PROTECT
LEGAL AND REGULATORY REVIEW
MARCH 2016
A legal and regulatory review of what?
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Normally – about what has happened since
November, but . . .
“General insurance and insurers
There are no updates to report in the Insurance sector this month”!
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It has actually been a pretty quiet patch!
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When I say “quiet” . . .
•
The Insurance Distribution Directive has become EU law – in force 23 February 2018. By then we may not
even be members and, even if we are, there will be loads of UK consultations about implementation
before then
•
Complaints Reporting – FCA eventually sorted out its own mess; you only need to record and report
complaints under the new (3 business day) regime once it has started (after 30 June)
•
FCA reported back on its Mobile Phone Thematic Follow up - worth a read even if you are not in that
market (e.g. FCA measure claims service from the date of claim - even if the customer delays)
•
FCA consulted on Transparency and Engagement at Renewal – with some very nasty suggestions
regarding prompting customers to “shop around”
•
FCA slipped into January’s “Regulation Round-up” requirements (under EU law) to inform customers in
complaints processes and in policy documentation about the EU ODR Platform – by 15 February!
•
The new Senior Managers Regimes (for Banks and Insurers) come into force on 7 March. FCA have
delayed implementation of rules which apply to all firms asked for a reference for a Senior Manager
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And on Tuesday . . . .
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So, today - a pause for a much broader
brush regulatory overview
 What are the key regulatory issues facing the GI market as
at March 2016?
 What do you need to be doing about them?
 Put another way . . . . .
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What could get you into really bad trouble?
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The key areas are . .

The outcomes from the Add-on Insurance Market Study

Conduct Risk (and the TCF Outcomes)

Unfair Contract Terms

Culture and Business Models (Senior Management responsibility)

Financial Incentives

Product Governance and Product Risk

Claims and complaints handling
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Let’s look at the essence of each of these
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The essence of the Add-on Study?
 Apart from the specific attacks on GAP and Opt outs . . . .
 The real questions raised are as to: “value”?
 customer comprehension (from the “sales journey”)
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The essence of “Conduct Risk”
 Simply the new “buzz word” for: “the risk a firm will fail to pay due regard to the interests of
customers or will fail to treat them fairly at all times”
 TCF by any other name – save that the term “Conduct Risk” focuses on
the key “conduct” objective of the FCA - to protect consumers
 Any firm failing to meet that objective will “risk” its authorisation
 So delivering on the TCF outcomes is your core regulatory objective
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What are the essential TCF Outcomes?

Outcome 1: Consumers can be confident that they are dealing with firms where
the fair treatment of customers is central to the corporate culture

Outcome 2: Products and services marketed and sold in the retail market are
designed to meet the needs of identified consumer groups and are targeted
accordingly

Outcome 3: Consumers are provided with clear information and are kept
appropriately informed before, during and after the point of sale

Outcome 5: Consumers are provided with products that perform as firms have
led them to expect, and the associated service is of an acceptable standard
and as they have been led to expect
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The next essential . . .
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Fair Contract Terms

In January 2016 FCA announced it was abandoning its Unfair Contract Terms library – why?

Because the expectation is now that each firm should address the issue of fair (and
realistic) contract terms in the light of the specific inter-action between its: particular product;
 particular customers; and
 the particular sales environment employed

Put another way – ask “can our product be quickly and easily understood by our customers
before purchase so we can be sure that it will meet their expectations (at claims stage)”?

Put even more simply - does our product do what it says (simply) on the tin?
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Another essential . .
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Culture and Business Models

A “Business Model” is stated, within the FCA Handbook Threshold Conditions, to be a
firm’s “strategy for doing business”

The Threshold Conditions require each firm to ensure that its Business Model is clear as
to: the assumptions underlying the Business Model and the justification for it; and
 the rationale for the business undertaken; and
 the needs of, and risks to, consumers related to the products and services offered
and the firm’s product strategy

In essence, the requirement is that a Business Model has integrity. Integrity within the
provision of financial services in the UK is another of the three fundamental regulatory
objectives which FCA is obliged to pursue – and enforce. Therefore . .

Lack of any integrity = conduct risk = enforcement
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Three essentials to go . . .
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FCA on Financial Incentives . . .

Products should be sold “to meet the needs of consumers, not driven predominantly by
financial incentives and profits for firms”

Firms should “properly identify, consider (and understand) how incentive schemes might
encourage staff to mis-sell and put in place effective systems and controls to adequately
manage the increased risks of mis-selling arising from incentive schemes”

“Routine monitoring” of incentive schemes is not sufficient – nor are customer feedback
surveys. What is required is a full and effective risk based monitoring which looks for
problems and corrects them

Firms take action to address any inadequacies; and where reviews identify any “recurring
problems” firms should not only properly and fully investigate but they also should “take
action and pay redress where consumers have suffered detriment”
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Nearly there . . . .
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Product Governance and Product Risk

FCA say that good product governance involves a firm employing its senior management
systems and controls constantly to ensure that: it identifies the target market for its insurance and the needs of likely consumers of
the product;
 the events covered by the insurance are aligned with the needs of the target market
 the benefit following a claim meets the needs of consumers in the target market;
 the control over distribution strategy is carefully considered - especially if it involves
selling the insurance as an add-on product; and that
 the product features (and their fit with the target market) are reviewed on a regular
basis, in the light of customer feedback, claims and complaints
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Which brings us nicely (and finally) to . . .
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Claims and complaints handling

FCA’s Thematic Review (TR15/7) emphasised the need for insurers to retain
oversight over, and reactive engagement in, outcomes from claims handling
undertaken on their behalf

Why?

Because feedback from claims (and complaints) is the crucial ingredient in
product governance and ensuring good, targeted product design which will
deliver good consumer(TCF) outcomes
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That’s it – an overview of the key regulatory
issues . . .

But it gets easier to focus on these

If we extract the duplications which
exist within more than one key area

Then we get . . .
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The true essence of regulatory expectations
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The seven essential steps to regulatory
compliance
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Step 1
Consumers can be confident that they are dealing with
firms where the fair treatment of customers is central to
corporate culture and products are designed/delivered
under a Business Model which has integrity
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Step 2
Products should be sold via distribution which is
committed to meeting the needs of consumers, and
which is not driven predominantly by financial incentives
and profits for firms
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Step 3
The distribution of insurance and the delivery of
complaints and claims handling must be governed
and controlled by senior management who take
personal responsibility for good consumer outcomes
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Step 4
Products and services should be designed to meet the
needs of identified consumer groups, be targeted
accordingly and have a carefully considered and
genuine “value” for those consumers
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Step 5
The product must be capable of quick and easy
understanding by customers within the context of their
particular sales journey
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Step 6
Consumers must be provided with products that
perform as firms have led them to expect, and will meet
their expectations at claims stage
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Step 7
Senior management systems and controls must ensure
that products (and their fit with the target market) are
reviewed on a regular basis, in the light of customer
feedback, claims and complaints
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Its really all about . . .
 Responsible firms undertaking . .
 Responsible Product Design
 With Responsible Product Governance
 Via Responsible Distribution
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Easy . . or is it ?????
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Before your food –
some food for thought. . . .
“I remember once asking to see board papers of a bank suspected of mis-selling a financial
product. What papers had been laid before the board about the sale of this product to its
largely retail customers? One might have expected evidence that a detailed due diligence of
the product had been conducted, an assessment of its risks, a study of the kinds of
customers for whom it might be suitable, a plan for how the product would be sold, including
how frontline staff would be trained etc. What came back to the board was . . . a single slip of
paper that calculated the profits that would be earned if the product could be sold widely
from commissions that were being offered by the issuer”
Mark Steward, Director of Enforcement and Market Oversight at the FCA Nov 2015
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That could never happen today?
 With the regulator demanding that firms focus entirely on good
consumer outcomes when designing, governing and distributing
insurance?
 Well it could happen, and it does happen today – widely
 Why?
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A “typical” GI distribution chain
TPA
Claims Handler
Complaints
Handling
Insurer
Managing
Agent
“Underwriter”
Coverholder
Wholesale
Broker
Sector Broker
Retail Broker
Retailer
Customer
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Only two of these firms contract with
customers
TPA
Claims Handler
Complaints
Handling
Insurer
Managing
Agent
“Underwriter”
Coverholder
Wholesale
Broker
Sector Broker
Retail Broker
Retailer
Customer
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So we can have . . .

Up to ten firms engaged in the distribution of one product

Typically up to eight of those firms have no direct relationship with the
consumer and would regard themselves as “commercial” intermediaries or
service providers

Typically neither of the two firms which are contracting with the customer will
have a primary involvement in product design

The outcome of that can be . . .
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A view from afar . . .
“In one case an insurer was underwriting a number of single risk and add-on personal lines
products for a range of third parties under the umbrella of a new relationship with a Managing
Agent - entered into due to an existing relationship with a wholesale broker. It became
apparent in the course of our review that the insurer had not considered or understood the
products being underwritten, their distribution to customers or the delivery of post sales
services prior to agreeing to underwrite these. Consequently the insurer was almost entirely
unsighted on these products and was unable to state whether customers buying these
products were treated fairly or demonstrate that they had previously considered this question.
The value of some of these products was unclear and in some cases they appeared to be
targeted at more vulnerable customer groups, which should have indicated heightened levels
of conduct risks to the insurer”
TR15/07 Delegated authority: Outsourcing in the general insurance market
June 2015
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By virtue of the way we “do things”
That insurer was exposed to
massive conduct risk and unable to
govern or even participate in all the
issues which we have identified as
the 7 essential steps to regulatory
compliance
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More from TR15/07

“Some intermediaries designing insurance products did not appear to recognise the
extent of the product provider responsibilities they had acquired by virtue of acting as the
retail manufacturer of the product. In some cases this was reflected in a lack of
appropriate consideration of customer needs when designing products”

“There was a lack of appropriate oversight and monitoring by many product providers
(both insurers and intermediaries) of the delivery and performance of the product,
particularly in relation to meeting customers’ needs. This was often contributed to by poor
or incomplete MI”

“Lack of oversight also extended in some cases to shortcomings in complaint processes,
handling and outcomes. It was not clear that complaints data was complete and
accurate, or that it was collated, analysed, reviewed and acted upon”

“Product providers did not always appreciate that as the complexity of the distribution
chain increases, so do the potential challenges in overseeing it and the potential for
consumer detriment”
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So it is not only the insurer . .
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So - when FCA says . . .
“We consider that product design and decisions made by product designers about how – and
to whom – products will be distributed play a significant role in determining consumer
outcomes. We are looking primarily at the product governance processes employed by firms,
whether competition is working effectively for consumers, and whether firms are exploiting
consumer behaviour. We maintain that products can be designed – deliberately or
inadvertently – to take advantage of consumer behavioural traits in ways which are contrary
to their interests and that consumers can be unable to exert competitive pressure on firms to
support their interests”
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If you are a player in this game . . .
TPA
Claims Handler
Complaints
Handling
Insurer
Managing
Agent
“Underwriter”
Coverholder
Wholesale
Broker
Sector Broker
Retail Broker
Retailer
Customer
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As an authorised firm . .

required by FCA to eliminate conduct risk

Are you certain that you can be seen to be effectively questioning and ensuring that the
products with which you are associated are sold:-
to deliver easily understood valuable and good consumer outcomes;
under a Business Model which has integrity;
via distribution which is committed to meeting the needs of consumers;
with complaints and claims handling governed and controlled by senior management
who take personal responsibility for good consumer outcomes; and
 which meet customer’s expectations at claims stage;
 within a distribution chain which operates effective and responsible product reviews?





Your core regulatory requirement is to ask . . .
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What product governance is in place?
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Who is undertaking product reviews?
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How are we engaged in these processes?
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How is information delivered by us . .
 into product governance and product review processes?
 What information do we receive from product governance and product
reviews undertaken by others?
 Are we certain that all those with whom we do business are committed
to, and will co-operate with us to, ensure good consumer outcomes and
will make all adjustments necessary to deliver these?
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If you fail to ask and answer these
questions . .
You will be exposed to
enforcement and that will
threaten your continued
presence in the market . . . .
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If you need help with these issues . . .
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Just ask . .
 The “Desk Top Guide to Undertaking Product Reviews”
 Sign up for the Product Review Roadshow
 Consultancy, advice, review project management, hand
holding . . . .
 Please do not do . . . nothing!!
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Thank You
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