MicroCertificate in Disruptive Technologies
Norton Rose Fulbright has launched its MicroCert in Disruptive Technologies at its annual Tech Business & Law Conference in Silicon Valley.
In this section we have asked some of our partners across the firm for their views on the big issues that will affect the insurance industry in their region over the next few months.
The insurance industry’s focus is squarely on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Evidence of significant breaches of regulation and the intense media scrutiny of witnesses have led many commentators and some members of Parliament previously opposed to the Commission to publicly declare their support for it. The Turnbull Government faces renewed criticism for its objections to the Commission and its delay in approving it; bringing the issues of corporate culture and conduct risk to the forefront of political debate, and to the top of boardroom agendas.
The first round of hearings in March focused principally on consumer credit products such as mortgages, vehicle finance and credit cards. In doing so, evidence touched on associated insurance products, including consumer credit insurance, with some criticisms being raised about the manner in which products are sold, and the value of those products to consumers. A second round of hearings focusing on the financial planning and wealth management industry recently commenced on April 16, 2018. It is expected that the Commission will focus specifically on the insurance industry in a further block of hearings over the coming months.
The Commission is having an immediate impact on the market, with class action litigation already being investigated against a number of entities called to give evidence, and a strong expectation that numerous further class actions will arise before the Commission concludes. Further, in the face of strong criticism, the Government has announced an increase in fines and penalties against companies, directors and officers who engage in misconduct, with fines up to 10 per cent of annual turnover and prison terms of up to 10 years being imposed.
There is little doubt that the Commission will play a significant role in the insurance landscape over the coming 12 months and beyond.
The cyber insurance market has continued its strong growth, driven not only by a growing awareness of the risk of cyber breaches, but also the introduction of mandatory data breach notification laws and the attention given to the issue by the corporate regulator, ASIC.
As of February 22, 2018, most corporations are required to notify both the Privacy Commissioner and affected individuals where there has been an unauthorised access, disclosure of loss of personal information, and the organisation considers that it is likely that the affected individuals will suffer “serious harm”. In the first two months since the laws were implemented, 63 notifications had been made, a significant increase from the number of notifications made under the voluntary disclosure regime previously in place. Penalties for significant data breaches can be up to $2.1 million.
ASIC has turned its attention to cyber resilience over the last few years, and recently has made it very clear that it has high expectations of directors in the proper management of cyber risks. The need for cyber insurance as part of a broader risk management framework is now better understood by most corporates; while the increasing likelihood of claims against directors and officers arising from cyber risk management failures has not been lost on the D&O market.
In October the Quebec government announced its Bill 141 whose main objective is to replace an outdated legislative framework for financial services and insurance with measures suitable for the contemporary legal environment. Amongst the changes brought in by Bill 141 are the replacement of the Act respecting insurance with the Insurers Act, and amendments to the Act respecting the distribution of financial products and services (ADFPS). One of the objectives of these recent changes has been, among other things, to bring the Chambre de la sécurité financière and the Chambre d’assurance de dommages (ChAD) within the authorité des marches financiers (AMF), in addition to integrating certain easing measures to facilitate the distribution of insurance products via the internet. The Minister had nevertheless chosen not to immediately address in Bill 141 the complex issue of business ties that may exist between brokerage firms and insurers and other financial institutions, announcing instead that this reform would be introduced in the coming months in another bill.
Bill 150 addresses this issue directly by abolishing section 148 of the ADFPS, which provides that no more than 20 per cent of the shares or voting rights connected to a brokerage firm may be held, directly or indirectly, by financial groups or financial institutions (including insurers). This prohibition would be replaced by the notion of "significant interest" by a financial group or a financial institution in the decisions or the equity capital of an insurance brokerage firm. "Significant interest" can be defined as a shareholder’s ability to exercise 20 per cent or more of the voting rights over shares issued by that firm. The holding of shares issued by that firm representing 20 per cent or more of its equity capital also constitutes a "significant interest" in a firm’s equity capital.
It is specified that this amendment does not have the effect of prohibiting any financing agreement or any service contract between a financial institution (or a financial group) and a brokerage firm. Finally, it should be noted that a "significant interest" will also be considered to be in place when voting rights or shares are held by legal persons related to the financial institution or the financial group.
The Bill also distinguishes between two types of insurance brokerage businesses, thereby aligning the Quebec regulation with that generally found in other Canadian provinces.
The amended ADFPS will distinguish between "dommages” (i.e. property and casualty insurance) brokerage firms whose role is to offer products from several different insurers and agencies limited to the sale of insurance products underwritten by only a handful of insurers or a single insurer.
Both agencies and brokerage firms will be required to register with the AMF as one of these two designations. In both cases, "a damage insurance agency" or "a damage insurance brokerage firm" will be required to disclose, on its website and in its communications with its clients, the names of the insurers for which it offers insurance products. If they are bound by an exclusive contract with one insurer in particular, this information as well as the products included in the contract must also appear on the website of the agency or in its communications with clients.
Furthermore, any insurance brokerage firm will now be required (in order to maintain the "brokerage firm" designation) to offer clients products from at least four (4) insurers who do not belong to the same financial group, for each insurance proposal received. If it cannot disclose to the AMF the information demonstrating that it made every effort to comply with this provision, it may be required by the AMF to change its registration from "brokerage firm" to "agency" and even be required by the AMF to enter into an exclusive contract with an insurer. The AMF may also require the agency to comply with the publication requirements on its website and in its communications with clients regarding its new status.
On April 11, 2018, Mr. Yi Gang, the new governor of the People’s Bank of China, spoke at a sub-forum “Normalization of Monetary Policy" during the Boao Forum for Asia Annual Conference 2018 and announced a number of measures and timeline on more financial sectors opening, following President Xi’s high-level speech regarding further opening of Chinese financial market on April 11.
According to Governor Yi, the following measures are expected to be put in place in the next few months by June 30, 2018:
The following measure is expected to be put in place by end of 2018.
The European Union and the United States have notified each other that all procedures have been completed to enable the bilateral agreement on prudential measures relating to insurance and reinsurance (the Agreement) to enter into force. Accordingly, notice has now been published in the Official Journal of the European Union stating that the Agreement entered into force on April 4, 2018.
Historically, US states have been able to impose collateral requirements where risks are ceded to European reinsurers. This has been applied as a consumer protection measure. Collateral can be up to 100 per cent of the risk reinsured, depending on the US state (some states have a sliding scale). The covered agreement was signed by representatives from the EU and the US on September 22, 2017. The agreement will principally benefit European reinsurers by progressively (over five years from formal adoption) removing collateral requirements. In addition, however, US reinsurers will no longer need to have a local presence in the EU in order to cover EU risks.
The text, negotiated by the Commission on the basis of a mandate approved by the Council in April 2015, includes provisions on:
Some of the Agreement’s provisions have been applied provisionally since it was signed in September 2017. The Agreement will fully apply for both sides 60 months post-signature and a Joint Committee will oversee its implementation.
The European Parliament voted on March 1, 2018 to adopt a directive to delay the implementation of the Insurance Distribution Directive until October 1, 2018. The European Council has adopted the directive agreed by the Parliament with the effect that European Member States must implement the IDD into national law by July 1, 2018. Firms will be required to comply with the new distribution rules from October 1, 2018.
The Insurance Distribution Directive (IDD) was due to apply from February 23, 2018. However, on the basis of a proposal from the European Commission, the IDD transposition deadline was postponed until July 1, 2018 and the application date to October 1, 2018.
The delay will enable the insurance industry to better prepare for the directive and for the changes necessary to comply with implementing rules.
Amendments to both the Long-term Insurance Act Regulations and the Short-term Insurance Act Regulations, both gazetted on December 15, 2017, became effective on January 1, 2018 in South Africa.
The changes to the Long-term Insurance Act Regulations include changes to the remuneration and practices for intermediary services for both investment policies and other policies, the remuneration for binder and intermediary functions, changes to other aspects of the binder regulations, and amendments to the section 54 limitations (which prohibit certain policy provisions).
The majority of the changes to the Short-term Insurance Act Regulations relate to the circumstances in which an insurer may enter into a binder agreement, the respective rights and obligations of the insurer and binder holder, and the remuneration that may be paid to the binder holder.
Most sections of the Financial Sector Regulation Act 2017 were brought into force from April 1, 2018. This step was anticipated as the first step towards the commencement of the new Insurance Act on July 1, 2018.
By a two-step process the Minister was empowered to make regulations, which were passed on that day, to enable the Reserve Bank to perform the functions of the Prudential Authority and for the FSB to perform the functions of the Conduct Authority in the meantime. The regulations also put in place the processes to establish the new authorities and to transfer FSB assets and staff to the Conduct Authority in due course.
Most of the Act is in force except:
Many of the amendments to financial institutions legislation are yet to come into force. The Conduct Authority provisions in the Long-term Insurance Act and the Short-term Insurance Act regulated by the FSB (now the Conduct Authority) remain in place for now.
The provisions regarding offences, penalties and personal liability will be effective for insurers when the new Insurance Act is in force.
The immediate effect of bringing the law into force is to give official status to the publication of the draft Prudential Standards. Firms had until April 23 to comment on the draft Prudential Standards. The intention is to bring them into force when the new Insurance Act comes into force on July 1, 2018.
UK and EU negotiators have agreed the text for the agreement governing the transition (or implementation) period following the UK’s departure from the EU. Significantly, the draft text confirms the UK’s agreement that the transition period should end on December 31, 2020. This is slightly shorter than the UK had previously suggested, but has the advantage of certainty – and will no doubt help to focus the minds of the parties as to the time available to reach agreement as to the future trading relationship between the UK and the EU, particularly given that, at present, there does not appear to be any mechanism for extending it.
Ultimately, if there is no agreement reached on the terms of the UK’s departure, the agreement as to the transitional period would also fall away. This latest announcement regarding agreement as to the terms of the transitional period is a significant step in the Brexit negotiations but there is work still to be done.
Norton Rose Fulbright has launched its MicroCert in Disruptive Technologies at its annual Tech Business & Law Conference in Silicon Valley.
The technology that makes smart contracts possible3 was developed with a view to enabling transactions to be made end-to-end without the intervention of third parties, intermediaries, adjudicators or courts.