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
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.
How does the CMA relate to the FCA? The CMA has assumed the CC and OFT functions regarding making markets work well for consumers – with huge investigatory powers The FCA has its competition objective under FISMA (as you know)!!! By 2015 FCA will be a “Concurrent Regulator” with (basically) the same powers as CMA with regard to regulated financial services On 12 June CMA and FCA entered into a “Memorandum of Understanding” – to avoid turf wars! However.....
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 Business Plan A crucial indicator of regulatory risk and expectation A mixture of explicit commitments and apparent platitudes 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
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.....
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...
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 (2)
“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! Lessons from the Claims Review (3)
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
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
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
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?
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
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....