1. PROTECT LEGAL AND REGULATORY REVIEW NOVEMBER 2014

2. I’m a Director – get me out of here!! (c) Paginator Limited 2014

3. FCA has totally changed the game (c) Paginator Limited 2014

4. The Key Words...  Executives - and their responsibility for...  their firm’s Culture (c) Paginator Limited 2014

5. Let’s just go back in time (c) Paginator Limited 2014

6. We used to have...  Rules  And if firms broke rules  They got fined (c) Paginator Limited 2014

7. Well firms still get fined!!! (c) Paginator Limited 2014

8. But some (most) of these fines..  Are not for breaking rules..  They are for breaching the Principles for Business  Even if your firm meets every rule in the FCA Handbook  It can still be £30m the lighter for failing to additionally meet... (c) Paginator Limited 2014

9. “Principles-based regulation” (c) Paginator Limited 2014

10. So you hopefully know..  That you must embed the principles for business into everything you do?  But - do you actually do it?  The regulator found that most firms do not  Which is why.... (c) Paginator Limited 2014

11. It fined and made an example of some of them (c) Paginator Limited 2014

12. But fining firms isn’t working... “Ultimately, the events of the past few years — from the crisis itself, to PPI, to Libor — can be laid at the feet of individuals.” Tracey McDermott, FCA Director of Enforcement and Financial Crime (c) Paginator Limited 2014

13. So FCA has changed its point of attack “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”. (FCA Business Plan 2014/5) (c) Paginator Limited 2014

14. Where is the responsibility for this? “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”. (FCA Business Plan 2014/5) (c) Paginator Limited 2014

15. Which is why... (c) Paginator Limited 2014

16. How was it they became personally liable?  CEO - Fined £412,700 – for failing to deliver management controls to ensure customers were treated fairly. Also failed to recognise that the Director’s share scheme might engender a culture where the profit motive harmed TCF.  Finance Director - Fined £208,600 for his failures of oversight over the compliance function by “missing warnings of compliance problems” and for being heavily involved in creating and implementing a business strategy to maximise operating profits “that he should have seen would lead to a sales-focused culture that would act to the detriment of customers’ fair treatment”.  Marketing Director – Fined £306,700 for playing a central role in developing and launching the monthly add-on strategy at Swinton by being responsible for their design, development and marketing and for “also being involved in the strategy to maximise Swinton's operating profits”. (c) Paginator Limited 2014

17. So the (conduct) risk of running a regulated firm in 2014 is..  Meet all rules (of course)  Embed the Principles for Business into everything  But now there is much more that firms must do  And “executives” will take personal responsibility for doing it (c) Paginator Limited 2014

18. What you now must do..  Have a Culture which you can demonstrate puts consumers at the heart of what you do  Have a Business Model which is utterly resilient to FCA investigation  Ensure that remuneration practices do not incentivise employees or distributors to put quick profit first  Have in place robust governance and risk management processes from which you can demonstrate that you are on top of.... (c) Paginator Limited 2014

19. Delivering...  the culture,  the integrity; and  the consumer outcomes which is contained in your Business Model Our Business Plan (c) Paginator Limited 2014

20. FCA has a totally different regulatory approach to FSA FCA Compliance Senior Management “Business Model” Operational Management Culture

21. To ensure the delivery by.. Operational Management “Good consumer outcomes” (c) Paginator Limited 2014

22. Not only is the approach different – so is the target...  FSA focused its attention on regulating interaction between firms and customers at the point of sale  The assumption was that consumer detriment would occur if the wrong product was sold to the wrong person  But “point of sale regulation” totally failed to avoid this... (c) Paginator Limited 2014

23. So FCA have changed the point of attack Insurer/Underwriter/Syndicate Retailer/Sub-delagee/Connected contract Coverholder/Intermediary/Administrator Managing Agent Agent/Intermediary Point of Sale with the end customer

24. FCA is focusing its attention...  on delivering change in the financial services industry by asking:-  What are the key drivers in your Business Model?  Where is the focus on good consumer outcomes in your Business Model?  Who is taking personal responsibility for this? (c) Paginator Limited 2014

25. FCA’s fundamental concerns  “Firms do not design products or services that respond to real consumer needs or that are in consumers’ long-term interests;  Distribution channels do not promote transparency for consumers on financial products and services” FCA Business Plan 2013/14 (c) Paginator Limited 2014

26. FCA are making a direct link between Product Design and Governance Poor Consumer Outcomes POS RegulationRoute to Market (c) Paginator Limited 2014

27. To address this the Regulatory focus will be on your “Business Model” (c) Paginator Limited 2014

28. What is a “Business Model”?  Defined, in the Threshold Conditions, as a firm’s “strategy for doing business”  The definition goes on to elaborate that....  Your Business Model is “the reasons why you do what you do”  This will reveal your culture (c) Paginator Limited 2014

29. You must be able to  Justify to FCA the fundamental reasons why you:-  are in the market you are in; and  you offer the products you offer; and  you choose and operate the routes to market you use? (c) Paginator Limited 2014

30. FCA will tunnel into your firm to:- “assess how culture affects the way your firm is run” (c) Paginator Limited 2014

31. I cannot emphasise too strongly  How different a regulatory regime this is  FCA want to engage with senior management directly  They want to find out all your secrets – why you do what you do and the reasons why you do what you do (c) Paginator Limited 2014

32. 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 customers  A market where product design is driven to set customer need as much as to meet customer need  A market where identifying risk to customers and offering “peace of mind” defines and justifies product offerings – “insurance is sold and not bought” (c) Paginator Limited 2014

33. And if FCA do find such a culture in your firm? (c) Paginator Limited 2014

34. FCA will... “ensure that senior individuals carrying out significant functions are accountable for their firm’s conduct and compliance” (c) Paginator Limited 2014

35. So make very sure you are not in the next headline... (c) Paginator Limited 2014

36. You can help make sure.. (c) Paginator Limited 2014

37. Thank You www.paginator.co.uk malcolm@paginator.co.uk (c) Paginator Limited 2014