Transcript Simple Products (c) Paginator Limited 2015 Now the Latvians . .

Simple Products
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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
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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 . .
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FCA got a good response and
seems to have learned some
lessons?
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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
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Unfair Contract Terms
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Unfair Contract Terms
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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”)
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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 . .
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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
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“core terms” will only be exempt if “transparent and prominent”
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FCA has already narrowed, significantly, its views on what represents a “core term” within
a financial services contract
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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)
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The Insurance Act 2015
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What the Act does . .

Abolishes “basis of the contract” clauses, converting pre-contractual information supplied
to insurers into warranties
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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
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The Act also provides that the insurer may refuse any claim arising after a fraudulent act
– but previous valid claims are unaffected
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Attestations
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Attestations
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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
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FCA is significantly increasing the use of “attestations” as a regulatory tool
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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.
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FCA has responded by creating a webpage explaining how it will use
attestations – worth a look
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Fraud, Enforcement and Whistleblowers
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Fraud
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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
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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
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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)
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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/3890
63/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
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Whistleblowing
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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-fromwhistleblowers.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
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Performance Management
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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
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FCA and Social Media
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Finalised Guidance FG15/04

Guidance to help firms understand how they
can use social media in compliance with FCA
rules
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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”!
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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
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Conduct Risk
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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 . . .
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Product design and Conduct Risk
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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
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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
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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 . . . .
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Consumer Vulnerability
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Consumer Vulnerability?
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Protection products are targeted . .
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. . . at the vulnerable and the potentially vulnerable
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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.
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When a claims situation arises, there is a disconnect between your expectations,
and the capability of many consumers – and. . . . . .
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And that makes consumers . . .
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Vulnerability
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All customers are nervous of dealing with
financial services

Most have no idea about underwriting and
other issues which preoccupy you
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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
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Then you have a conduct risk in offering
that product – so . . .
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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
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Thank You
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