The best insurance is a BIBA broker www.biba.org.uk | 0844 77 00 266 Welcome to the second issue of Compliance Rules, BIBA’s quarterly newsletter on all things regulatory. The first issue generated some very positive feedback and we hope this issue is just as popular. In this issue, in addition to the promised summary of recent updates, you will find a description of the European regulatory framework for financial services, which we hope you will find both useful and interesting. We also include an article summarising the changes to the FSA’s insurance conduct of business rules, in response to members’ requests. Discussion Paper DP08/2 The FSA’s long-awaited follow up to last year’s forensic review was published in March. DP08/2 Transparency, disclosure and conflicts of interest in the commercial insurance market has generated more debate and column inches than anything it has released since prior to January 2005. The paper is a must-read for all intermediaries in the commercial insurance sector. It sets out six outcomes that the FSA is focusing on in its quest to achieve a more competitive and efficient market: 1. Commercial customers should have information which indicates the full cost of mediation, including the likely extent of contingent commissions on a standardised and clear basis and the total amount of commission paid to intermediaries throughout the chain. 2. Commercial customers should have clear information about the services an intermediary provides, including the breadth of search they undertake. 3. Commercial customers should have clear information about the capacity in which an intermediary is acting – i.e. whether they are acting for them, for the insurer or, in some cases, for both. 4. Conflicts of interest arising from remuneration arrangements/ business models should be properly disclosed and managed. 5. Commercial customers should have sufficiently standardised/ comparable information to enable them to gauge the value of intermediary costs and services, and compare these across the market (and over time). 6. Commercial customers should be made aware of their right to commission information and helped to appreciate the value of using it. The paper restates the FSA’s hope that a market-led solution can be found and they praise some of the work BIBA has been doing in this area. We are continuing to explore the possibilities of such a solution with the regulator, our members and other market participants. We have had a good response to our call for members to respond formally to the FSA with their concerns about the discussion paper by the 25 June deadline. However, we know that there are still more of you who have yet to do so. This is an important issue and it is not yet a done deal (as some of the media would have you believe). When responding, members should consider the six outcomes set out in the paper and comment on their appropriateness and practicability. Should you decide to write to Hector Sants, the FSA’s Chief Executive, please copy Steve White, BIBA’s Head of Compliance and Training, in on your submission. British Insurance Brokers’ Association rules Quarter Two 2008
Transcript
The best insurance is a BIBA brokerwww.biba.org.uk | 0844 77 00 266
Welcome to the second issue of Compliance Rules, BIBA’s quarterly newsletter on all things regulatory. The first issue generated some very positive feedback and we hope this issue is just as popular.
In this issue, in addition to the promised summary of recent updates, you will find a description of the European regulatory framework for financial services, which we hope you will find both useful and interesting. We also include an article summarising the changes to the FSA’s insurance conduct of business rules, in response to members’ requests.
Discussion Paper DP08/2The FSA’s long-awaited follow up to last year’s forensic review was published in March. DP08/2 Transparency, disclosure and conflicts of interest in the commercial insurance market has generated more debate and column inches than anything it has released since prior to January 2005.
The paper is a must-read for all intermediaries in the commercial insurance sector. It sets out six outcomes that the FSA is focusing on in its quest to achieve a more competitive and efficient market:
1. Commercial customers should have information which indicates the full cost of mediation, including the likely extent of contingent commissions on a standardised and clear basis and the total amount of commission paid to intermediaries throughout the chain.
2. Commercial customers should have clear information about the services an intermediary provides, including the breadth of search they undertake.
3. Commercial customers should have clear information about the capacity in which an intermediary is acting – i.e. whether they are acting for them, for the insurer or, in some cases, for both.
4. Conflicts of interest arising from remuneration arrangements/business models should be properly disclosed and managed.
5. Commercial customers should have sufficiently standardised/comparable information to enable them to gauge the value of intermediary costs and services, and compare these across the market (and over time).
6. Commercial customers should be made aware of their right to commission information and helped to appreciate the value of using it.
The paper restates the FSA’s hope that a market-led solution can be found and they praise some of the work BIBA has been doing in this area. We are continuing to explore the possibilities of such a solution with the regulator, our members and other market participants.
We have had a good response to our call for members to respond formally to the FSA with their concerns about the discussion paper by the 25 June deadline. However, we know that there are still more of you who have yet to do so. This is an important issue and it is not yet a done deal (as some of the media would have you believe).
When responding, members should consider the six outcomes set out in the paper and comment on their appropriateness and practicability. Should you decide to write to Hector Sants, the FSA’s Chief Executive, please copy Steve White, BIBA’s Head of Compliance and Training, in on your submission.
British Insurance Brokers’ Association
rules
Quarter Two 2008
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Compliance Rules Quarter Two 2008
With Europe playing a much larger role now in shaping the regulatory environment, we thought that a brief overview of how the European regulatory framework works might be useful.
The framework is named after a Belgian banker called Baron Alexandre Lamfalussy who designed the structure to speed up the development of financial services legislation and ensure greater
consistency in its implementation across member states. The Lamfalussy Framework is split into four ‘levels’:
• Level 1 – framework legislation, voted on by the Council and Parliament
• Level 2 – implementing measures for the Level 1 legislation, led by the Commission
CouncilWorking Groups
THE LAMFALUSSY FRAMEWORK
FinancialServices
Committee
Economicand FinanceCommittee
Council of Ministers(ECOFIN)
EuropeanCommission
European Parliament
CESR
ESCSecurities
EBCBanking
FCCFinancial
Conglomerates
CEIOPS CEBS
Regulators‘Level 2’
Committees
Supervisors‘Level 3’
Committees
EIOPCInsurancePensions
‘3L3’
ParliamentCommittees
CEIOPS
A European regulatory jigsaw...
REGULATORY ROUND UPFirms need to do more to improve data securityDo you know who has access to your computer server room? Do you know where your data back-ups are stored? Do your customers’ claims files get locked away when not in use?
If you answer “No” to any of these questions then you could be storing up a whole heap of trouble and exposing you and your customers to financial crime.
Firms are still not doing enough to ensure the security of their data and prevent their customers becoming the victims of identity fraud and other types of financial crime, according to the FSA.
The regulator’s financial crime and intelligence division carried
out a thematic review of data-security controls during the summer of 2007, visiting 39 firms, including 20 small firms. What that review found was that poor data security is a serious, widespread, problem across the entire industry.
Firms’ shortcomings fell into three broad categories: a failure to appreciate the gravity of the data security risk; lacking the expertise to make a reasonable assessment of risk factors and devising ways of mitigating them; and failure to devote adequate resources to the problem.
The FSA has published a report about its findings which contains examples of both good and bad practice and is well worth a read, it can be found at the link below:www.fsa.gov.uk/pubs/other/data_security.pdf
The regulator has also produced a factsheet aimed at smaller firms:
BIBA’s Regulatory Working Party will be publishing a guide to helping members protect their business from financial crime in the very near future, so keep an eye out for the document.
FSA calls on aggregators to be clear, fair and not misleadingBIBA has welcomed the findings of an FSA review which urges general insurance comparison sites to look again at their business practices to ensure that their users are being treated fairly.
The review of 17 websites was launched following research, commissioned by BIBA, which showed potential for serious consumer detriment across insurance comparison websites. In particular, the research showed that 84 per cent of insurance buyers said that the
• Level 3 – supervisory committees facilitating the convergence of regulatory outcomes
• Level 4 – enforcement of all EU measures, led by the Commission.
The diagram above (provided by CEIOPS) shows how the framework is put together, level by level.
The FSA has a section on its website on Lamfalussy which can be found at: www.fsa.gov.uk/Pages/About/What/International/european/lamfalussy/index.shtml
The FSA is an active participant with the “Level 3” (“3L3”) committee CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) and it is interesting to note how this participation gives the UK regulator a not to be underestimated influence on the European political stage.
CEIOPS is also involved in Level 2 in that it puts forward suggestions for the Commission to consider via EIPOC.
More information about CEIOPS can be found on its website at: www.ceiops.org
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details of insurance policies offered via price comparison websites can be confusing.
The regulator found examples of both good and bad practice in the market which the regulator shared with firms to help them meet its required standards. The FSA made five points about the kind of behaviour it expects from comparison sites, these were:• assumptions must be reasonable
and clearly highlighted to consumers
• sites comparing a limited number of features, and in particular where comparison is only on the basis of price, should explain to consumers in a clear and timely way that the products being compared may have different features, and that features other than price should be taken into account before purchasing a policy
• firms should have processes in place to ensure that all information provided is correct and updated on a regular basis. This includes an expectation that firms will have systems and controls in place to ensure that the information provided by consumers is correctly relayed to the broker or insurer
• firms should take a consistent approach to the provision of information, and the basis for providing certain pieces of information should be clearly explained to the customer
• firms should not give a misleading impression of their market coverage.
BIBA hopes that those operating the sites will now take action to stamp out the “poor practices” observed. We also anticipate that the series of thematic firm visits promised by the FSA as a follow-up to this review will show a marked improvement on the findings from our initial research in this market.
BIBA supports the sales of insurance through comparison sites but believes a minimum set of standards is essential to ensuring that consumers purchase cover which meets their needs. It offers its support in helping to develop these standards going forwards.
High level principles for placement of co-insurance developedBIBA has worked closely with the European Federation of Insurance
Compliance Rules Quarter Two 2008
Intermediaries (BIPAR) to produce high level principles aimed at addressing some of the issues raised by the European Union’s Director General Competition sectoral inquiry into business insurance.
The 2007 EC DG Competition inquiry report raised serious concerns in respect of certain activities around the placement of co-insurance business. The inquiry recognised the importance of the co-insurance market, but was concerned by the absence of an opportunity for the following market to compete on the premium.
The high level principles are designed to provide a framework for multiple placement options. BIBA is strongly urging its members in the subscription market to embrace these principles and embed them into their business practices. They should also encourage (re)insurers to give careful consideration to the principles.
New BIBA Compliance Manual on sale nowAn updated version of the BIBA Compliance Manual is now available. It contains a full rewrite to incorporate changes introduced in ICOBS. The manual is written in user-friendly language and is competitively priced at £295 plus VAT. This price includes updates during the year of subscription. There is also the BIBA compliance manual update service available to ensure that your manual remains current on an ongoing basis for £150 plus VAT.www.biba.org.uk/BrokerCompliance Manual.aspx
FSA proposes change to FSCSThe FSA has asked us to draw members’ attention to the treatment of pure protection business in consultation paper CP08/8 which contains proposals for changes to the Financial Services Compensation Scheme’s (FSCS) tariff measures.
The FSA is planning to exclude pure protection (e.g. critical illness; term assurance; income protection insurance) business from the tariff base for the general insurance intermediation sub-class (B2) for the 2008/09 levy year and thereafter.
Eligible income reported for the FSCS general insurance intermediation sub-class should therefore not include income arising from pure protection contracts (see chapter paragraphs 2.56 to 2.59 of the consultation paper).
However, where firms have reported their income data to the FSA including this business they can re-submit their annual eligible income data if they feel that it would make a material difference to their levy amount within the general insurance sub-class. www.fsa.gov.uk/pubs/cp/cp08_08.pdf
Separately, consultation paper CP08/9 is seeking views on proposals to amend the scope of the FSCS regarding business written through the European Economic Area (EEA) branches of UK insurers.
The changes are designed to remove inconsistencies between the treatment of UK and EEA policyholders.
The FSA is proposing changes to its Compensation sourcebook (COMP) which would extend coverage of the FSCS so that UK and EEA risks written under long-term or general insurance policies issued through EEA branches of UK insurers are treated in the same way as regards eligibility for the compensation scheme. This is not the case currently. The consultation paper can be accessed by clicking on the link below:www.fsa.gov.uk/pubs/cp/cp08_09.pdf
Hunt review makes recommendations for improving FOS accessA new consumer-friendly brand name and the introduction of a scheme for identifying the best and worst performing firms with regards to their complaints handling are just two of the suggestions put forward by the Hunt review of the Financial Ombudsman Service (FOS).
The independent review led by Lord Hunt of Wirral looked at the ombudsman’s relationship with its consumers, stakeholders and the industry.
The report, entitled Opening up, reaching out and aiming high – an agenda for accessibility and excellence in the Financial Ombudsman Service, concludes that the FOS approach to settling disputes on the basis of “what is fair and reasonable” is essential and that charging consumers to access the ombudsman would comprehensively damage accessibility.
The review put forwarded 73 recommendations about how the FOS can improve its accessibility and transparency; these can be accessed at the link below:www.financial-ombudsman.org.uk/news/Hunt_report.pdf
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ICOBS – should much change?BIBA members will no doubt be aware that the FSA published final Insurance Conduct of Business (ICOBS) rules on 6 January 2008, with full implementation needed by 5 July 2008. The March 2008 edition of the BIBA Compliance Manual has a brand new chapter on ICOBS to take on board the new sourcebook and members wanting a copy of this very practical manual should contact BIBA.
So has much changed? ICOBS sees a gradual move towards principles-based regulation. Firms will have to decide in many areas what they consider is appropriate for their business and staff and, above all, their clients – in other words, the rules allow greater flexibility. There are now three different sets of rules covering three different product areas:
• general insurance products
• protection products (income protection, critical illness and term assurance)
• payment protection insurance.
The FSA has attempted to make its rules simpler and to align this second set of ICOBS rules more in line with the Insurance Mediation Directive. It has applied high level standards across the board and has added detailed rules and formal guidance (R and G in sourcebook speak!) where necessary to protect consumers – this being for protection products (PP) and payment protection insurance (PPI). For a typical general insurance broker which knows that it is already compliant with the old ICOB rules, the FSA makes it clear that the firm may wish to make no changes at all.
Treating customers fairly Everyone selling any form of general insurance will still treat customers fairly and give them clear, fair and not misleading information but, in many areas, the FSA does not say exactly how this should be done – hence the flexibility that comes from principles-based regulation.
High level standards cover suitability, product disclosure and claims handling. With suitability, a firm must take reasonable care to ensure the suitability of its advice and supply factually correct information which is appropriate to the customer’s demands and needs. For PP
Compliance Rules Quarter Two 2008
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and PPI the firm should also take into account cost, exclusions, limitations and conditions. But I am sure that firms would wish to do this for all the insurances that they sell?
For product disclosure, appropriate information must be given in ‘good time’ and in a ‘comprehensible’ form so that an ‘informed decision’ can be made. This information will vary according to the ‘knowledge, experience and ability’ of a ‘typical customer’ for the policy and the policy’s overall complexity. It is down to the firm to decide what is ‘appropriate’ and in line with treating customers fairly will have already ensured that the information they provide is ‘comprehensible’.
Clearly, as the sophistication of the client increases, firms may wish to provide less information but should consider their professional duty to their client and bear in mind they could be found negligent if they fail to advise the client of something that is material in respect of their contract of insurance.
Since the original ICOB rules surfaced in 2004, we have all had to deal with the customer classifications of ‘retail’ and ‘commercial’. Now the FSA has dropped ‘retail’ and we now have ‘consumers’. An excellent decision has been made vis-à-vis mixed use commercial policies for sole traders and non-LLP partnerships. In the past, these have been classed as ‘retail’ and now the FSA states that if the main purpose of the policy is to cover a commercial exposure, then the policy will be a commercial sale and not one to a consumer. Clearly, commercial customers should be savvier than consumers – again that is down to the firm to determine.
Pricing transparency Members will know that the FSA has decided (again) to look into the issue of pricing transparency and there is a current discussion paper (DP08/02) which they should read and respond to. For the time being, under ICOBS, commercial clients can ask and should be told and consumers are entitled to know under Agency Law – i.e. no change.
For demands and needs statements there are no changes but in respect of the consultancy work we do we see a number that are quite ‘light’ especially where an advised sale takes place. Firms are responsible for deciding how much detail is needed taking into account the
customer’s circumstances and the complexity of the product. They must continue to set out the reason(s) for making a product recommendation for advised sales.
The only change for renewals is the dropping of the 21 day requirement for consumers. This is now ‘in good time’ which, in my view should still be 21 days. A demands and needs statement is still needed and firms should re-examine what the client wants and what is now available.
So is this now time for confusion and if firms sell the three types of general insurance should they have three different sales processes? Well no! Firms have to decide if they want a lighter approach or a thorough, more detailed, approach.
The ICOBS rules can be viewed as ‘minimum standards’ – a firm’s professional duty as a broker (and indeed a BIBA member) should mean much more. Too little information sometimes is not enough and yes, too much is sometimes excessive. Clients do complain that they are bombarded with paper, but in reality firms are protecting them and, in turn, their businesses in ensuring that there is enough information to hand to ensure that an informed buying decision can be made.
Branko Bjelobaba FCII is the principal of Branko Ltd, one of BIBA’s partners in its compliance initiative – more details at www.branko.org.uk.
