The IFoA has responded to a consultation from the UK’s Department of Business, Energy and Industrial Strategy on the future of actuarial regulation. Ben Kemp and Andrew Rear explain why this is an important opportunity to have our say and influence the future of the profession.
The IFoA has responded to proposals that would bring into being a new statutory framework of actuarial standards, monitoring and enforcement, under the auspices of a new UK regulator – the Audit Reporting and Governance Authority (ARGA).
We have expressed concerns that, unless carefully considered and implemented, the proposals will not achieve the government’s objective: a genuinely effective, credible regime that serves the public interest. Simply attempting to place current informal arrangements on a statutory footing will likely fail due to lack of enforceability and the opportunity for regulatory arbitrage.
What are the government’s proposals?
The UK government has produced a white paper setting out proposals that principally relate to the regulation of audit and corporate governance in the UK. The white paper follows several related government reports, including that of Sir John Kingman (published in December 2018). It would see the creation of a new statutory audit and financial reporting regulator, ARGA, to replace the current body, the Financial Reporting Council (FRC). While these changes have not been brought about by issues relating to actuaries, the review of the FRC has meant the government has considered what to do in relation to the FRC’s role in actuarial regulation.
The government proposes that ARGA take on the FRC’s current role regarding regulation of actuaries. There had been suggestions of a different regulator for actuaries, but the government has settled on ARGA continuing the FRC’s role.
What is proposed in relation to actuarial regulation is to some extent a continuation of the current arrangements, but on a statutory footing, with new specific powers given to the new regulator. ARGA would be responsible for setting Technical Actuarial Standards (TASs), although these would now have a statutory basis and be ‘legally binding’. It is unclear what this means, but in any event the standards, like the new regulator itself, will have their basis in statute. ARGA will have new statutory powers to monitor and enforce the new TASs. Monitoring will likely include direct monitoring of work to ensure compliance, with powers to remedy issues identified. It is suggested that the new powers might extend to ‘entities’, not just individuals.
As is currently the case with the FRC, ARGA will oversee the IFoA in relation to its UK regulatory role. We will continue to be responsible for ethical standards, CPD, qualification, thematic monitoring and the Quality Assurance Scheme, among other activities that we currently discharge in performing our public interest role.
Finally, as is currently the case, it is proposed that ARGA will operate a public interest disciplinary scheme to consider the more serious disciplinary cases that are not dealt with by the IFoA’s Disciplinary Scheme. It is suggested that the ARGA scheme may in future extend to organisations, not just individuals.
What is the IFoA’s view of the new proposals?
Council has set up a steering group that has been working hard to prepare the IFoA’s response to the consultation and to engage with a broad range of members, employers and wider stakeholders. The white paper sets out five principles that would underpin an effective risk and cost-based regime to regulate the actuarial profession:
- Proportionality of resource relative to risk
- Cost effectiveness, to ensure resource is used efficiently and the cost of regulation is not overly burdensome
- Confidentiality, to ensure the commercial sensitivity of actuarial activity is respected
- Avoidance of duplication or ‘gold plating’, to ensure regulation does not replicate other activities
- Oversight and regulation in the public interest, to ensure appropriate focus.
The IFoA supports an effective risk-based regulatory framework according to these principles. We are committed to ensuring that it is independently accountable so it can command continuing confidence in its own regulatory role, and can uphold standards and the reputation of the profession. We are supportive of independent oversight being undertaken by ARGA but believe it will be essential that it has sufficient dedicated expertise and resource in relation to actuarial matters, and that these are not just an adjunct to its regulation of the audit and accountancy professions.
What are the IFoA’s concerns?
Crucially, it is not clear how ARGA’s new statutory powers will apply in relation to technical standard setting, monitoring and enforcement, or to whom they will apply, or to which areas of activity. A particular concern at this stage is that we avoid a situation in which the new regulation is ineffective or even fails because it is either too broad in scope to enforce, and/or it creates an arbitrage situation in which actuaries are regulated to do work or roles for which non-actuaries do not have to be regulated.
We support regulatory powers that are in the public interest, clearly focused on a risk basis, and applicable to everybody doing these types of work or role. We believe this will be essential to ensure the credibility of the new framework, and to protect the public interest first and foremost, as well as the reputation and standing of the profession. In turn, the IFoA remains committed to providing a strong framework of ethical regulation around the Actuaries’ Code, applicable to all its members.
What about the proposals in relation to entity-based regulation?
The government has said that it sees merit in the case for regulating actuarial work undertaken by entities, in addition to the regulation of individual professionals who undertake actuarial work. It is considering whether ARGA’s independent disciplinary regime should also apply to entities.
We can see that the rigour and effectiveness of the new regime would be enhanced if it had specific powers in relation to entities to ensure they co-operate with regulatory monitoring and investigations.
In relation to actuarial regulation, the challenge lies in ensuring that any regime is both practical and proportionate. Actuarial practice does not lend itself to easy categorisation, and is not undertaken in homogeneous organisations. Actuaries work in a wide range of organisations and it is essential that any new regime is clear and focused enough to be effective. For an entity such as a supermarket or charity to be subject to ARGA oversight just because it employs a member of the IFoA would be absurd, for example.
There is also a clear and obvious risk of overlap with the regulation of other UK regulators, particularly in relation to insurance, and the entity and individual-based regulation already undertaken by the PRA and FCA in that sector. It will be important to ensure co-ordination and clarity if the new regime is to avoid unnecessary complexity – the cost of which would ultimately be borne by users and clients.
Will the IFoA be publishing its response to the consultation?
The IFoA’s response is now available on our website at bit.ly/3cMOkNp. We will continue to engage with members, employers, regulators and the government, and will leave no stone unturned in seeking to secure a positive outcome: in other words, a regulatory framework that is clear, effective and risk-based in serving the public interest and upholding the standards and reputation of the actuarial profession.
These proposals provide an opportunity to improve and clarify the current arrangements and to ensure their effectiveness, but they also pose significant risk, the greatest of which may be that they are not sufficiently considered to ensure appropriateness for the modern actuarial profession. It is imperative that we seize this opportunity to influence the future for our profession.
Ben Kemp is IFoA general counsel
Andrew Rear is chair of the IFoA Regulation Steering Group
Image credit | Shutterstock