A New Era In Regulation For The UK Actuarial Profession
A New Era
In Regulation For The UK Actuarial Profession
Revised regulatory environment helps the UK Actuarial Profession ensure its actuaries maintain the highest professional and ethical standards, in the interests of both its members and the public who depend on their expertise.
By Caroline Instance
The UK Actuarial Profession entered a new era in regulation in 2005 when it accepted the recommendations of the government-sponsored Morris Review of the Actuarial Profession. After more than a century of self-regulation, the Faculty and the Institute of Actuaries, which work in collaboration in the United Kingdom as the Profession, agreed that its regulatory responsibilities would be subject to external oversight through the Financial Reporting Council (FRC). Oversight arrangements are common for professional bodies in the United Kingdom and the FRC already fulfilled a similar role in relation to the six professional accountancy bodies operating in the United Kingdom and Republic of Ireland.
The FRC is the United Kingdom's independent regulator responsible for promoting confidence in corporate reporting and governance. In relation to actuaries it aims to ensure that:
- The users of actuarial information can place a high degree of reliance on its relevance, transparency of assumptions, completeness and comprehensibility.
- The clients and employers of professionally qualified actuaries can rely on them to act with integrity and competence, having regard to the public interest.
The UK Actuarial Profession fully supports these goals, reflected by a cornerstone of its strategic plan–to build a quality framework which promotes public confidence in the work of actuaries, resulting in regulators and organisations representing the public respecting the professional ethics and standards demonstrated by actuaries.
THE FRC AND ITS ROLE
The FRC is accountable to the UK government. Its core functions include:
- Promoting high standards of corporate governance.
- Setting, monitoring and enforcing accounting and auditing standards.
- Setting actuarial standards.
- Overseeing and regulating auditors.
- Operating an independent investigation and discipline scheme for public interest cases.
- Overseeing the regulatory activities of the professional accountancy and actuarial bodies.
It delivers this through six operating bodies, three of which are involved with matters directly related to actuaries: the Board for Actuarial Standards (BAS), the Professional Oversight Board (POB) and the Accountancy & Actuarial Discipline Board (AADB).
The FRC's role for actuaries is limited to the United Kingdom. For example, standards issued by the BAS only apply in the United Kingdom. Likewise, the AADB will only concern itself with disciplinary cases which raise or appear to raise serious issues affecting the public interest in the United Kingdom. In contrast, the Profession retains some responsibilities towards its members who operate outside the United Kingdom.
Regulation by the FRC impacts both the membership body (oversight) and individual member levels (standard setting and discipline). The cost of the FRC's activities in relation to actuaries is paid for by a levy on insurance companies (45 percent), a levy on pension schemes (45 percent) and a levy on the Profession (10 percent). In 2008, the Profession contributed £245k.
The independence of the FRC from the Profession is a key strength in promoting confidence in the regime with other regulators and government departments. However, there are many actuaries involved in all parts of the FRC's operations–sitting on its main and operating boards, employed as staff and assisting with specific working parties.
TECHNICAL ACTUARIAL STANDARDS
The Board for Actuarial Standards (BAS) is now responsible for setting technical actuarial standards in the United Kingdom. The Profession requires its members to follow any standards set by the BAS and would discipline them if they did not. In practice, other regulators such as the Financial Services Authority (FSA) and the Pensions Regulator (who have observer status on the BAS) also expect their regulated entities to follow applicable BAS standards. It is hoped that this will be extended and formalised, so as to ensure better and more consistent adherence with standards across the board.
The BAS has a programme of work running to 2010 to replace the set of guidance notes adopted from the Profession in 2006 with a suite of new standards which respond to the needs of users rather than practitioners. These standards are written in a way which favours principles over prescriptive rules. There will be three generic standards covering reporting, modelling and data and specific technical standards related to roles and areas of practice. As some of the old guidance notes also contain ethical and conduct-related material, the Profession may re-introduce some of this in Actuarial Profession standards when BAS withdraws them.
The BAS operates an open consultation process when developing standards. The normal pattern is to publish a discussion document and then an exposure draft. It will therefore take six- to nine-months to produce a new standard. The Profession will always respond to any BAS consultation on a high-level basis and, in addition, in order to help the BAS understand all the issues, private detailed comments may be made by particular practice areas.
Most concerns about the professional conduct of actuaries will continue to be dealt with by the Profession. While the Faculty and the Institute as separate legal entities have two schemes, they are identical and share the same infrastructure so that the members of either body are treated in an identical manner. If a disciplinary matter raises or appears to raise significant public interest concerns, it would be dealt with by another of the FRC's operating bodies which also deals with similar cases for accountants and accountancy firms: the AADB. This group may ask to take over cases or complaints which have been initially made to the Profession or the Profession itself may refer them to the AADB. It is for the AADB to decide whether or not to choose to deal with them. So far, the AADB has considered two cases referred to it from the Profession and has decided to investigate one of them.
THE PROFESSION AS A REGULATOR
Whilst the Profession no longer has responsibility for the production of technical standards, it continues to be responsible for the regulation of its members in all other respects and a lot remains to be done! In addition to the maintenance of an ethical Code and production of conduct or other ethical standards, the Profession is responsible for the setting of qualification standards and education and training requirements to attain membership, measures to maintain competence including mandatory Continuous Professional Development, and the maintenance of a practising certificate regime for reserved roles.
The Profession has taken the opportunity to rethink the structure and format of its standards in the light of the BAS role. We started with our primary ethical standard, the Professional Conduct Standard (PCS), developing the Actuaries' Code as its successor. The Code–which is currently in its third round of consultation with members–is principles-based, which is a distinct change in direction for the Profession. It sets out five core ethical principles which should underpin the conduct of all members when related to their professional lives:
- Competence and care.
Work has already begun on a pensions specific conduct standard, which aims to bring all other ethical regulation for actuaries working in the pensions practice area together.
If the Profession wants any technical standards to apply to its members outside the United Kingdom–if the work is not covered by appropriate standards in the local country either from legislation, regulation or standards by a fellow actuarial association–it may choose to adopt or adapt a BAS standard for such circumstances. There is one existing Guidance Note which covers the prudential supervision outside the United Kingdom of long-term insurance business.
While the Profession is still responsible for setting and operating its own regulatory arrangements, these are subject to review and scrutiny by the POB. If it has any concerns–in the public interest–about the efficacy of the arrangements, it may make recommendations to the Profession. The Profession will then comply with the recommendations within a reasonable period, or explain in writing why it is not doing so, on the basis that its reasons will be published and be subject to public scrutiny and media comment. The Profession will naturally think very carefully before it decides not to follow a POB recommendation.
The Profession's staff supplies the POB with explanations and statistics about its regulatory operations and have regular meetings. This activity has added to operating costs, but can be a useful discipline as it provides an external challenge to our work which might otherwise be lacking in a member-led organisation. For example, two recent FRC/POB consultations–on promoting actuarial quality, and the monitoring and scrutiny of actuarial work–have looked at how the Profession's activities fit with the work of financial services and pensions regulators, and the responsibilities of senior management and governing bodies, auditors and actuarial consulting firms.
The Profession will let the POB know about any planned change to its regulatory arrangements to enable the POB to comment before a public announcement is made. This may mean that change takes longer than it did previously, although the POB can also be a catalyst for change. The end result will hopefully be of improved quality and will enhance the credibility of professional regulation, as it will have the benefit of independent input from a public interest perspective.
A PROFESSIONAL REGULATOR, NOT JUST A REGULATOR OF PROFESSIONALS
Along with its external partnerships, the Profession has been taking steps to boost its internal regulatory capacity.
There is increased lay participation on its key professional regulation committee. As of July 2009, it has a lay chairman: Sir Philip Mawer who was a Parliamentary Commissioner for Standards until the end of 2007 and is currently the Prime Minister's Independent Adviser on Ministers' Interests. The Professional Regulation Division, headed up by Richard Maconachie, has been augmented with two senior appointments: Irene Paterson FFA as head of Regulatory Policy and Christine McConnell, a lawyer, as head of Regulatory Compliance. The new appointments are a strong signal of the importance the Profession places on regulation in the public interest.
It is essential that our members are equipped with relevant and up-to-date training, and that is why our regulatory framework reinforces the importance of compliance with its Continuing Professional Development (CPD) Scheme. A number of members are currently facing disciplinary action after failing to meet requirements. With the benefit of several years' experience of the scheme and feedback from members and other stakeholders, the Profession will shortly make revisions to it.
A working group has recently been established to review the requirements of the Profession's Practising Certificates regime. In particular, it will assess the adequacy of its assessment and validation arrangements for first-time applicants and, separately, the adequacy of its renewal processes, in order to help build confidence and trust in the profession.
Building and maintaining this confidence in actuaries is a primary function of the Profession's regulatory system. In these times, more than ever, it is crucial that our members uphold, and are seen as upholding, the highest standards of professionalism at all times. The changes to our regulatory system since the Morris Review provide members with clear guidelines and standards on ethics and professionalism. This should benefit all those who rely on actuarial advice or are affected by it.
Caroline Instance is chief executive of the UK Actuarial Profession. She is based in London and can be reached at email@example.com. For more information on the UK Actuarial Profession, visit Actuaries.org.uk and Frc.org.uk.