Slide 1

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 2

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 3

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 4

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 5

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 6

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 7

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 8

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 9

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 10

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 11

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 12

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 13

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 14

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 15

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 16

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 17

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 18

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 19

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 20

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 21

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 22

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 23

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 24

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 25

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 26

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 27

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 28

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 29

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 30

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 31

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 32

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 33

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 34

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 35

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 36

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 37

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 38

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 39

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 40

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 41

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 42

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 43

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 44

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 45

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 46

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 47

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 48

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 49

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 50

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 51

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 52

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 53

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 54

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 55

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 56

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk


Slide 57

PROTECT
LEGAL AND REGULATORY REVIEW
JULY 2014

What’s Occurring?

Welsh for . . .
 What has happened since I last saw you?
 What’s happening right now?
 What’s going to happen?
 What’s going on that people aren’t telling me about!

In the next half hour
 I will try to tell you about “what’s occurring” on the
regulatory front both: operationally; and
 strategically
 And all the time I am doing this there will be . . .

The elephant in the room

The Add-on Investigation
 A lot has happened since I last saw you
 Much is happening right now behind closed doors

 We don’t know (for sure) what is going to happen
 But what is going on right now will define the future for our
industry for years to come

So Mr Devine . . .

What’s occurring?

 Lots of the usual day to day stuff which we must find out
about;

but
 we also need to consider the wider picture of what is
occurring within FCA?

What’s been occurring since I last saw you?

1 April 2014


April Fools day . . .



A perfect date for FCA to take on the regulation of Consumer Credit – the
project is overwhelming it



A perfect day for the OFT and the Competition Commission to be abolished to be replaced by the Competition and Markets Authority (CMA)



A huge exercise – and chaotic. Many links to key Orders such as the Store
Cards Market Investigation Order are dead and unobtainable! The PPI Order
is, though, still available online.

The Payment Protection Insurance Market
Investigation Order 2011


Is the preserve of the CMA



Reporting which previously had to be made to
OFT must now go to the CMA



The CMA has produced a new compliance
reporting template – but . .



Much of the background materials (e.g. Q&A’s)
are only traceable via the National Archives!



(CMA have published excellent materials on
UCCTA)

The FCA Business Plan 2014/15

The Business Plan
 A crucial indicator of regulatory
risk and expectation
 A
mixture
commitments
platitudes

of
and

explicit
apparent

 Ignore the platitudes at your
peril

 They tell you “what’s occurring”!

Business Plan - Key explicit commitments
 Huge commitment to FCA getting the outcomes it wants from add-on
insurance
 Investigation into distribution chains – basically seeking to identify and
manage the product design and distribution influence exerted by large
intermediaries and coverholders in the GI Market
 FCA is worried about “the mixed responsibilities” in these distribution
chains (conflict of interest)

 FCA want to nip product, distribution and market concerns at the point
of supply into the retail market

Other commitments?
 To get the new CASS 5A (risk transfer) rules into place - delayed by the
add-on investigation
 The new rules will require unconditional risk transfer and direct agency
relationships with the insurer (both already demanded by FCA ahead of
rules)
 FCA still carefully checking out the mobile phone market
 Even greater focus on unfair (and unrealistic) terms

Now, the “Platitudes”

Ignore these at your peril. . .


A new consumer spotlight segmentation model – FCA are using it to “achieve
competitive financial markets in which customers have access to a range of
appropriate, good value products and services” (Beware of regulators
determining “good value”)



Big concern at FCA about the level of compliance with, and focus on, the
prevention of financial crime (and bribery). FCA started with the big boys but is
now focusing on smaller firms. Beware – lack of focus in this area is a key
indicator of poor (product governance) systems and controls. (See excellent
BBA Guidance on this area)



FCA to carry out “work to determine whether the relationship between [the]
Handbook, and firms’ perceptions of it, works in the interests of consumers?
One example given is how the understanding of what is “an advised sale” can
be made clearer and simpler for consumers?

A snapshot of FCA’s expectations. . .
“Our supervision focuses on firms’ culture, looking at their business models to
ensure that consumers are at the heart of what they do and that remuneration
practices do not incentivise employees to put quick profit first, at the expense of
consumers getting products and services that meet their needs or of the integrity
of the market. We also ensure that senior individuals carrying out significant
functions are accountable for their firm’s conduct and compliance”.
“In particular we will look at the robustness of firms’ governance and risk
management processes, their market abuse controls, the revenues that firms
generate from their existing customers, and how they monitor sales practices”.


More on culture and business models later . . . . .

Thematic Reviews . . .

Insurance Claims Processes


Very aggressively commenced by Martin
Wheatley speaking of “firms trying to
wriggle out of responsibility to pay
legitimate claims”



The findings?



Pretty good!



But lots of issues for you to take on
board . . .

Lessons from the Claims Review (1)


20% of claimants said they felt like complaining at some stage during the claims process
- yet only about one-third to one-half went on to make a formal complaint.



It is well worth you examining how your firm collects data from those who don’t complain but who do express some dissatisfaction or simply make observations. It is from this pool
of customers that you can probably learn more about deficiencies in your sales, your
product and your claims handling (and thereby improve root cause analysis and product
governance).



The words “Oh OK – I am bit surprised by that” should be as big a warning of potential
shortcomings as anything the more belligerent customer may come out with.



Incidentally – FCA complaints data shows 15% decrease in complaints – but if you extract
PPI there is a 3% increase . . .

Lessons from the Claims Review (2)


FCA have some really interesting (not necessarily universally correct) things to say about
consumer outcomes in long chains of delegation.



It says that “it does not appear that insurers that delegate claims handling have the
information, or the means to collect it, to show that consumer outcomes are being
delivered which are comparable to those where claims are handled directly by the
insurer”.



High quality third party administrators can significantly assist in this process, but their
ability to do so can be constrained where (some) insurers operate at arm’s length, via
pure claims auditing - rather than adopting a more collaborative and constructive
approach.

Lessons from the Claims Review (3)


“Some of the insurers we interviewed acknowledged that the industry had not yet
achieved the right balance in its documentation, between setting out the legal basis of
the contract with the policyholder and explaining easily and clearly what the main
features of the cover are”



“Some interesting ideas emerged during our interviews with firms. One senior manager,
responsible for product development, speculated about the implications of moving to a
two page policy document and whether an insurer would have the courage to do this”?



“During our feedback meetings with insurers a number said that they aspired to produce
shorter product documentation. However, they equally do not want to fall foul of
regulatory requirements. Documentation tended to grow in length and become more
legalistic to minimise this risk, reflecting the influence of compliance and legal
departments”.



FCA fail to see that this actually reflects a lack of trust by firms that FCA would be
supportive!

Another Thematic Review

Conflict of Interest and Remuneration


Focused on commercial insurance intermediaries – but don’t let that distract you



FCA say that “Conflicts of interest are inherent in many general insurance intermediary
business models. So it is important that intermediaries put in place effective control
frameworks to identify, mitigate and manage the risk that conflicts arising within their
business could damage the interests of their customers”.



The problem facing FCA is that the only way to avoid a conflict of interest is not to have
one. However FCA recognise (and seem to fundamentally accept) that conflict of interest
is inbuilt into the structure of the intermediary market. Even Principle 8 makes this
assumption - asking firms to “manage” conflicts “fairly”.



I simply do not know how you are supposed to do that when FCA insist that such fair
management must deliver consumer outcomes which are untainted by any conflict!!



We see the same issues cropping up in relation to incentives, and this issue also divides
those concerned with bringing IMD 2 into being. . . .

IMD 2


If you ever want to explain to anybody why they might want to exit the EU – the
process towards IMD 2 is a perfect case study



An EU Commission proposal that seeks to deal with issues arising from all the
developments in insurance distribution since IMD 1 was made in 2002



The problem is that those developments have occurred at breakneck speed in
some member states - but have not even started in others



Also – different member states have very different attitudes to matters such as
commission disclosure and tying and bundling



Different member states have utterly different intermediation markets

So . . .


Whilst FCA roars ahead in the UK to
address these issues IMD2 is
increasingly bogged down in the EU
political processes



In the past 2 months there have been
two
very
different
“compromise
proposals”



These proposals are ill-considered quick
fixes to seek to achieve progress



Don’t hold you breath – but , if you do,
FCA will take it away again long before
IMD 2 will!!

Whilst on the subject of Europe . . .


The European Insurance and Occupational Pensions Authority (EIOPA) has published a
report which contains a mass of information regarding how EU Member State regulators
are regarding PPI within their respective countries.



The responses show a huge variation of attitudes to PPI from different state regulators



Most member states have, or are, undertaking intensive market or other reviews but,
Germany, for example, reported that the “optional nature of PPI products in Germany,
together with the existing consumer protection framework, does not necessitate any
further action in this field”.



If you have any international dimension to any PPI business or are simply interested to
see the lie of the regulatory land within the rest of Europe this is an interesting read

What else is occurring?

The PRA Rulebook


The PRA is developing its own Rulebook as it moves away from the old FSA Handbook
provisions



A key change is the replacement of the Principles for Business with PRA “Fundamental
Rules”



These Fundamental Rules will have an equivalent impact on the PRA driving the
behaviour of insurers as have the FSA/FCA Principles for Business on the intermediary
market.



There is a strong regulatory drive at both PRA and FCA to have insurers more engaged in
the consumer outcomes from their manufacture and distribution of insurance (also in
IMD2). Accordingly you need to become familiar with the new Fundamental Rules as they
will provide a key backcloth to the demands and expectations of insurers, going forward.

FOS


FOS is moving; but has arranged post
forwarding for the foreseeable future. No need
to update materials until needed, but a
reminder to check you are aware of correct
contact details



Standard case fee remains at £550 for 2014/5
– the PPI supplementary case fee will no longer
be charged



Ombudsman News (117) has a focus on PPI
complaints handling and a Q&A on a changed
approach to compensating “distress and
inconvenience”



FOS doesn't want to be known as . . . FOS!!

MAS


Heavily criticised by the Treasury Select
Committee



The Government announced an
Independent Review into “the role and
strategy for such a body in the future”



On 3 July H.M. Treasury published a
“call for evidence” which closes on 2
September

Insurance Contracts Bill


Law Commission has published the draft Bill



Mainly relates to “non-consumer insurance contracts”



Also contains proposals to change the law on the rights of insurers in the event
of fraudulent claims



Fraud would no longer to “avoid” the contract from the start; instead the
fraudster would forfeit the whole claim and all subsequent claims. In some
circumstances the insurer would be entitled to claim damages for investigating
the claim



The last Law Commission Insurance Bill was enacted almost unchanged as the
Consumer Insurance (Disclosure and Representations) Act 2013

Premium Rate Telephone Lines


The Consumer Contracts (Information, Cancellation And Additional Charges)
Regulations 2013 ban premium rate telephone lines for help and complaints.



Does not apply to financial services – but FCA is committed to introducing an
equivalent ban and at the same time improving complaints handling



FCA to impose the ban “later this year” but “would like to see all financial
services firms change to basic rate lines as soon as possible and not wait until
our new rules come into effect”



Remember – DISP requires that you must provide a means for consumers to
complain to you without charge

So – that’s what has “Occurred”

What is more worrying is . . .

What’s is occurring at the FCA?

A Regulator in a hurry . .
 New regulatory objectives
 Add-on Investigation is a toe into the water for its market studies
 Just that toe is causing untold damage to firms in the market
 FCA says that it does want to listen to what’s occurring . . .

 But it does not trust what it hears, and has very little willingness to
delay forcing through the changes it wants
 What changes?

We have been through and you have
adapted to . .
 Conduct of Business Regulation
 Treating Customers Fairly
 Principles Based Regulation

 Product Suitability, Risk and Governance

But what’s occurring right now

FCA is radically changing the point of attack

 Are you fit to be allowed to operate at all in the market you
work in?
 Should firms generally be offering particular products into
particular markets?
 How can FCA control products, markets and supply?

Let’s not mess around

We are looking at . . . .

 “Soviet style” central planning
 Applied to a capitalist market
 And that is very dangerous path to tread

Are you fit to be allowed to operate in your
market?
 This is from the Add-on Provisional Remedies (MS14/1) . . . .
“Firms may wish to review their processes for the design, distribution and
sale of all add-on products, and not only those in the sample in our study,
to ensure that they comply with existing FCA requirements. This might
involve not only a review of compliance with existing FCA rules and
guidance on product design, sales and disclosure, but also a wider
consideration of whether the firm’s business model and processes are
achieving the right outcomes for add-on customers. We will be engaging
with firms through follow up supervisory work as appropriate”.

The “Business Model”
 This has a very particular meaning under the Threshold Conditions

 It means “your strategy for doing business” . . . .
 The Threshold Conditions must be met for you to be allowed to
undertake regulated activity . . . So . . .
 FCA’s engagement with your Business Model will be engagement as to
your suitability, as a firm, to continue to do what you do, how you do it,
where and with whom?

 That suitability will be subjectively judged by FCA

So – what’s occurring

Is not funny at all . . .
 You will be required to have a Business Model which is clear as to: The assumptions underlying your business strategy and your
justification for it
 The rationale for the business you undertake; and
 The need of, and risks to, consumers related to the products and
the services you offer and your product strategy

In Essence . . . .

 Does your Business Model (in FCA’s eyes) have integrity?
 Ensuring integrity, in the provision of financial services, is one of FCA’s
three fundamental regulatory activities . . .
 By concentrating on your Business Model FCA will be moving on from
principles based regulation into . .

Integrity Based Regulation
 Asking you to justify the fundamental reasons why you: are in the market you are in; and
 you offer the products you offer; and
 you choose the routes to market you use?
 The answers the FCA will expect, and the answers most firms would
truly give, are very different

What FCA Expects . . .


It expects you to have undertaken a comprehensive product governance and
suitability exercise



It expects you to have undertaken a comprehensive review of all product terms
for simplicity, value and fairness



It expects you to have reviewed all enforcement and unfair terms information to
consider the root causes for failures identified by FCA and to assess whether
similar problems could arise with your products and business?



It expects you to remove or totally redesign any product or distribution which
could give rise to consumer detriment



It will tunnel into your firm to “assess how culture affects the way your firm is
run”

What will FCA find?


In most firms a culture that demands sales and profit



A structure which is locked into a means of distribution developed over a 20/30
year period



A market where product design and delivery matches the retail markets in
which the product is sold - where product is “pushed” to consumers



A market where product design is driven to set consumer need as much as to
meet a consumer need



A market where identifying risk to consumers and offering “peace of mind”
defines and justifies product offerings – “insurance is sold and not bought”

What is occurring is that . . .


FCA is hurrying to fundamentally
change Business Models, products,
distribution and culture which have
taken decades to develop . . . . .
within months



The question is whether firms have
the capability and capacity to
respond?



Many are seriously struggling . . . .

The Regulatory approach is . .
 Damaging markets before firms have had time to properly adjust or
respond
 Damaging the capacity to respond – hits to the bottom line are
reducing manpower and resources

 FCA are asking for Business Models which place the consumer interest
first, but have created a market environment in which firms are having
to put themselves first - just to stay in business

FCA are establishing the wrong climate
 Firms need a little love, some genuine engagement and a lot more time
 FCA must understand that firms have “got the message” – but they and
the market generally are unable to respond at anything like the pace
FCA expects
 What will occur as a result are unregulated products and consumers
exposed to increased risk.
 Changing what has occurred without damaging what will occur . .

Needs . . .
 Less posturing
 More listening

 A lot more thought and understanding
 More balance
 And from the industry . . . .

More fight . . .

Thank You

www.paginator.co.uk