Transcript not

PROTECT
LEGAL AND REGULATORY REVIEW
MARCH 2014
In the next 30 minutes we are going to. . .
 Talk about a sensible Ombudsman
 Learn how not to be fined £30,647,400
 Smirk at an FCA man getting a bo**ocking
 And find out why . . .
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These two are working at FCA
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A lot to get through
 All the key events
 Then the “biggies”: Consumer Credit
 The HomeServe Enforcement
 The Add-on Insurance Market Study – Preliminary Findings
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December
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The Consumer Contracts (Information, Cancellation
And Additional Charges) Regulations 2013

Made 11 December 2013

Come into force on 13 June 2014

Apply to “distance contracts”

Generally do not apply to “services of a banking, credit, insurance, personal
pension, investment or payment nature”

But we do need to know about three of the Regulations . . .
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Regulation 38

Does apply to financial services contracts

Provides that, if a consumer withdraws from, or cancels, a main distance contract “any
ancillary contracts” (e.g. a warranty) are automatically terminated

BIS Guidance says that automatic termination “does not prevent the trader from
contacting the consumer for their express consent should the consumer wish to keep a
warranty, for instance if the warranty purchased will cover other items” – a bit odd since
the warranty has been automatically terminated!

Be aware of ICOBS 7.2.10G. “A consumer's notice to cancel a distance contract may also
operate to cancel any “attached” contract which is also a distance financial services
contract”. This is not “automatic” as the consumer may give notice that the cancellation
is not to operate to cancel the attached contract.
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Regulation 39

Provides that no sum should be payable by a consumer in a distance contract “in addition to
remuneration agreed for the trader’s main obligation unless, before the consumer became
bound by the contract, the trader obtained the consumer’s express consent”. A pre-ticked
box does not constitute “express consent”.

Regulation 39: does not apply if the main contract is a financial services contract; but
 does apply where the additional payment is for such services

So Regulation 39 prohibits pre-ticked boxes to purchase add-on insurance - but does not
ban them if insurance is the main contract

Note, however, that ICOBS 3.1.17R already effectively bans pre-ticked boxes for distance
insurance contracts (as might Principles 6 & 7 for any contract)

FCA proposes a total ban as a remedy in the Add-on Insurance Market Review
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Regulation 41
 Bans premium rate help telephone lines
 Does not apply to financial services contracts
 But FCA announced that it “is committed to considering whether it
could introduce a similar prohibition for those calling banks, insurance
companies and investment brokers”.
 Watch this space
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Before we move into 2014 . . .

Martin Wheatley’s Christmas Message

“I want to look ahead to 2014 and what is
likely to be an important period of
consolidation. Less ‘exciting’ maybe than
previous years – but also a platform to bed
in regulatory change and move things
forward”.

We need to pause to think about that . .
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“A platform to bed in regulatory change”

FCA think that they have now delivered all they need you to know to be able
to deliver on FCA’s expectations for conduct of business outcomes

It has given you its fundamental expectations for:





Meeting the Principles for Business
Delivering the TCF Outcomes and eliminating unfair terms
Product design, (“target market”) suitability and distribution
Ongoing product governance
Claims, promotions and incentives
FCA will simply now enforce (brutally) against any breaches - and focus on
ensuring that senior management are capable and engaged
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In a few moments we will find out how
FCA will “move things forward”
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But first – January 2014
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The Financial Services and Markets Act 2000
(Designated Consumer Bodies) Order 2013

In force 14 January 2014.

Designates the consumer bodies (including CAB and the Consumer’s Association) which can
bring “super-complaints” to the FCA, on behalf of consumers

The “super-complaint” system is now part of FCA’s role in ensuring that competition works
well in the interests of consumers within the financial services market.

These bodies can submit a complaint, on behalf of consumers generally, if they consider
that a feature, or combination of features, within a market for financial services in the UK is
seriously damaging the interests of consumers

The decline of PPI began with a super complaint made to the OFT

FCA seems to be doing pretty well itself on competition - without any super complaints!
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Financial Promotions

MoneySupermarket.com required to formally agree not to publish or broadcast
misleading advertisements

FCA announced that “the quality of financial promotions will be central” to its
work in 2014

FCA focus is on the fact that the context or environment in which a product is
promoted can hugely affect whether the information is found by the consumer to
be clear fair and not misleading

This is the reason for the need for “simple” products. You will increasingly be
judged on consumer outcomes from your promotion – not product content

Always review product promotion and description from the consumer’s
perspective – not yours
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The PRA

Yes it does exist!!!

Announced it would replace
Handbook with a . . Rulebook!!!

The idea is to get rid of the legacy link
with FSA and be seen to be entirely
separate from FCA and focused on
prudential supervision
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its
ABI Good Practice Guide for Mobile Phone
Insurance

Produced in response to FCA’s Thematic review

Good (and fairly brief) illustrations of how to
handle the fundamental issues of:






Product Design
Product Governance
Product Content
Financial Promotions
Consumer Comprehension
Claims Handling
But of interest for another reason . . .
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The Perimeter of Regulation

The Guide is specifically addressed to administrators and retailers and even
to “retailers selling under the connected contract exemption”!

ABI only has any “jurisdiction” over its insurer members

Retailers undertaking connected contract sales are outside the scope of
FCA regulation

Notwithstanding - FCA is increasingly focusing on the distribution models of
regulated intermediaries and pressurising them to procure good consumer
outcomes by unregulated retailers

ABI is merely reflecting this approach.
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The Consumer Rights Bill

Introduced into Parliament on 23 January

Will be subject to changes

Re-enacts the Unfair Terms in Consumer Contract Regulations 1999 with
significant changes

The big change will be that “core terms” (price and cover) will be assessable
for fairness unless they are “transparent” and “prominent”

Other clauses will mean that many elements of cover will no longer be
regarded as core – and will be assessable for fairness however prominent
they may be
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February
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This is where we . . .

Talk about a sensible Ombudsman;

Smirk at an FCA man getting a
bo**ocking; and

Find a good question to ask
candidates in the forthcoming
European Parliament elections
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The Sensible Ombudsman
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A Speech to the Insurance Institute
 More sense in 20 minutes than out of FOS in the past 10 years
 Deals with the reality of changes in consumer expectation and
behaviour in a digital market - and the inevitable implications for
insurance
 Discusses the issue from your perspective in a sensible and balanced
manner
 Hugely refreshing and thought provoking - anyone interested in “simple
products” should read it
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And now
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FCA get a bo**ocking . . .
 Martin Wheatley met the Treasury Select Committee!
 He is told: FCA have not got to grips with controls over sales incentive
schemes
 He has failed to convince them that he can properly describe what
constitutes an “advised sale”
 More on incentives in a minute – so let’s look at advised sales
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Advised or Non-advised?

Treasury Select Committee:“once customers have been taken a couple of steps through some sort of a guided
process [e.g. on a website], a lot of people would feel they have been advised”

Martin Wheatley:“we are spending quite some time talking to the industry about whether we need to revise
our guidance and make products fall clearly into one class or the other”

Treasury Select Committee:-
“We have agreed that this is a concern – I am asking you for evidence that you are
bringing some clarity to the piece as uncertainty could drive firms out of the market
altogether as they fear the consequences of a regulator changing its mind at a later point”
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Ouch!!

Whilst it is lovely to see FCA get told off –
be afraid

The last time the Treasury Select
Committee humiliated the Regulator we
got Principles Based Regulation in
response!

Do make sure you really do understand
the current distinctions between advice
and a non-advised sale – many do not

Be ready for more!
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And just to add to your work list . .

IMD2

It hasn’t arrived – it hasn’t gone away

Changes proposed and approved by the EU Parliament on 28 February –
most not helpful

Next steps is “trialogue negotiations” – later in 2014 “once the Parliament
is in place following the May Elections”

So – you can amuse yourself by asking your Euro-candidates . . .
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What will your position be in the trialogue
negotiations on IMD2?
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Into March . . .
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March – so far

The Mortgage Credit Directive is made – must be UK law by 21 March
2016 – big implications if you have any interest in MPPI

FOS published its complaints data. Non-PPI complaints are down 8% and
the average uphold rate in favour of the consumer is just 51%

Maybe the Treasury Select Committee should next ask FCA why it
continues to cheerlead “complaining” when half of the ensuing
“complaints” are groundless?

But be careful you don’t get things wrong. CPP are paying out £1.3 billion
in redress and Yorkshire Building Society’s redress package (of a mere
£8.4m) includes redress to all arrears customers - even those with no loss
- “to avoid lengthy delays and uncertainty”
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This leaves us with the “Biggies”
 Consumer Credit
 The HomeServe Enforcement
 The Add-on Insurance Market Study – Preliminary
Findings
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Consumer Credit

Regulated by FCA from the end of the month – a massive cultural change for any
previously unregulated firm

FCA: produced the final rules just one month ahead of regulation!
 is pretty overwhelmed by the process - leading to neglect of other areas
 admitted, in Risk Committee, that it doesn’t understand the market because it
has no information gathering powers yet!!

There are particular issues for those firms which carry an FCA authorisation for
insurance mediation but only undertake “low risk” consumer credit

I have produced an entry level “Desk Top Guide” to the regime
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And now – how not to be fined
£30,647,400
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The HomeServe Enforcement

When FCA says it hopes that all it
has to do in 2014 is “to bed in
regulatory change and move things
forward” - it assumes that nothing
similar to what happened at
HomeServe will ever happen again

I think there are risks that it will
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What went wrong at HomeServe

“HomeServe failed to ensure that its senior management undertook adequate
regulatory training, which led to a lack of regulatory knowledge and a failure
adequately to identify and address issues that created a risk that customers may not
be treated fairly and contributed to a culture that placed more importance on
generating profits”

Cost cutting led to the redundancy of the Compliance Director!

HomeServe also “failed to identify and address inappropriate bias within the
remuneration structure for the sales teams, which incentivised staff to increase the
volume of products sold, irrespective of the customer’s need for the product”.
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What I think

Most senior management remain either uninformed or unengaged with
what FCA now assumes to be expectations bedded into firm cultures

Senior management roles remain to maintain a culture that places “more
importance on generating profits”

That is a huge gap between regulatory expectation and capitalist reality

Failure to close that gap (by both FCA and senior management teams) can
only lead to increasing fines and departures from the market
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What is needed
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Incentives

Hot on the heels of the HomeServe enforcement came TR14/4 – FCA’s update on
the thematic work on incentives

FCA underlines a “lack of awareness” of the issues especially within smaller firms

Most firms are small firms!!

Even where firms are aware, and have removed or reduced sales incentives, FCA
underlines the tension between compliance and profit by saying:“There is a question about whether the many new schemes that have
eliminated or significantly reduced the amount of bonus driven by sales will
last, for example if there appears to be a negative impact on profits”.
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That is a regulator asking . . .

If staff or firms are not incentivised
to sell financial services – will they
continue to bother to do so?

This raises the key issue . .

If firms don’t sell insurance - will
customers bother to buy it?
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Which brings me neatly to . .
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Remember what he said . .

That conduct of business expectations are now
fully in place

They will simply be vigorously enforced

He said that FCA would now concentrate on
“moving things forward”

Moving what forward?

To understand this we need to look at FCA’s
objectives . . .
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FCA’s three operational objectives
 Delivering consumer protection - securing an appropriate degree
of protection for consumers
 Enhancing market integrity − protecting and enhancing the
integrity of the UK financial system
 Building competitive markets − promoting effective competition
in the interests of consumers
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The Competition Objective is nothing to do
with . . .
 Meeting Rules
 Running a Principled Business
 Good Product Design
 Excellent Claims Service
 It is in fact nothing to do with what any individual firm does
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It is simply market economics
 It means FCA trying to establish: how a competitive market is built; and
 how effective competition can be generated in the interests of
consumers
 FCA have no more idea than you or I how this can be done – but they
have a legal objective to find out
 They have chosen the add-on insurance market as their first go at this
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If FCA don’t know how to do it – who does?
PSYCHOLOGISTS
ECONOMISTS
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When I say who “knows” – I mean who “has
a theory”
 “I predict that the economy will
grow by 3%”
 “I may well be proved wrong in a
year’s time”
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And when you apply behavioural science to
commercial markets
It gives a whole new meaning
to the word “Shrink”!!!
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So when you read the Add-on Market
Provisional Findings . . .
 It is nothing to do with your conduct of business;
 The theories which are applied are not necessarily correct;
 Not all necessary evidence may have been put into the equation
 The findings are odd, and currently (save for GAP) pretty limited
(but more to come)
 But – unless you have the services of . . .
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Some of these . . .
you will struggle to argue with
them
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So you will have to put up with me!!

The Provisional finding is based, largely, upon the following conclusions: consumers face difficulties in engaging with financial services;
 38% of add-on buyers said they had not thought about buying insurance before the
day of their purchase compared with just 15% of stand-alone buyers;
 consumers’ understanding of policies is poor for both add-on and stand-alone
products;
 weak consumer engagement increases the point of sale advantage enjoyed by
selling add-ons; and
 FCA is less concerned about travel insurance (which consumers buy frequently,
and are broadly familiar with) than the other products (with which they are less
familiar and often are not bought).
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I would conclude from this . .

Consumers need to engage more with financial services and they need to be
encouraged to think about buying insurance;

their understanding of product content is poor however they purchase their insurance
and the point of sale increases “engagement” with financial services;

if consumers become more familiar with an insurance product, they will more often
purchase it, and then the regulator would have less concern regarding consumer
engagement with it; and

from this you would think that anything firms can do to assist the regulator in
remedying “poor engagement” would be of value - and that the point of sale appears
to be a potentially very effective place to do this
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You would think the conclusion would be

to encourage consumers to engage with
financial services at the point of sale; but

to apply the most rigorous conduct of
business regulation at the point of sale -

particularly as FCA say it “found little
evidence of consumers saying they were
actively pressurised into buying insurance at
the point of sale or are dissatisfied with their
purchasing experience”!
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So why do FCA reach a different
conclusion?
 Because this is not a conduct of
business investigation
 It is a competition investigation
 Focused on just one thing . . .
 Getting the price down!!
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Theory says . . .

Increasing the outlets - decreases the
price

That is what the economists are saying to
FCA

Get more competition with the point of
sale - and prices will come down

You can’t really argue with them –
because (in their world) this is right

But that theory is of no value . .
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Unless this man tells FCA . .

You might want consumers to engage
with financial services . . .

But they don’t, and they won’t

They are not risk aware until risk is
brought to their attention

The only way to engage consumers with
financial services is . . .

. . . to engage with them!!!
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Where that risk relates to purchases
The only way to engage with
consumers is at the point of sale where and when the customer will
briefly be prepared to focus on that
risk
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So . . .

I have reached a conclusion totally at
odds to that of FCA on the basis of
almost the same evidence

My conclusion is just as logical as is
theirs

But mine is more likely to be right

How can I say this?

Because . . . .
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I said “almost the same evidence” . .
 MS14/1 does not factor consumer inertia into its equation
 This was the “mistake” which the Competition Commission made
- and which now leaves millions exposed
 I doubt this is a “mistake” by FCA - but comes from inbuilt
prejudice against the add-on market and a preference for “standalone” solutions
 But failure to factor inertia into the equation totally distorts the
integrity of the evidence upon which its conclusions are drawn
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You must please . . .

engage with FCA on this

Concerns which FCA have with the add-on market will not be solved by
distorting the market

Inertia means that consumers will not respond to distortion

Make sure that FCA understand that less engagement with financial services
and with risk will be the outcome

Of course FCA will say “but if there is no competition because of consumer
inertia, then our concern will remain that the price is too high at the point of
sale”
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My answer to that?

I agree!!

But I also agree that :-
 the products are currently too complex for
the point of sale;
 that consumer expectations are high, and
are increasing; and
 that the point of sale presents a number of
real dangers for abuse

So I would go on to ask FCA . . .
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The real question to be answered

Is it better for FCA: to accept consumer inertia - and that the point of primary product
sale is a key moment of engagement; and
 to demand that distributors deliver genuine and improved products
and consumer outcomes for the money they earn

or to: drive point of sale distributors from the marketplace; and
 leave even more consumers unengaged with financial services?
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To conclude . . .

Only three firms are listed in
MS14/1 as having responded to
FCA’s call for evidence

I would suggest that, if you don’t
engage now in a debate with FCA on
an issue which FCA admit it is still
trying to understand, then you will
live with what . . .
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He
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And, even worse, he
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Tells them – for a very long time to come
Thank you
www.paginator.co.uk
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