where does all this leave the protection market?...i really don’t know why i bother to go to work...

PROTECT

LEGAL AND REGULATORY REVIEW

MARCH 2015

What a joy it is . . .

(c) Paginator Limited 2015

To do my job!


It’s a doddle . . .


Since November there’s only been . . .

Some proposed remedies for competition

issues in the GAP market

More obsession from FCA on claims ratios

A new Structure for FCA

A review of Financial Crime (it doesn’t pay to

ignore it)

Some stupid proposed changes to complaints

handling

A launch of Simple Products (pause to applaud

ABI)

Some Latvians taking an interest in IMD 2

The FCA being nice about Retrospective

Regulatory Action

Everyone having their say on Unfair Contract

Terms

A new Insurance Act 2015 (PhD in law required)

The FCA trying to explain “Attestations” . .

FCA trying to be nice about Fraud, Whistleblowing

and Enforcement

FCA trying to save you from the horrors of

“performance management”

FCA getting into social media


I really don’t know why I bother to go to

work . .


But I suppose I should mention that . .

at last somebody (other than me) has actually bothered to

explain what “conduct risk” is and to demonstrate just how

exposed you are to it . . .


. . and we have . . .

a new “buzz” word for

2015 . . . .


“Vulnerability”


So - not much to talk about really!!


Since I really want to talk about conduct

risk and vulnerability

Here comes a whistle-stop

tour of all that other stuff!


The Proposed GAP remedies


The first consultation on add-on insurance

“remedies”

FCA still working on:-

the calculation and publication of claims ratios

a ban on pre-ticked boxes (‘opt-outs’); and

improvement in the way add-ons are offered through price comparison

websites


The proposed GAP remedy . . .

Proposed amendments to ICOBS to:-

require “improved information” to be provided by a firm which wishes to

sell GAP insurance “in connection with” the sale of a vehicle by it (or by a

person connected to that firm); and

ban firms from concluding a GAP contract unless (with one exception) 2

clear days have elapsed since the firm provided required information to the

customer

The exception is that a “confident consumer” be permitted to initiate a sale

the day after the information has been provided


“GAP sold in connection with” . . . ?

There will be sufficient “connection”

between a GAP contract and the sale of a

vehicle if the GAP contract is sold “in

connection” with a credit agreement for

the vehicle.

A person “connected” with a firm would

include persons acting as an introducer or

appointed representative of that firm


How the proposed GAP remedy works . . .


Day 1

Required

Information

given to

customer

GAP

insurance

sale banned

until process

followed

Day 3

GAP sale still

banned

Day 4

GAP sale can

be made

Day 2

GAP sale still

banned

unless

customer

initiates the

sale

What is the “required information”?

The total premium of the GAP insurance policy, separately from other prices;

The significant features and benefits, and significant and unusual exclusions and

limitations, of the GAP insurance policy; and “cross references to the relevant policy

document provisions”;

The duration of the policy;

That GAP insurance can be purchased from other sources;

Whether the GAP insurance policy is optional or compulsory;

How the deferred opt-in works, including the date on which the prescribed information

was provided; and

The date on which all the above information was provided to the customer


ICOBS

Some of the required information is already

required under ICOBS

The required information is additional to any

other information required to be given to

customers under ICOBS

Before concluding a GAP contract a firm

should consider whether the customer should

receive the required information again (e.g. if

there is a long period between delivery of the

information and purchase of the GAP)


GAP remedy - the next steps

The Consultation on the remedy

ended on 13 March 2015

A Policy Statement confirming the

remedy is expected in June 2015

The final remedy will be in force

from 1 September 2015


What has been the reaction?

Very little concern regarding the sale of new vehicles

Probably shifts in the way in which the sales process for used cars will be

structured where an opportunity to market GAP is desired

Generally the Add-on remedies in isolation are a bit of a damp squib - except

(possibly) publication of claims ratios – but . . .

Remember that FCA has stated that the entire GI market should be alert to its

core “confirmed findings” . . .


The “Confirmed Findings”

That:-

the add-on “mechanism” has a clear impact on consumer behaviour and

often (adversely) affects consumers’ decision-making and weakens

engagement; and

there is a lack of transparency and comparability about the value provided

by general insurance products

More on this later


A New Structure for FCA


A new Structure for FCA


On 5 January 2015, the Authorisation and Supervision Divisions were integrated into one

Division.

That Division will then be split, from April 2015, into two new Divisions:-

One will regulate larger C1 and C2 firms,

The other will regulate all other firms.

This means that the distinction between C3 and C4 firms will disappear.

The impact is that there will be a much greater focus by FCA on whether the business

models of small and medium sized firms meet FCA’s requirements for consumer focus,

good outcomes and the minimisation of conduct risk

And that is potentially very dangerous – more on that later . .

Financial Crime


Financial Crime

FCA published its review into compliance with requirements to manage financial crime

risks

The conclusions were that “most intermediaries fail to manage risks effectively”.

The review related to commercial insurance intermediaries - but FCA observe that all

firms are subject to its financial crime rules - and should therefore ensure that they:-

note the review; and

have correct controls in place . . .

So - here follows a two minute guide to what you must do - and why . .


The background . . .

One of FCA’s three statutory objectives is its

“integrity objective”

“To protect and enhance the integrity of the

UK financial system”

If FCA lets any firm facilitate any financial

crime, then FCA breaches its regulatory

objective

Which it is not going to do – so we better

understand . .


What is financial crime?

Section 6(3) of FISMA says that financial crime “includes”:-

Fraud or dishonesty

Misconduct in, or misuse of information relating to, a financial market

Handling the proceeds of crime


How does FCA regulate financial crime?

The application of the Principles

for Business

Some specific Handbook Rules

A great deal of Guidance


The four relevant Principles for Business

(1) A firm must conduct its business with integrity

(2) A firm must conduct its business with due skill, care and diligence

(3) A firm must take reasonable care to organise and control its affairs responsibly and

effectively, with adequate risk management systems

(11) A firm must deal with its regulators in an open and cooperative way, and must

disclose to the appropriate regulator appropriately anything relating to the firm of which

that regulator would reasonably expect notice


The Handbook Rules

The main Rules are at SYSC 3.2.6 and 6.1.1:-

These require firms to establish and

maintain effective systems and controls to

prevent the risk that they might be used to

further financial crime

There are specific Rules and Guidance

regarding anti-money laundering at SYSC 3.2.6A

to SYSC 3.2.6J and at SYSC 6.3:-

These involve establishing if there is any

risk of your business being used to launder

money – and, if so, putting in place all

necessary systems and controls to prevent

this


FCA Guidance on preventing financial crime

Contained in “The Financial Crime Guide” - found as a “Regulatory Guide” within the

Handbook

The Financial Crime Guide says that effective systems and controls help firms detect,

prevent and deter financial crime

So, you must assess risk of financial crime affecting (or existing within) your business,

and if you find any risk, do something very effective to deter and prevent it!

Remember that financial crime includes “dishonesty” - so keep an eye on (the possibility

of) rogues within your business


Complaints Handling Review

Consultation closed on 15 March 2015

Proposed implementation date March

2016

Some changes from 14 May 2015 to

meet EU ADR Directive requirements

Covered in the January meeting so only

brief comment from me


What FCA want is for . .

. . . front line staff to take more

responsibility in immediately dealing

with establishing what has caused the

customer to complain - and to seek,

informally, to put things right if they can

Only if they can’t do this should the

formal complaints process begin


FCA’s proposed changes

Extend the time period for dealing with a complaint less formally, from the end of the next

business day following receipt of the complaint, to the end of 3 business days

If a firm resolves the complaint “informally” within the 3 days it will:-

not have to send a ‘final response’ letter; but

will be required to send a written communication explaining that the customer still

has the right to refer their complaint to the ombudsman service if they are

unsatisfied (and they don’t have to wait 8 weeks to do so)

Firms will have to report and publish all complaints to FCA including those informally

resolved within the 3 days (currently complaints resolved before the close of the next

business day don’t have to be reported)

If a complaint is unresolved after 3 days - then the existing DISP rules kick in


FCA expect . . .

That the outcome of these proposals will

be that 60% + of complaints will be

handled and resolved informally by

frontline staff

I expect this to cause great difficulty as it

will involve firms in training frontline

staff to a very high standard in

“informal” complaints handling (and

recording/reporting)

My guess is that firms will carry on as

before – using the 3 day window as a

first stage of their formal process


Simple Products


Now the Latvians . . .

Latvia has the EU Presidency from

January until July 2015

It has announced it “intends to reach

agreement with the European

Parliament on IMD2” (now known as the

Insurance Distribution Directive)

Very encouraging except . . so said the

two previous Presidencies also!

Still uncertainty on some key issues

There will be two years to plan – once

the Directive is made


Retrospective Regulatory Action

August 2014 - FCA issued a call for

examples of where firms felt FCA

had retrospectively applied

regulatory rules.

A major concern for many firms . .

FCA got a good response and

seems to have learned some

lessons?


Retrospective Regulatory Action

FCA said the concerns could be grouped under two headings:-

FCA taking action in connection with things which have persisted for some time and

had not previously been the subject of any FCA comment; and

FCA making interpretations on past business based on new methodology

FCA state that it appreciates the concerns of industry and that it will “actively take steps”

to avoid the bias of hindsight (Mmmmmm)

In respect of the “new methodologies” these are FCA’s love of behavioural studies and

economics – FCA using new “science” to settle old scores

FCA says that, whilst it is conscious of the risk of retrospectivity, it does have to have the

freedom to apply new methods to old problems when, to do so, would fulfil its objectives


Unfair Contract Terms


Unfair Contract Terms

Still the biggest problem in the GI Market

Unfair terms are not just tough terms, they are terms which are applied when customers

could not be expected to have read or understood them (“unrealistic terms”)

Any product of any complexity is therefore comprised of lots of potentially unenforceable

terms

The approaches to unfair terms are developing so fast that FCA have deleted much

current Guidance from its webpages – but is not ready to replace it, because . . .

The Consumer Rights Bill will make significant amendments to the current law on Unfair

Terms later this year

The CMA has published draft guidance on the proposed new law - it’s 122 pages long; so

here comes my one slide guide . .


The Consumer Rights Act

Unfair terms will be subject to review in negotiated, as well as standard, consumer

contracts (all your contracts are standard); and

“core terms” will only be exempt if “transparent and prominent”

FCA has already narrowed, significantly, its views on what represents a “core term” within

a financial services contract

It is better to regard the premium as about the only term not automatically the subject of

a test of fairness – and then only if the premium is transparent and prominent

If you sell products based on numerous contractual terms on which you hope to rely

(which you do) – time to undertake a product review (on which more soon)


The Insurance Act 2015


What the Act does . .

Abolishes “basis of the contract” clauses, converting pre-contractual information supplied

to insurers into warranties

Provides that:-

the insurer’s liability will be suspended, rather than discharged, in the event of

breach of warranty - so that the insurer is liable for valid claims which arise after a

breach has been remedied

non-compliance with a warranty should not allow the insurer to escape liability for a

different type of loss

Gives the insurer statutory remedies when a policyholder submits a fraudulent claim – in

essence the policyholder forfeits the whole claim

The Act also provides that the insurer may refuse any claim arising after a fraudulent act

– but previous valid claims are unaffected


Attestations


Attestations

An attestation is a personal undertaking by a senior manager of a firm to FCA

as to a state of affairs, or as to an action taken

FCA is significantly increasing the use of “attestations” as a regulatory tool

No provision within the Financial Services and Markets Act 2000 gives the FCA

the right to require senior managers to attest

The process is controversial, with the FCA Practitioner Panel having expressed

concerns regarding the use of attestations.

FCA has responded by creating a webpage explaining how it will use

attestations – worth a look


Fraud, Enforcement and Whistleblowers


Fraud

At last some good news!

Chris Grayling (Secretary of State for Justice) announced in December that he was to set

up a taskforce to consider the issue of insurance fraud

The aim of the Government is to seek to remove the perception that insurance is “fair

game” and the widespread consumer view that insurance fraud is somehow legitimate

A parallel objective is to examine the extent to which insurance fraud is encouraged by

“the practices of those involved in the claims process” (no prizes for guessing to whom

that refers)!!!!

The Taskforce is now up and running and you can follow progress on the website at

https://www.gov.uk/government/groups/insurance-fraud-taskforce (interim report

published on Wednesday)


https://www.gov.uk/government/groups/insurance-fraud-taskforce

Enforcement

Many firms (rightly) view the prospect of any engagement with FCA (or PRA) concerning

enforcement with horror

The fact that firms earn their discounted fine via “early co-operation” is an indicator as to

the risk of enforcement processes abusing fair and balanced outcomes

HM Treasury is alert to this and has produced an interesting review which you can read

at:-

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/3890

63/enforcement_review_response_final.pdf

FCA and PRA are expected to publish consultation/policy documents regarding how they

intend to implement HM Treasury's recommendations later this year - and I suggest it is

then that you may wish to catch up on what to expect in the future


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/389063/enforcement_review_response_final.pdf

Whistleblowing

In 2014, 1,367 people “blew the whistle” to FCA.

Two developments:-

FCA has published notes on how it handles whistleblowing; see these at:-

http://www.fca.org.uk/static/documents/how-we-handle-disclosures-from-

whistleblowers.pdf

FCA and PRA have issued a joint consultation on whistleblowing in deposit takers,

investment firms and insurers – this includes proposals as to the internal whistleblowing

procedures and protections which they should put in place. See these at:-

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp615.pdf


http://www.fca.org.uk/static/documents/how-we-handle-disclosures-from-whistleblowers.pdf

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2015/cp615.pdf

Performance Management


Performance Management

FCA Guidance in 2013/4 made overt sales

incentives vulnerable to mis-selling issues

Firms have responded by burying sales pressure

within “performance management” (PM)

FCA is concerned that “undue pressure” from

PM is just as likely to lead to mis-selling

Don’t read GC15/01 in isolation from a review

of your business model and culture

If these are not right then everything else

(including your incentives and PM) will be wrong


FCA and Social Media


Finalised Guidance FG15/04

Guidance to help firms understand how they

can use social media in compliance with FCA

rules

Key issues include:-

what is perceived to be a financial

promotion in new media

how to ensure that promotions are clear

fair and not misleading

who is responsible for e.g. re-tweets of

promotions

Remember (Mr. Devine) that Blogs are part of

“social media”!


So – that’s us up to date . .

But all of that fades into some

insignificance when we see that in

2015 key regulatory streams are

converging to completely change

the way you should look at your

regulatory responsibilities:-

Product Design & Conduct Risk

Unfair Terms

Consumer Vulnerability


Conduct Risk

You now have a fundamental regulatory obligation to

identify, manage and control “conduct risk”

If you don’t know how to approach this then read the

Lloyds’ Minimum Standards on Conduct Risk

(MS11)

It is all about product design and product review and

governance . .

You can find out much more from my “Desk Top

Guide” . . .

But here’s a flavour . . .


Product design and Conduct Risk

1. Fair Treatment of Customers

2. Role of the Board, Management and

Staff

3. Product Oversight Group

4. Effective and Proportionate Product

Controls

5. Assessing and Recording Product Risk

6. Product Design - General

7. Product Design – High Product Risk

8. Obtaining Assurance from Others

9. Product Sales

10. Product Service

11. Product Service – Handling and

Determining Claims

12. Product Service – Complaints

13. Conduct Management Information

14. Product Review

15. Distributor Appointment, Review and

Audit

16. Third Party Administrators

17. Training

18. Miscellaneous

19. The Glossary


Unfair Terms

We have already seen that attitudes to unfair terms are ever tightening

Unfair terms are not just tough terms, they are terms which are applied when

customers could not be expected to have read or understood them (“unrealistic

terms”)

We have seen that FCA’s competition approach is also all about customers having

the time to digest and reflect on what it is that they are buying

The regulator does not “buy” the fact that consumers will subsequently read terms

and cancel (they don’t)

So all regulatory focus is on consumer outcomes – did (in the event) the product

do “what it said on the tin”?

And, in that connection, we have a new regulatory agenda . . . .



Consumer Vulnerability

Consumer Vulnerability?


Protection products are targeted . .

. . . at the vulnerable and the potentially vulnerable

We all think that customers:-

understand more than they do; and

that they can absorb [a vast] amount more information than they have the

time to do.

When a claims situation arises, there is a disconnect between your expectations,

and the capability of many consumers – and. . . . . .


And that makes consumers . . .


Vulnerability

All customers are nervous of dealing with

financial services

Most have no idea about underwriting and

other issues which preoccupy you

They purchase for the certainty of the

outcome which you promise – and the

outcome they desire

If that promise has more than a very

fewstrings or the certainty is not delivered

Then you have a conduct risk in offering

that product – so . . .


When you review and design products . .

Your conduct risk is in the mis-match between the industry’s “contract

term driven” approach and consumers who only “read the label on the

tin”

Stop thinking about “unfair terms” and think, instead, about

“unrealistic” terms (and expectations) – and then eliminate them

Start thinking of every customer as vulnerable

Design your products and treat and communicate with your customers

always with that thought uppermost


Thank You

www.paginator.co.uk
