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The Actuary The magazine of the Institute & Faculty of Actuaries

DPB status good news for actuaries

FSA compliance. Not always considered the most riveting of subjects. But before you quickly turn the page, do pause long enough to appreciate that the Institute of Actuaries, along with a number of accounting and legal professional bodies, has become a designated professional body (DPB) under the Financial Services and Markets Act 2000 (FSMA2000). This is good news for actuaries, especially those of the consulting variety.
Because of the Institute’s DPB status, actuarial consultancy firms have new compliance options available to them. In particular, in contrast to before N2, all actuarial firms are likely to be able to make use of a ‘lighter touch’ compliance regime if they wish, being regulated by the Institute of Actuaries, rather than coming under full FSA regulation.

Does compliance really matter for consultants?
Actuarial consultancies advise on all sorts of investment products for their clients. Typically, this is for pension scheme trustees, but it can also be for insurance companies or other clients, eg actuaries advise trustees on pooled investments, annuities, AVC policies, etc.
Any advice given on such investments will almost invariably be a ‘regulated activity’ because, under FSMA2000, from December 2001 it has been a criminal offence to provide such advice without authorisation from the Financial Services Authority (FSA), unless your firm is exempt from authorisation, and that is what the DPB status of the Institute is all about. So, unless you want to risk ending up in jail, compliance does matter!

Quick history lesson
Before December 2001 investment advice was regulated under the Financial Services Act 1986. Under that Act there were a number of regulators, including the PIA, IMRO, and various professional bodies.
The Institute of Actuaries became a recognised professional body (RPB) under FSA86 and any firm that was both managed and controlled by actuaries could choose to be regulated by the Institute by signing up to the RPB regime and paying an appropriate fee. (The Faculty of Actuaries was not an RPB, and neither is it a DPB under the new regime. Fellows of the Faculty can, however, make use of the new compliance regime by becoming affiliates of the Institute.)
In this context, ‘managed’ by actuaries essentially means at least half of the partners or directors are actuaries, while ‘controlled’ by actuaries essentially means that at least half of the ownership of the firm is in the hands of actuaries.
Under the old regime, RPB firms could advise all clients, including individuals, on all sorts of investments and insurance products. Therefore, at least in theory, there was little restriction on what an RPB firm could do when compared to, say, a PIA firm.

Part XX of FSMA2000
When FSMA2000 first became law, it was presumed by many that actuarial firms would need to seek full FSA authorisation in order to undertake regulated activities from N2. However, there was a possibility of a lighter touch compliance regime as a result of Part XX of the Act. A lighter touch regime is generally considered appropriate for professionals because the regulated activities they undertake are typically incidental in the context of offering wider professional services. Further, professionals are required to pass their own examinations, abide by certain standards of conduct, and are subject to professional discipline arrangements, so there is less need to impose further rules on them.
The idea behind Part XX is that professional bodies who wished to do so would be ‘designated’ by the Treasury and would become a DPB. In principle, this works in a similar way to the RPB regime that existed before N2, but the range of activity that can be undertaken by professional firms is considerably restricted.
After detailed discussions with the Treasury and the FSA, the DPB Committee of the Institute identified a way in which the Institute could make use of the Part XX regime during 2001. The results of the committee’s labours went to the Institute’s Council, who decided on 2 October 2001 that the Institute should go full steam ahead in agreeing DPB rules with the FSA and hence activate its DPB status that had already been formally agreed with the Treasury.
Those rules were formally agreed with the FSA on 27 November 2001 just in time for N2!

Defining some terminology
Before describing the consequences of this for actuarial consultancy firms, it is useful to define something called exempt regulated activity (ERA), or non-mainstream regulated activity (NMRA). This is the regulated activity that can be undertaken by a professional firm without the need to follow the FSA’s full rules. The key features of exempt regulated activity and non-mainstream regulated activity are set out in the box across.
It is likely that nearly all regulated activity that consulting actuaries do for pension scheme trustees and insurance companies would be able to satisfy this definition. However, any regulated activity for an individual almost certainly will not, and this includes advice on stakeholders and group personal pensions.

Consequences for firms compliance options
Compliance route 1
The first compliance route is open to any firm that is either managed or controlled by actuaries. This is a wider definition than firms that could be RPB firms, as it only requires firms to be managed or controlled rather than both managed and controlled by actuaries. Any actuarial firm with a predominantly actuarial management would be likely to be able to satisfy this definition.
All such firms can sign up for the DPB regime with the Institute. They will then be licensed to undertake exempt regulated activities. They have to follow the Institute’s DPB rules on these activities. There is no need for FSA authorisation.
However, such firms will only be able to undertake exempt regulated activities. If they wish to undertake other activities, they will need to set up a subsidiary which is authorised by the FSA in order to do so. It should be noted that no firm can be both a DPB firm and authorised by the FSA at the same time.

Compliance route 2
The second compliance route is available to firms that are both managed and controlled by actuaries essentially those firms that could come under the RPB regime. These firms can apply for FSA authorisation and should satisfy the FSA’s definition of an authorised professional firm (APF). Such a firm can undertake non-mainstream regulated activity and also undertake any other regulated activity for which it has received FSA permission. The advantage of this route is that there is no need to split the firm’s business in order to, for example, advise individuals. The FSA and the Institute have rules applicable to APFs which mean that:
– when an APF undertakes mainstream activity for example, advising individuals the full FSA rules apply in the usual way;
– when an APF undertakes non-mainstream regulated activity the firm follows the DPB rules (with a few high-level FSA rules).
The availability of compliance routes 1 and 2 means that a level compliance playing field is available to nearly all actuarial firms, and that this is at a level that is specifically designed for actuaries. Unfortunately, there remains one difference between compliance routes 1 and 2 that could not be resolved. This is that a DPB firm must set up a subsidiary in order to undertake mainstream regulated activities, whereas an APF is not required to do so. This discrepancy has an impact on firms that are managed by actuaries, but not controlled by actuaries. Such firms are not able to make use of compliance route 2.

Compliance route 3
The third route available to an actuarial firm is to seek full FSA authorisation and follow the FSA’s full rules when completing all regulated activity, including non-mainstream regulated activity.
A number of firms are following this route. This includes many firms that were regulated by PIA and IMRO before N2. These firms may wish to consider whether they are able to make use of the DPB regime going forward.
Multidisciplinary firms will also need to follow compliance route 3. Because of the way the DPB regime is structured, it is unlikely that a multidisciplinary firm could make use of the regime, either as an actuarial firm, or as an accountancy firm.

Compliance route 4
The last route available to any firm is not to undertake any regulated activity at all. If a firm chooses this route, there will be no need for it to seek authorisation from the FSA or a licence from the Institute of Actuaries.

Maintaining status
Achieving DPB status for the Institute of Actuaries is good news. It opens up an appropriate compliance regime for nearly all actuarial consultancy firms, and it ensures that the Institute maintains its status as a fully-fledged professional body alongside the accounting and legal bodies.