Legal and regulatory.

The impact of regulation on the Group’s strategy is likely to continue to increase; the current pace and depth of regulatory reform and supervisory activity is already high and there are indications that this may further intensify. The changes fall into three categories:

  • Delivery of current/known UK and EU regulatory initiatives.
  • Adapting to the changed UK regulatory architecture.
  • Adapting the way we do business under the new regulatory culture.

Delivery of current/known UK and EU regulatory initiatives:

Solvency II: Current indications suggest that the implementation of the long-awaited EU-wide requirements on capital adequacy and risk management rules is unlikely before 2017. The final details of Solvency II are still to be resolved and the overall timeline for development of the full rules remains challenging. We remain particularly concerned that there should be appropriate stabilising measures to dampen volatility and pro-cyclicality for providers of long-dated financial products and we are encouraged by the progress made to develop these measures, including the matching adjustment for annuity products.

Retail Distribution Review (RDR): The RDR changes, which applied to advised sales of retail investment products, came into force on 31 December 2012. The RDR banned product providers from paying commission to advisers. It also required advisers to change the way they describe their services to customers, including the way they will be charged for advice. Furthermore, it required advisers to meet new professional qualification standards.

Pensions reform: From 1 October 2012, the first tranche of employers were required to enrol most of their current and future employees into a workplace pension scheme. This requirement will be rolled out across all employers over several years. Auto enrolment is a significant act of Government intervention into pensions. With full implementation, the Department of Work and Pensions expects between six and nine million new participants in pension saving.

Gender directive: The implementation of the EU’s gender directive, which forbids price discrimination on the basis of gender, was implemented in December 2012.

Mortgage Market Review (MMR): The FSA recently consulted on a major package of regulatory reforms for the mortgage market, setting out new standards for, among other things, responsible lending, disclosure, suitability and distribution of mortgage products. In its response to this consultation, the FSA has indicated that MMR reforms will be implemented in April 2014.

Retail Conduct EU Directives: The Commission’s reviews of the Markets in Financial Instruments Directive (MiFID), Insurance Mediation Directive (IMD), Undertakings for Collective Investments in Transferable Securities (UCITS) and the new Packaged Retail Investment Products (PRIPs) proposals may bring about changes to the way most insurance and investment products are sold in the UK.

Adapting to the changed UK regulatory architecture

The Financial Services Act 2012 means the FSA will be replaced with the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Financial Policy Committee (FPC), from 1 April 2013. These changes give rise to:

Regulatory culture and focus: We expect the new regulators to use their powers both more assertively and frequently to deliver their objectives, act more quickly and be more judgement-based, with a lower risk appetite than the FSA.

Enhanced regulatory powers: The Financial Services Act provides the new regulators with fresh powers to support their regulation and supervision of firms.