General Insurance Brokers

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1. FOS Complaint Upheld - Failure to Identify Customer’s Needs (Under Insured)
2. Change of Control – Firm Fined for not waiting for Approval
3. Changes to Close Link Reporting
4. Feedback from TCF Follow up Verification Visits
5. Plain English Guide to Data Protection
6. FSA Register – Change Required to Key Facts Documents
7. Reminder - Changes to the Financial Services Compensation Scheme
8. Reminder - Complaints and Compensation arrangements for smaller firms
9. FOS & FSCS – How to reduce your fees!
10. FSA Investigations – Legal Costs Insurance
11. Intensive Supervision
12. FSA Fines
13. Client Money CPD

Ladies & Gentlemen

Please find enclosed the latest compliance and industry news.

As usual, sit back and enjoy!

Kind Regards

ATEB consultants

Which article applies to me?
Please use the following table to decide which article applies to you, if any:

	1	2	3	4	5	6	7	8	9	10	11	12	13
Directors / Partners
Compliance / A&O
Broker / Account Exec
T&C Supervisor
MLRO
Back Office

1. FOS Complaint Upheld - Failure to Identify Customer’s Needs (Under Insured)

THIS A MUST READ FOR ALL GENERAL INSURANCE BROKERS

Although reproduced generically here, this is an actual complaint (thank you to one of our clients for allowing us to reproduce for the benefit of others).

Background and Circumstances

The customer was unhappy that the settlement of a claim following cancellation of a fair due to bad weather was subject to 'average' by the underwriter of the policy, due to the customer being underinsured. The customer believed that the broker was responsible for the under-insurance.

The customer had for some years insured the event under a special events insurance, renewing it annually through the broker. This year, the customer visited the broker’s office to arrange a similar policy but, on this occasion, opted to include cancellation cover. The total cancellation cover was for £10,000 and the customer signed the proposal form to this effect.

The event was cancelled due to bad weather and, as such, the customer submitted a claim to the underwriter. The underwriter investigated the claim before making a settlement offer. It subsequently wrote to the customer stating that as he had only insured for 27.5% of the total potential cost of cancellation, it would only pay him 27.5% of the shortfall in revenue. As the shortfall experienced was just over £16,000 it meant that the consumer was offered around £4,000 after the deduction of the policy excess. He disputed this, arguing that he had believed he was covered for £10,000 and, as such, requested the additional payment be made. The underwriter declined his request.

The customer believed that he was not provided with correct advices throughout the life of his policies and stated that at no point was underinsurance ever mentioned or explained to him. He asked that the broker cover the shortfall between his expected settlement and the settlement received from the underwriter. The broker refused the request and the case was referred to FOS.

FOS Findings

FOS believed the complaint should be upheld for the following reasons.

In its role as the customer's broker, the firm has certain regulatory requirements which it must adhere to in processing a sale. FOS was of the opinion that these had not been achieved to a satisfactory degree in this instance.

The broker had stated that the customer called into its office to set up a new policy and at this point requested cancellation cover. The real issue here was the level of cancellation cover taken out and who was responsible for the customer being underinsured when he came to submit a claim. The broker pointed out that the proposal form clearly stated: "All sections are extendable by individual quotation” and believed that this placed the burden of responsibility with the customer. However, FOS did not agree.

FOS reviewed copies of the proposal form and concluded that it had clearly not been completed by the customer but pre-completed on his behalf. FOS stated that this practice is quite commonplace and not unusual; however it detracts from the argument set out above in the broker’s defence.

FOS stressed that it is important to remember that the proposal form is not a policy schedule or certificate. FOS felt it was likely that once pre-completed the customer would have been handed the proposal form to sign and he would have had little reason to read the whole document when placing his trust in a broker he had used for a number of years.

ICOBS 5 (all sub-sections) of the FSA Handbook pertains to identifying a customer's needs and advising the best cover to meet those needs. In this example, FOS concluded that the broker had not complied with its requirements.

In FOS’s view, when this quotation was taken, the customer requested £10,000 of cover. The broker should have immediately identified if the total loss could exceed this figure and explicitly explained the issues associated with underinsurance. This was the broker’s regulatory responsibility under ICOBS.

ATEB view:

We’re not sure if all brokers fully appreciate their obligations to fully identify customer’s needs, including at renewal.

Action required by you:

Please ensure that all broking staff fully appreciate and understand their regulatory obligations.

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2. Change of Control – Firm Fined for not waiting for Approval

We have mentioned this so many times in the past, but PLEASE, PLEASE remember that you must tell the FSA and seek prior approval for changes in control in your firm.

In the past, firms have got away with some wrist slapping but no fines, but the law changed in March 2009 so that the courts now have the power to impose an unlimited fine for change in control offences committed after this date.

Please note that this requirement extends to business acquisitions e.g. one firm taking over another.

A firm recently received a £1,000 fine for failing to wait for FSA approval.

ATEB view:

You have been warned

Action required by you:

Information only

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3. Changes to Close Link Reporting

Do you know what a Close Link is?

Do you know that you have to report any changes to close links that you may have?

Do you know that the reporting rules are changing?

A close link is defined as:

• participation, meaning ownership, direct or by way of control, of 20% or more of the voting rights or capital of an undertaking; or
  
  
• control, meaning the relationship between a parent undertaking and a subsidiary.

You must notify the FSA if you have become or ceased to become closely linked with any person (see SUP 11.9.1R). The notification must be made by completing the Close Links Notification Form (see SUP 11.9.3A G) and must include the information set out in SUP 16.5.4R (4). You must do this no later than one month after you become aware that you have become, or ceased to be, closely linked. By arrangement, some firms report such information monthly, but these will be few and far between.

ATEB view:

Information only

Action required by you:

If you have any concerns or suspect that you may have close links that have not been notified to the FSA, you should take action immediately.

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4. Feedback from TCF Follow up Verification Visits

Here are some of the key issues raised by the FSA as they affect general insurance brokers

Use of Management Information

MI should be used to assist in the identification of any potential issues or trends that might impact on the fair treatment of customers. MI should be reviewed periodically (how often will depend on the size and complexity of your firm) and formally document this process (to include an explanation of what the MI is telling you, any issues or trends and further investigations needed, any remedial action taken and the effectiveness of that action). The FSA believe that using MI in this manner will help demonstrate how you manage risk to improve your business and overall outcomes for consumers. We recommend that a formal sign-off is used when reviewing MI (refer to your ATEB Consultant).

Principal’s Involvement in Systems & Controls

Business principals must engage fully with the systems and controls in place and be actively involved in monitoring. ‘Abdication’ to managers or compliance consultants is unacceptable. Principals must be actively involved in the process.

Principal’s T&C and Competence

Following on from this, business principals must be able to demonstrate competence, through active CPD and competence testing. Principals should maintain T&C records in the same way and to the same standards as advisers. You may be interested to know that a partner in a firm has recently been banned and could have received a £10,000 fine. The person was registered as a controlled function CF 4 (partner) but took very little active part in the firm.

The FSA said: "……. was incompetent and acted as an ‘absentee partner’ putting both ABC Ltd and its customers at risk. Engaging with the day to day running of the firm and how your customers are treated are important aspects of being an approved partner of a regulated business. Partners are responsible for making sure that their businesses are properly managed and must inform the FSA if they can no longer meet their responsibilities. Our action shows how seriously we expect senior management to take their roles. We will not hesitate to take action against anyone who fails to carry out their regulatory roles as required."

Non-Advised Business

Be absolutely clear what constitutes this type of business and have procedures and declarations in place to cater for them.

In-House File Checks

Make sure these are selected on the basis of risk and that volumes are commensurate with broker’s competence, business volumes and business types. The checks need to be thorough and fully followed through. In one instance, the FSA picked up issues with a file that had not been actioned following an in-house check.

ATEB view:

These are all very important points.

Action required by you:

Measure yourself against these standards. Discuss with your ATEB consultant.

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5. Plain English Guide to Data Protection

The Information Commissioner’s Office (ICO) has issued a new booklet which aims to provide businesses with practical advice about the Data Protection Act.

It can be found at here.

ATEB view:

Useful information

Action required by you:

Issue as CPD material

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6. FSA Register – Change Required to Key Facts Documents

(Read in conjunction with next article)

On your Key Facts documents, section 5 includes the following text:

“You can check this on the FSA’s Register by visiting the FSA’s website www.fsa.gov.uk/register or by contacting the FSA on 0845 606 1234.”

Unfortunately, even though the FSA’s own templates (generated from their website) include this text, the web address www.fsa.gov.uk/register is no longer correct.

To access the FSA Register nowadays, you need to go to http://www.fsa.gov.uk/Pages/register/

ATEB view:

Long live the FSA!

Action required by you:

Better change your documents (again!!)

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7. Reminder - Changes to the Financial Services Compensation Scheme

If you have not already done so, you need to change your Key Facts Documents and / or your Terms of Business to reflect changes in the FSCS compensation levels.

Most of you will use TOBAs and within it you should have a paragraph that covers compensation arrangements. This should be amended to say something like:

“Insurance arranging and advising is covered for 90% of the claim with no upper limit”

(previously 100% of the first £2,000 and then 90% of the remainder)

Please note that there is no change to compulsory insurance, such as motor third party and employers' liability insurance. This will remain at 100% protection with no upper limit.

ATEB view:

Information only

Action required by you:

Make changes if not already done so

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8. Reminder - Complaints and Compensation arrangements for smaller firms

(Read in conjunction with next article)

This one has caused some confusion! So, in an attempt to clarify matters .....

The access rights of small businesses to the Financial Ombudsman Scheme (FOS) have changed from 1st November 2009. From that date, to have rights of referral to FOS, small businesses must employ fewer than ten persons and have an annual turnover and/or annual balance sheet total that does not exceed €2 million (this is the European Commission’s definition of a micro-enterprise).

Please note the use of the word “and” i.e.

“Fewer than ten persons AND have an annual turnover and/or annual balance sheet total that does not exceed €2 million”.

Both conditions must apply and we have confirmed this with the FOS technical helpline.

So by way of example:

1. Firm has 12 employees and a turnover of €1 million - firm is not eligible.
   
   
2. Firm has 8 employees and a turnover of €2.5 million - firm is not eligible.
   
   
3. Firm has less 8 employees and a turnover of €1.5 million - firm is eligible.
   

Note that access rights of individuals to FOS are unchanged and the access rights of both individuals and small business to the Financial Services Compensation Scheme (FSCS) also remain unchanged.

ATEB view:

Information only

Action required by you:

It is very important that you read the next article – it could save you significant money

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9. FOS & FSCS – How to reduce your fees!

If you are primarily a commercial broker, it is likely that a high proportion of your clients will not be eligible for FOS or FSCS i.e. if they have a case against you, they do not have referral rights to either organisation because of the above definition (FOS) or because they have a turnover of £1M or more (FSCS).

Now, when you report fees data to the FSA, which you do annually by completing section J of your RMAR/Gabriel Return, you submit turnover figures under 3 columns – FSA, FOS and FSCS.

• Under the FSA column, you should report full turnover from broking activities;
  
  
• Under the FOS column, you should report the turnover generated only from those clients eligible to refer cases to FOS;
  
  
• Under the FSCS column, you should report the turnover generated only from those clients eligible to refer cases to FSCS.

In previous years, reporting accurate, tailored income like this would not have affected the fees you paid significantly. However, with FSCS raising levies considerably, it is very important that you report this data accurately, as it could save a significant amount (in some cases thousands) in fees and levies.

ATEB view:

Cannot be ignored

Action required by you:

You will need to record information about your commercial customers (turnover, number of employees) in order to be able to complete this data accurately. This might seem difficult and it is unlikely that many of you will hold such information currently. However, we strongly recommend that you instruct your staff to start obtaining such details to allow you to submit accurate data. If you decide to ‘estimate’ these figures, please ensure that you err on the side of caution and be able to explain fully to the FSA the basis for any assumptions or calculations you have made. Don’t take our word for it – have a play with the Fee Calculator on the FSA website to see how it can affect fees. The calculator can be found at http://www.fsa.gov.uk/Pages/Doing/Regulated/Fees/calculator/index.shtml

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10. FSA Investigations – Legal Costs Insurance

We might be teaching granny to suck eggs, but did you know that you can insure against the legal costs incurred for defending FSA investigations?

It is designed to assist FSA Approved Persons by funding the legal advice and action required when investigated by the FSA. Please note that such insurance is not designed to insure against fines and/or penalties.

If considering purchase of such insurance, please check your PI and Directors/ Officers policies to avoid any duplication of cover.

ATEB view:

Information only

Action required by you:

Information Only

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11. Intensive Supervision

You may have heard or read about the FSA’s move to more ‘intensive supervision’. After a number of fallow years when we heard very little from the FSA, more recently there has been, and will continue to be, more monitoring in the form of themed reviews which often necessitate the need for internal and/or external reviews, desk based monitoring (e.g. questionnaires and telephone interviews), roadshows (e.g. TCF), mass assessments (e.g. TCF) and supervision visits.

This more intensive approach to supervision has already resulted in numerous fines this year, totalling £2,644,000 to date. A list of these fines and the reasons behind them can be found in the Fines Table on the FSA website at
http://www.fsa.gov.uk/Pages/About/Media/Facts/fines/index.shtml

The fines imposed on firms and/or individuals contribute to the FSA’s annual funding requirement and means that the amount of fees levied on firms is reduced for the next fee paying year.

ATEB view:

We do not see the intensity of supervision decreasing, certainly in the short term, and believe that it is right and proper that serious offences should be adequately punished.

Action required by you:

Information only

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12. FSA Fines

We don’t like to scaremonger, but we would not be doing our job if we failed to fully explain the consequences of non-compliance.

By way of illustration therefore, please see below. Note that individuals, as well as directors, have been fined.

Sett Valley Insurance Services

This is small firm, not untypical of those reading this newsletter. The FSA’s Final Notice letter is a MUST READ – it can be found at http://www.fsa.gov.uk/pubs/final/sett_valley.pdf

None of the issues highlighted are particularly complex, but simply a failure of core compliance requirements – systems and controls, T&C, etc. As you read it, ask yourselves (objectively) whether or not some of the issues highlighted are adequately addressed in your firm.

Total fine = £49,000.

Financial Ltd

Charles Palmer, director of Gloucestershire based IFA network, Financial Ltd, has been fined £49,000 for management failings which resulted in poor compliance monitoring on pension switching advice during a period of rapid expansion. Financial Ltd has also agreed to carry out a past business review, which may lead to customer redress if it is found that unsuitable advice was given.

During its investigation, the FSA found shortcomings in the way the firm organised its business and how responsibility for monitoring advisers was allocated to senior management. In turn, this led to concerns about the monitoring of the quality of pension switching advice given by advisers between April 2006 and August 2008.

Note that the FSA state that "As the director of the firm, Palmer was personally accountable for failing to take the steps needed to manage the risk of advisers giving potentially unsuitable advice .....”

Park Row

Another IFA firm, Park Row based in Leeds, has been told to repay up to an estimated £7.8m in redress to customers, quite possibly the highest redress figure for any firm to date (the lender GMAC had to repay £7.7M plus interest in 2009).

The FSA found that the firm recklessly failed to ensure proper advice was given on pensions, mortgages and investments.

The FSA said that the firm would have been fined £2.4m but it would have been unable to pay it.

Interestingly enough, the net commissions and fees generated by Park Row during the two-year period when the mis-selling took place, reached approximately £10.3m – still seems to be a profit in there somewhere!

The FSA has also handed down a fine of £49,000 to Peter Sprung, the firm's former chief executive (past president of the LIA before it merged with SOFA to create the Personal Finance). He has also agreed not to perform a significant function at any firm for five years.

ATEB view:

Interesting Footnote: Financial Ltd also offers compliance consultancy services, providing support to numerous firms - be careful who you get advice from!

Action required by you:

Read the Sett Valley Insurance Services Final Notice letter Ask yourselves if you have adequate monitoring facilities – how often are files checked, how often is CDP checked, do you (or external consultants) undertake an annual audit, how often do you see your compliance consultant, do you listen to what they say?

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13. Client Money CPD

It is a fair to say that poor client money systems, procedures and training, would pose significant risk to your business.

The individuals who have responsibility for undertaking the day-to-day client money administration, whatever degree of their responsibility and involvement, should be part of your T&C regime and should therefore have job descriptions, be set training objectives, undertake CPD and be assessed as competent for the role.

As such, we are often asked what training should be undertaken by such individuals and where is it available. Well, the FSA website offers plenty of resource in this respect.

In the small firms section of the website, in the general insurance intermediaries section, there are a number of useful documents, which can be found by scrolling down on the page at:

http://www.fsa.gov.uk/smallfirms/your_firm_type/gi/index.shtml

The documents include the up to date Client Money Guide, a useful flowchart and a 6 page Healthcheck which you can use to validate how well you are adhering with the rule requirements. This is all very useful and valid CPD.

There is also an online training module, which costs £20 and can be found at:
http://www.fsa.gov.uk/Pages/Doing/training/client_money.shtml

ATEB view:

Essential reading and training for client money personnel

Action required by you:

As above

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Important Note:

The ATEB Newsletter is intended to provide general guidance on areas of compliance and T&C; however it is not a replacement for the main Rules and Guidance contained within the FSA Handbook. We welcome all feedback. If you have any feedback or questions relating to any articles then please direct them to your local ATEB consultant or the newsletter editor Huw Reynolds email info@atebconsulting.co.uk. Unless you have consulted specifically (as part of a regular visit) with ATEB on a particular issue then ATEB Consulting accept no liability for any actions taken based on the information contained solely within the newsletter.

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