Compliance Newsletter – May 2019

Distribution chains in the regulatory spotlight
The FCA has published a Thematic Review (TR19/2) on GI distribution chains, which reviewed a range of products from insurers, MGAs, TPAs and brokers. It also reviewed the progress the market has made following previous related work, including its 2015 review of delegated authority arrangements, expressing disappointment with the widespread issues found in systems and controls, including monitoring and MI.

Key regulatory concerns included:

  • customers paying potentially excessive prices due to parties in the chain receiving remuneration which appeared to significantly exceed their distribution costs; and
  • customers buying potentially unsuitable products due to issues with either the distribution or sales arrangements in place.

The FCA says it will be taking a more interventionist approach if it continues to see failings in these areas, using the full range of regulatory tools at its disposal.

Alongside the Thematic Review, the FCA issued a ‘Dear CEO’ letter to all GI firms highlighting the areas of potential harm it found during its review. This calls on each firm’s management body to review the FCA’s findings and proposed new guidance (see next article) and to act promptly in addressing any gaps or shortcomings, to mitigate the risk of harm to customers.

New FCA guidance for product manufacturers and distributors
The FCA has issued consultation guidance (GC19/2) on its expectations of product manufacturers and distributors in considering the value that product and distribution arrangements present to the end-customer, which builds on some of the issues it found in its thematic review of the distribution chain (see first article). The consultation ends on 9 July 2019 and finalised guidance is expected in the autumn.

‘Duty of fair presentation’ tested in the courts
For the first time, a court has considered the duty of fair presentation under the Insurance Act 2015. In Wayne Stephen Gardner Young v Royal and Sun Alliance plc, the insurer gave a quotation based on a market presentation from the broker but made the quote subject to the insured never having been declared bankrupt or insolvent, or had a liquidator appointed. After a £7.2 million fire claim, the insurer discovered that the insured’s director had had previous involvement with four companies that had entered insolvent liquidation, which was not revealed on the original market presentation. Although the insurer’s subjectivity related to the particular insured’s insolvency or liquidation, and not the director’s involvement with other companies, the judge decreed that the insurer had not waived its rights to receive this material information and upheld the insurer’s decision to repudiate the claim.

Firms’ operational resilience in the headlines again
The FCA and PRA have fined a small independent bank a combined amount of £1.89 million for failing to manage its outsourcing arrangements properly. The firm was found to have inadequate processes to enable it to understand the business continuity and disaster recovery arrangements of its outsourced service providers. This prejudiced its operational resilience and exposed its customers to a serious risk of harm. The risk crystallised in 2015 when a technology incident at a card processor led to over 3,000 of the bank’s customers being unable to use their payment cards.

The fine follows a series of FCA warnings to all authorised firms that operational resilience remains high up on the regulator’s agenda.

FCA shares its plans for 2019-20
The FCA has published its Business Plan for the twelve months from April 2019. Highlights from a GI perspective include:

  • A GI ‘renewals evaluation’ report, which will consider the impact of the consumer renewal transparency rule changes introduced in April 2017;
  • The regulator’s intention to begin general insurance ‘value measures’ reporting starting in 2021, in respect of consumer product data for the year ending 31 December 2020;
  • A consultation on policy proposals for operational resilience. This follows previous work undertaken by the regulator on cyber and technology resilience;
  • A broad review of authorised firms’ remuneration arrangements, to identify situations where firms are encouraging staff to act in ways that could harm consumers or markets; and
  • Continued work on fair pricing and product value.


Customer TOBA criticised by FCA for being unfair
The FCA has forced a firm to make changes to its customer TOBA, which it considered unfair under the Consumer Rights Act 2015. The TOBA contained a clause stating that the firm could terminate the agreement by providing the customer with written notice at any time, for any reason.

As a result of the FCA’s intervention, the firm in question, which is in the investment sector, had to write to about 5,000 customers to inform them that the TOBA was being amended to include a 20-day notice period of termination. That was considered sufficient time to allow customers to make alternative arrangements.

Regulatory deliberations continue on ‘duty of care’
The FCA has issued a Feedback Statement (FS19/2) on the possible introduction of a duty of care, to apply to firms when dealing with consumers. The regulator intends to carry out further work to examine the options that are likely to be the most effective and proportionate. A further paper will be published in autumn 2019, seeking detailed views on specific options for change.

Makeover given to FCA’s approach to supervision and enforcement
The FCA has published two separate papers confirming its latest approach to supervision and enforcement.

The Approach to Supervision publication sets out the new, portfolio-based approach to supervising most firms, prioritising supervisory activity according to the greatest risk of harm. The regulator explains how firms’ business models and culture are central to its work in identifying areas of harm, both to customers and market integrity.

The Approach to Enforcement document explains how the regulator addresses harm and adds public value through the use of its statutory powers to investigate and, where appropriate, to take action for, breaches of FSMA, FCA Principles and rules, and failure to comply with any other applicable regulatory obligations.

FCA to consult on new signposting service for travel insurance
The FCA has stated that it plans to consult on a multi-lateral approach to providing a ‘signposting’ service for consumers who find it difficult to source travel insurance due to pre-existing medical conditions, while retaining flexibility for some providers to build their own signposting arrangements. The consultation is expected before the summer.

LMA Consumer Wordings Guidance refreshed
Version 5.0 of the joint London Market Association (LMA)/Clyde & Co Consumer Wordings Guidance has been published. It contains a number of updates which are aimed at those involved in reviewing or drafting wordings for consumer insurance products.

FCA extends TPR deadline again
The regulator continues to update its ‘Brexit Resources’ web page and has recently announced a further extension to the deadline for participation in the temporary permissions regime (TPR). The new deadline is 30 October 2019.

FCA updates MoU with other regulatory and investigative bodies
The FCA has recently entered into Memoranda of Understanding (MoU) with the Insurance Fraud Bureau, Solicitors Regulation Authority and Advertising Standards Authority, with a view to increasing co-operation between the respective authorities for exchange of information and investigative assistance. Links to each MoU are available from the FCA’s website.

Use of ‘Big Data’ Analytics gets review from EIOPA
The European Insurance and Occupational Pensions Authority (EIOPA) has published a report on Big Data Analytics in motor and health insurance. It finds that 31% of insurance firms are already using Big Data Analytics tools, such as artificial intelligence and machine learning algorithms. But as well as considering the opportunities, EIOPA warns there are also risks which need to be addressed, to ensure that development continues in a sound way, particularly for ‘high-risk’ consumers.

Regulatory Sandbox: the next stage
29 businesses have been accepted into cohort 5 of the regulatory sandbox to test innovative products, services, business models and delivery mechanisms. Two general insurance products are included: a home contents product for low-income customers, which can be arranged at the same time as taking out a loan, and a travel insurance product with a bespoke medical screening process for consumers living with cardiovascular disease.

Meanwhile, the FCA has issued a Call for Input on the concept of a new cross-sector sandbox which would be a single-point-of-entry sandbox for firms to test innovative propositions with multiple UK regulators in a controlled environment. Comments are invited by 30 August 2019.

FCA reports a drop in complaints
The FCA has published complaints data for the last six months of 2018 which show an overall 5% drop in volumes from the previous six months, although PPI complaints still make up 40% of the total. This is the first time the number of complaints has fallen since the new complaints rules came into force in June 2016.

Regulatory fees round-up
The FCA has consulted on its regulated fees and levies proposals for 2019/20 in Consultation Paper CP19/16, which is now closed. An increase of 2% in its ongoing regulatory activities budget and 2.7% in its annual funding requirement was proposed. Confirmation of finalised fees and levies will be published in a Policy Statement in July.

The Financial Services Compensation Scheme (FSCS) has published its Plan and Budget for 2019/20, the first year for which the recent FSCS Funding Review changes will take effect, with insurers making a contribution to the GI Distribution Claims class. However, unlike the 9-month transitional term of the previous budget, this covers a full year.

The information provided in this Newsletter is based on the Managing General Agents’ Association’s knowledge and understanding of regulatory issues at the date of publication. However, it is generic in content, and matters in UK regulation change regularly. Members should take their own professional advice in connection with any issues which could affect their business. The Managing General Agents’ Association accepts no responsibility or liability for any actions taken based on the information contained within this Newsletter

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