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The Actuary The magazine of the Institute & Faculty of Actuaries

Regulation: regulate or not to regulate?

Should the Profession regulate actuarial firms? This question may surprise many actuaries, for whom it is almost an article of faith that the Profession regulates only individuals. If so, do we mean any firm that employs an actuary, or any firm which provides actuarial services to external clients? Actuarial firms come in all shapes and sizes: sole practitioners, partnerships (often multidisciplinary), companies, insurers and other financial institutions.

This is one of the questions posed in a discussion paper Monitoring and scrutiny of actuarial work issued by the Professional Oversight Board — the operating body of the Financial Reporting Council (FRC), which oversees the Profession in regulating its members. Sole practitioners aside — much of the monitoring and scrutiny of actuaries’ work comes from, or is arranged by, their work colleagues. An obvious place to look is the quality assurance arrangements operated by actuarial firms. The FRC’s parallel discussion paper Promoting actuarial quality makes a similar proposition: one of the main factors influencing the quality of actuarial work is the working environment for actuaries.

The Profession already regulates certain actuarial firms through the Institute’s role as a Designated Professional Body under the Financial Services and Markets Act 2000. Professional regulation also impacts on employers, and sole practitioners are effectively regulated at the ‘firm’ level. In considering whether to award a practising certificate, or approve a student’s work-based training, the Profession will assess the arrangements operated by the relevant firm. It often requires a firm’s co-operation to investigate alleged misconduct by members. The ‘senior actuary’ role in the existing Professional Conduct Standards operates at the firm level, as does many actuaries’ handling of conflicts of interest, quality assurance and professional indemnity insurance. While reinforcing individual professional responsibility, firms play a significant role in promulgating, coordinating and enforcing regulatory and professional obligations, and in formulating a ‘house view’. Many external clients regard their relationship with the actuary’s firm rather than the individual actuary. The Profession might choose to formalise these existing indirect arrangements.

Formalising arrangements
One such way of doing this is through formal conditions on the issue of a practising certificate, which could be monitored by the Profession, or an independent body. Alternatively, the Profession might seek to streamline its regulation by allowing firms to hold group or corporate practising certificates directly. Individual actuaries could be permitted to hold a subsidiary certificate subject to fewer direct requirements. If desired, statutory requirements, restricting certain actuarial roles to individuals could be relaxed through legislation to allow the appointment of such qualifying firms, as with audit.

In considering the advantages and disadvantages for the Profession, the Oversight Board is distinguishing between life and general insurance actuaries, who often work in-house and whose work is closely scrutinised through arrangements operated or regulated by the Financial Services Authority; and pensions actuaries, most of whom work for consultancy firms. The strategy suggested in life and general insurance is for the Profession to support existing regulatory and market mechanisms, by equipping actuaries to review each other’s work, through education, research and non-binding guidelines. In pensions, we suggest the Profession adopts a more direct strategy for monitoring, either through professional requirements imposed on individual actuaries (or their firms) — such as peer review — or by arranging for direct inspection.

Given the important issues raised in both papers, we have set an extended period for responses until 30 September 2008. We welcome comments from actuaries and non-actuaries alike, so visit www.frc.org.uk/about/actuarialregulation.cfm

Recommendations for quality assurance
The Financial Reporting Council’s discussion paper Promoting Actuarial Quality tackles the problem of assessing actuarial quality. It describes current actuarial practices, seeks views on the drivers and threats, proposing six factors for consideration:
>> Reliability and usefulness of actuarial methods
>> Technical skills of actuaries
>> Communication of actuarial information and advice
>> Ethics and professionalism of actuaries
>> Working environment for actuaries
>> Other factors outside actuaries’ control.

The consultation closes on 30 September 2008. Visit: www.frc.org.uk/publications/pubs.cfm

The Professional Oversight Board’s discussion paper Monitoring and scrutiny of actuarial work responds to a recommendation by the Morris Review that the FRC should satisfy itself that appropriate monitoring of actuaries’ compliance with professional standards and independent scrutiny of actuarial advice is occurring through either direct supervision by the regulator, audit or external peer review. The paper considers three strategies for the Profession:
>> Support for existing regulatory and market review processes
>> Imposition of professional review requirements
>> Active external monitoring.

The consultation closes on 30 September 2008. Visit: www.frc.org.uk/pob/actuaries/reviewmonitoring.cfm

Paul Kennedy is head of actuarial oversight at the Financial Reporting Council