Royal & Sun Alliance Insurance plc full independent expert report

MILLIMAN | Client Report2. REGULATORY BACKGROUNDIntroduction2.1. General insurers, as well as other financial services organisations, are regulated by the FSA, which has morethan 3,000 employees and an annual budget of over £400 million.2.2. The FSA is a statutory body set up under FSMA, and has the strategic aims of:• Promoting efficient, orderly and fair markets;• Helping retail consumers achieve a fair deal; and• Improving the FSA’s business capability and effectiveness.2.3. The FSA places great emphasis on its Treating Customers Fairly (“TCF”) initiative and expects firms todemonstrate that they are treating customers fairly at all times. This is covered in more detail below.2.4. The FSA also sets the regulations governing the amount and quality of solvency capital held by firms; these aresummarised below. The solvency regime is designed to protect the benefit security of policyholders, as well asthe stability of the insurance industry.2.5. In June 2010, the UK government announced that the FSA will be broken up by the end of 2012. It will bereplaced by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). The latterentity will be a subsidiary of the Bank of England and will have responsibility for the prudential regulation ofindividual insurance companies along with banks, investment banks and building societies.2.6. For the purposes of this report I refer to the FSA as the sole regulator of the UK general insurance industry.Where I refer to the FSA this should be taken to implicitly refer also to the FCA and PRA as appropriate.2.7. In the UK, the taxation regime taxes general insurance companies based on profits achieved by those companiesat the main rate of corporation tax (currently 27.25% 1 ).FSCS2.8. Consumer protection is also provided by the Financial Services Compensation Scheme (“FSCS”). This is astatutory “fund of last resort” which compensates customers in the event of the insolvency (or other defineddefault) of a financial services firm. Insurance protection exists for private policyholders and small businesses(annual turnover less than £1 million) in the situation when an insurer is unable to meet its liabilities. For non-lifeinsurance business, the FSCS will pay 100% of any claim incurred before the wind-up under compulsoryinsurance (such as motor third party liability) and 90% of the claim incurred before the wind-up for noncompulsoryinsurance (such as home), without any maximum. The FSCS is funded by levies on firms authorisedby the FSA.2.9. Therefore, in relation to the companies concerned in the RSAI Scheme, certain of the UK policyholders areprotected by the FSCS.FOS2.10. The Financial Ombudsman Service (“FOS”) provides private individuals (and micro enterprises 2 ) with a free,independent service for resolving disputes with financial companies. It is not necessary for the private individual(or micro enterprise) to live or be based in the UK for a complaint to be dealt with by the FOS. It is necessary forthe insurance policy concerned to be, or have been, administered from within the UK.1The UK Corporation Tax rate is expected to reduce to 26.25% in 2012, 25.25% in 2013, 24.25% in 2014 and 24% from 2014onwards.2Micro-enterprises (an EU term covering smaller businesses) can bring complaints to FOS as long as they have an annualturnover of less than €2 million and fewer than ten employees.July 2011 6