Simple Products (c) Paginator Limited 2015. Now the Latvians... Latvia has the EU Presidency from...

Simple Products

(c) Paginator Limited 2015

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The CMA has published draft guidance on the proposed new law - it’s 122 pages long; so here comes my one slide guide .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)


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/389063/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


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


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


Date post:	15-Dec-2015
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