LEGAL AND REGULATORY REVIEW MARCH 2016 PROTECT LEGAL AND REGULATORY REVIEW MARCH 2016

A legal and regulatory review of what? (c) Paginator Limited 2016

Normally – about what has happened since November, but . . . “General insurance and insurers There are no updates to report in the Insurance sector this month”! (c) Paginator Limited 2016

It has actually been a pretty quiet patch! (c) Paginator Limited 2016

When I say “quiet” . . . The Insurance Distribution Directive has become EU law – in force 23 February 2018. By then we may not even be members and, even if we are, there will be loads of UK consultations about implementation before then Complaints Reporting – FCA eventually sorted out its own mess; you only need to record and report complaints under the new (3 business day) regime once it has started (after 30 June) FCA reported back on its Mobile Phone Thematic Follow up - worth a read even if you are not in that market (e.g. FCA measure claims service from the date of claim - even if the customer delays) FCA consulted on Transparency and Engagement at Renewal – with some very nasty suggestions regarding prompting customers to “shop around” FCA slipped into January’s “Regulation Round-up” requirements (under EU law) to inform customers in complaints processes and in policy documentation about the EU ODR Platform – by 15 February! The new Senior Managers Regimes (for Banks and Insurers) come into force on 7 March. FCA have delayed implementation of rules which apply to all firms asked for a reference for a Senior Manager (c) Paginator Limited 2016

And on Tuesday . . . . (c) Paginator Limited 2016

So, today - a pause for a much broader brush regulatory overview What are the key regulatory issues facing the GI market as at March 2016? What do you need to be doing about them? Put another way . . . . . (c) Paginator Limited 2016

What could get you into really bad trouble? (c) Paginator Limited 2016

The key areas are . . The outcomes from the Add-on Insurance Market Study Conduct Risk (and the TCF Outcomes) Unfair Contract Terms Culture and Business Models (Senior Management responsibility) Financial Incentives Product Governance and Product Risk Claims and complaints handling (c) Paginator Limited 2016

Let’s look at the essence of each of these (c) Paginator Limited 2016

The essence of the Add-on Study? Apart from the specific attacks on GAP and Opt outs . . . . The real questions raised are as to:- “value”? customer comprehension (from the “sales journey”) (c) Paginator Limited 2016

The essence of “Conduct Risk” Simply the new “buzz word” for:- “the risk a firm will fail to pay due regard to the interests of customers or will fail to treat them fairly at all times” TCF by any other name – save that the term “Conduct Risk” focuses on the key “conduct” objective of the FCA - to protect consumers Any firm failing to meet that objective will “risk” its authorisation So delivering on the TCF outcomes is your core regulatory objective (c) Paginator Limited 2016

What are the essential TCF Outcomes? Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect (c) Paginator Limited 2016

The next essential . . . (c) Paginator Limited 2016

Fair Contract Terms In January 2016 FCA announced it was abandoning its Unfair Contract Terms library – why? Because the expectation is now that each firm should address the issue of fair (and realistic) contract terms in the light of the specific inter-action between its:- particular product; particular customers; and the particular sales environment employed Put another way – ask “can our product be quickly and easily understood by our customers before purchase so we can be sure that it will meet their expectations (at claims stage)”? Put even more simply - does our product do what it says (simply) on the tin? (c) Paginator Limited 2016

Another essential . . (c) Paginator Limited 2016

Culture and Business Models A “Business Model” is stated, within the FCA Handbook Threshold Conditions, to be a firm’s “strategy for doing business” The Threshold Conditions require each firm to ensure that its Business Model is clear as to:- the assumptions underlying the Business Model and the justification for it; and the rationale for the business undertaken; and the needs of, and risks to, consumers related to the products and services offered and the firm’s product strategy In essence, the requirement is that a Business Model has integrity. Integrity within the provision of financial services in the UK is another of the three fundamental regulatory objectives which FCA is obliged to pursue – and enforce. Therefore . . Lack of any integrity = conduct risk = enforcement (c) Paginator Limited 2016

Three essentials to go . . . (c) Paginator Limited 2016

FCA on Financial Incentives . . . Products should be sold “to meet the needs of consumers, not driven predominantly by financial incentives and profits for firms” Firms should “properly identify, consider (and understand) how incentive schemes might encourage staff to mis-sell and put in place effective systems and controls to adequately manage the increased risks of mis-selling arising from incentive schemes” “Routine monitoring” of incentive schemes is not sufficient – nor are customer feedback surveys. What is required is a full and effective risk based monitoring which looks for problems and corrects them Firms take action to address any inadequacies; and where reviews identify any “recurring problems” firms should not only properly and fully investigate but they also should “take action and pay redress where consumers have suffered detriment” (c) Paginator Limited 2016

Nearly there . . . . (c) Paginator Limited 2016

Product Governance and Product Risk FCA say that good product governance involves a firm employing its senior management systems and controls constantly to ensure that:- it identifies the target market for its insurance and the needs of likely consumers of the product; the events covered by the insurance are aligned with the needs of the target market the benefit following a claim meets the needs of consumers in the target market; the control over distribution strategy is carefully considered - especially if it involves selling the insurance as an add-on product; and that the product features (and their fit with the target market) are reviewed on a regular basis, in the light of customer feedback, claims and complaints (c) Paginator Limited 2016

Which brings us nicely (and finally) to . . . (c) Paginator Limited 2016

Claims and complaints handling FCA’s Thematic Review (TR15/7) emphasised the need for insurers to retain oversight over, and reactive engagement in, outcomes from claims handling undertaken on their behalf Why? Because feedback from claims (and complaints) is the crucial ingredient in product governance and ensuring good, targeted product design which will deliver good consumer(TCF) outcomes (c) Paginator Limited 2016

That’s it – an overview of the key regulatory issues . . . But it gets easier to focus on these If we extract the duplications which exist within more than one key area Then we get . . . (c) Paginator Limited 2016

The true essence of regulatory expectations (c) Paginator Limited 2016

The seven essential steps to regulatory compliance (c) Paginator Limited 2016

Step 1 Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to corporate culture and products are designed/delivered under a Business Model which has integrity (c) Paginator Limited 2016

Step 2 Products should be sold via distribution which is committed to meeting the needs of consumers, and which is not driven predominantly by financial incentives and profits for firms (c) Paginator Limited 2016

Step 3 The distribution of insurance and the delivery of complaints and claims handling must be governed and controlled by senior management who take personal responsibility for good consumer outcomes (c) Paginator Limited 2016

Step 4 Products and services should be designed to meet the needs of identified consumer groups, be targeted accordingly and have a carefully considered and genuine “value” for those consumers (c) Paginator Limited 2016

Step 5 The product must be capable of quick and easy understanding by customers within the context of their particular sales journey (c) Paginator Limited 2016

Step 6 Consumers must be provided with products that perform as firms have led them to expect, and will meet their expectations at claims stage (c) Paginator Limited 2016

Step 7 Senior management systems and controls must ensure that products (and their fit with the target market) are reviewed on a regular basis, in the light of customer feedback, claims and complaints (c) Paginator Limited 2016

Its really all about . . . Responsible firms undertaking . . Responsible Product Design With Responsible Product Governance Via Responsible Distribution (c) Paginator Limited 2016

Easy . . or is it ????? (c) Paginator Limited 2016

Before your food – some food for thought. . . . “I remember once asking to see board papers of a bank suspected of mis-selling a financial product. What papers had been laid before the board about the sale of this product to its largely retail customers? One might have expected evidence that a detailed due diligence of the product had been conducted, an assessment of its risks, a study of the kinds of customers for whom it might be suitable, a plan for how the product would be sold, including how frontline staff would be trained etc. What came back to the board was . . . a single slip of paper that calculated the profits that would be earned if the product could be sold widely from commissions that were being offered by the issuer” Mark Steward, Director of Enforcement and Market Oversight at the FCA Nov 2015 (c) Paginator Limited 2016

That could never happen today? With the regulator demanding that firms focus entirely on good consumer outcomes when designing, governing and distributing insurance? Well it could happen, and it does happen today – widely Why? (c) Paginator Limited 2016

A “typical” GI distribution chain Insurer “Underwriter” Wholesale Broker Sector Broker Retail Broker Managing Agent Coverholder Customer Claims Handler TPA Complaints Handling Retailer (c) Paginator Limited 2016

Only two of these firms contract with customers Insurer “Underwriter” Wholesale Broker Sector Broker Retail Broker Managing Agent Coverholder Customer Claims Handler TPA Complaints Handling Retailer (c) Paginator Limited 2016

So we can have . . . Up to ten firms engaged in the distribution of one product Typically up to eight of those firms have no direct relationship with the consumer and would regard themselves as “commercial” intermediaries or service providers Typically neither of the two firms which are contracting with the customer will have a primary involvement in product design The outcome of that can be . . . (c) Paginator Limited 2016

A view from afar . . . “In one case an insurer was underwriting a number of single risk and add-on personal lines products for a range of third parties under the umbrella of a new relationship with a Managing Agent - entered into due to an existing relationship with a wholesale broker. It became apparent in the course of our review that the insurer had not considered or understood the products being underwritten, their distribution to customers or the delivery of post sales services prior to agreeing to underwrite these. Consequently the insurer was almost entirely unsighted on these products and was unable to state whether customers buying these products were treated fairly or demonstrate that they had previously considered this question. The value of some of these products was unclear and in some cases they appeared to be targeted at more vulnerable customer groups, which should have indicated heightened levels of conduct risks to the insurer” TR15/07 Delegated authority: Outsourcing in the general insurance market June 2015 (c) Paginator Limited 2016

By virtue of the way we “do things” That insurer was exposed to massive conduct risk and unable to govern or even participate in all the issues which we have identified as the 7 essential steps to regulatory compliance (c) Paginator Limited 2016

More from TR15/07 “Some intermediaries designing insurance products did not appear to recognise the extent of the product provider responsibilities they had acquired by virtue of acting as the retail manufacturer of the product. In some cases this was reflected in a lack of appropriate consideration of customer needs when designing products” “There was a lack of appropriate oversight and monitoring by many product providers (both insurers and intermediaries) of the delivery and performance of the product, particularly in relation to meeting customers’ needs. This was often contributed to by poor or incomplete MI” “Lack of oversight also extended in some cases to shortcomings in complaint processes, handling and outcomes. It was not clear that complaints data was complete and accurate, or that it was collated, analysed, reviewed and acted upon” “Product providers did not always appreciate that as the complexity of the distribution chain increases, so do the potential challenges in overseeing it and the potential for consumer detriment” (c) Paginator Limited 2016

So it is not only the insurer . . (c) Paginator Limited 2016

So - when FCA says . . . “We consider that product design and decisions made by product designers about how – and to whom – products will be distributed play a significant role in determining consumer outcomes. We are looking primarily at the product governance processes employed by firms, whether competition is working effectively for consumers, and whether firms are exploiting consumer behaviour. We maintain that products can be designed – deliberately or inadvertently – to take advantage of consumer behavioural traits in ways which are contrary to their interests and that consumers can be unable to exert competitive pressure on firms to support their interests” (c) Paginator Limited 2016

If you are a player in this game . . . Insurer “Underwriter” Wholesale Broker Sector Broker Retail Broker Managing Agent Coverholder Customer Claims Handler TPA Complaints Handling Retailer (c) Paginator Limited 2016

As an authorised firm . . required by FCA to eliminate conduct risk Are you certain that you can be seen to be effectively questioning and ensuring that the products with which you are associated are sold:- to deliver easily understood valuable and good consumer outcomes; under a Business Model which has integrity; via distribution which is committed to meeting the needs of consumers; with complaints and claims handling governed and controlled by senior management who take personal responsibility for good consumer outcomes; and which meet customer’s expectations at claims stage; within a distribution chain which operates effective and responsible product reviews? Your core regulatory requirement is to ask . . . (c) Paginator Limited 2016

What product governance is in place? (c) Paginator Limited 2016

Who is undertaking product reviews? (c) Paginator Limited 2016

How are we engaged in these processes? (c) Paginator Limited 2016

How is information delivered by us . . into product governance and product review processes? What information do we receive from product governance and product reviews undertaken by others? Are we certain that all those with whom we do business are committed to, and will co-operate with us to, ensure good consumer outcomes and will make all adjustments necessary to deliver these? (c) Paginator Limited 2016

If you fail to ask and answer these questions . . You will be exposed to enforcement and that will threaten your continued presence in the market . . . . (c) Paginator Limited 2016

If you need help with these issues . . . (c) Paginator Limited 2016

Just ask . . The “Desk Top Guide to Undertaking Product Reviews” Sign up for the Product Review Roadshow Consultancy, advice, review project management, hand holding . . . . Please do not do . . . nothing!! (c) Paginator Limited 2016

Thank You www.paginator.co.uk (c) Paginator Limited 2016