noble and visionary but really translate to “keep the gravy train running, and don’t get caught for mistakes, even if that means doing nothing much of the time”.
There needs to be strong scrutiny of this absurd organisation, but who has the patience (and the competence) to do it?
ERM threat to LV’s ring-fenced member funds
In the Mail this morning, the threat to the proposed ‘ring fencing’ of the LV With-Profits fund if the acquisition by private equity plunderers Bain Capital goes ahead.
Continue reading “ERM threat to LV’s ring-fenced member funds”
Published papers
As we (Kevin and I) are now getting ERM and other work published in peer reviewed journals, we have set up a page. Enjoy.
City watchdog on alert
The Sunday Times featured our UKSA letter to the FCA yesterday.
Just days before the deadline for 1.2 million policy members of the mutual insurer to vote on the controversial deal, concerns were raised with Charles Randell, chairman of the Financial Conduct Authority.
The UK Shareholders’ Association wrote to Randell to query a description of the “with-profits” fund that, in effect, owns the insurer and is backed by policyholders as being “ring-fenced”.
The lobby group fears that the fund could be used to prop up the business if the Bain-owned business ran into financial difficulty.
Our letter coincided with a letter in similar vein sent by solicitors Leigh Day on behalf of some LV members, urging the FCA to withdraw its non-objection to the acquisition by Bain Capital and postpone the vote until it addresses a series of issues. The Mail reports:
They [the members] claim the process has been defined by a ‘material lack of procedural fairness’ and accuse bosses of providing ‘incomplete and/or contradictory information’ about the £530million takeover by Bain Capital. …’This is a deeply unsatisfactory situation which the FCA has allowed to take place and is unfair to the members of LV,’ the letter states.
The Leigh Day letter outlines a number of concerns, including the question whether the with-profits fund is really ‘ringfenced’.
The Controller speaks
Speech at the Institute and Faculty of Actuaries
There is a concern that Solvency II as a negotiated compromise has created risks to our primary objectives. The Fundamental Spread does not include explicit allowance for uncertainty around defaults and downgrades, and appears low compared with ranges implied by academic literature for the credit risk portion of spreads. Second, the Fundamental Spread is not sensitive to changes in credit market conditions and changes little as spreads change over time. This means that any increase in spreads not accompanied by a downgrade is assumed to be entirely due to increased illiquidity of the assets, and therefore taken credit for as Matching Adjustment. Finally, the Fundamental Spread is not sensitive to risk and spread across asset classes, and thus assets that have the same rating but higher spreads will attract a higher Matching Adjustment despite what can appear to be a higher level of credit risk. This creates a risk of adverse selection based around the regulatory rules.
My emphasis.