Latest News
The insurance press is reporting (26 May 2011) that industry leaders are being warned the FSA is preparing a clampdown on ancillary and specialist products following latest figures showing an alarming rise in customer complaints against the insurance market. The Financial Ombudsman Service (FOS) figures for 2010 showed payment protection insurance (PPI) complaints more than doubled to 104,597, fuelled by claims farming. Complaints against specialist insurance products in general rocketed 66% to 1,791 last year. Aware that it must avoid another mis-selling scandal, the FSA has specialist products on its radar, including mobile phone insurance and ID theft, as well as some add-on products. There is concern that customers are being pressured into buying the products, only to later find that they were never eligible to claim or were already covered by another insurance product. The FSA has raised the issue with larger brokers, especially those operating in personal lines, during its recent Arrow inspection visits.
Both the FSA and Westminster are alarmed by some of the huge margins being made through the sale of add-on products. A study by Deloitte, released last October, revealed that personal lines brokers on aggregators can take 80%-95% commission selling motor legal products for £20-£25. Commissions of 60%-80% can be taken from selling a key cover policy for £10-£15.
Chairman of the parliamentary all-party group on insurance Jonathan Evans said he was aware of the large margins being made through the sales of add-ons. He said: “If commissions are at 90%, one suspects that it comes back to instances of mis-selling.”
Bribery Act Guidance April 2011
The Guidance for the Bribery Act 2010 has been issued. It provides guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing. The Act received Royal Assent on 8 April 2010. It was meant to come into force in April 2011 with Guidance to help firms minimise the regulatory burden issued 3 months before. Consultation with the industry on how to do this has taken longer than expected and so with the Guidance issued on 31 March the Act will come into force 3 months later on 1 July, giving firms time to prepare
The Guidance is designed to be of general application but not one-size-fits-all. Small or medium sized firms may have procedures that are different to large multinationals. A Quick Start Guide has been issued at the same time
The Act creates or re-implements the following offences:
- Active bribery – covering offering, promising or giving a bribe
- Passive bribery – covering requesting, agreeing to receive or accepting a bribe
- Bribing a foreign public official
- Corporate offence of failing to prevent bribery
The new corporate offence of failing to prevent bribery renders a commercial organisation liable to prosecution if a person associated with it bribers another person. It must be remembered that the firm will be held accountable for all those acting in its name – for example consultants and agents – not just employees. It will be a full defence if the organisation can show that had adequate procedures in place to prevent persons associated with it from bribing – even if a bribe has taken place. Firms need therefore to concentrate on establishing appropriate Systems and Controls to a) prevent and b) identify acts of bribery.
These procedures should, the Government feels, be informed by six principles. The description given of these principles will remind many in the insurance industry of TCF. They are not prescriptive. They are intended to be flexible and outcomes focussed. In this instance however we have been given more guidance and a series of scenarios to illustrate how to comply.
Principle 1 – Proportionate procedures
This takes into account both the risks of bribery occurring in the area(s) the firm works in and the size and complexity of the business itself.
A UK based organisation poses a lower risk than a multinational and a smaller firm should be able to control bribery with fewer procedures than a large, multi-department or branch group.
The procedures need to be clear, practical, accessible, effectively implemented and enforced.
To measure the degree of risk an initial assessment is required. If the assessment is that there is no risk of bribery with one or more of its associated persons then no procedures will be required. However, ICS suggests that there is always some risk, even if it might be low.
Principle 2 – Top-level commitment
This is essential since those at the top are best situated to foster a culture of integrity where bribery is unacceptable. It can take the form of a formal statement; drawn to people’s attention on a regular basis and available on an intranet and/or an internet site.
3. Principle 3 – Risk assessment
This can be part of the general risk assessment process or a specific anti-bribery exercise. The former is more likely to apply in smaller firms. A risk assessment should already be part of a Compliance Monitoring Programme and bribery can be easily slotted in.
Principle 4 – Due diligence
The application of due diligence procedures taking a proportionate and risk-based approach to persons who perform services for a firm will mitigate identified bribery risks. The degree of due diligence will depend on the perceived risk and the guidance actually allows for no due diligence in low risk situations.
However, in higher risk situations general research, indirect investigations and direct interrogative enquiries may be required. Action should not stop on appointment. Appraisal and continued monitoring should be built in where the risk is high. Employees are include in the definition of “associated persons” and so the firm’s recruitment and HR procedures should include an appropriate level of due diligence
Principle 5 – Communication (including training)
This deters bribery by associated persons by enhancing awareness and understanding of the firm’s commitment and procedures.
Internal communication
This will come “from the top”. The focus will be on the implementation of the company’s policies and procedure and their impact on staff. Another important area is the provision of methods to raise concerns about bribery and suggestions for improvement – the so-called “speak up” procedures.
External communication
This will include a statement or code of conduct which can reassure existing or new associated persons and also act as a deterrent to others.
Training
This should take place whatever the degree of perceived risk. It should cover awareness of the risk of bribery in general and specific to the firm, the sectors in which it operates and how these are being addressed. Training should be mandatory for new employees and agents and refreshed at regular intervals.
Principle 6 – Monitoring and review
The bribery risks a firm faces can change over time and complacency is a big risk. The organisation will also need to respond to changes in its own business as well as external events. Regular reviews can be included in the Compliance Monitoring Programme and a report made to the Board or Senior Management on a regular basis. Information from trade bodies can be drawn on and the guidance suggests some form of external verification of the effectiveness of procedures would be wise. ICS include bribery in their compliance audit.
Hospitality, promotional and other business expenditure
The Quick Start Guide issued at the same time states that the Government does not intend that genuine hospitality or similar business expenditure that is reasonable and proportionate be caught by the Act. The issues that would influence a decision would be the level of hospitality offered, the way in which it was provided and the level of influence the person receiving it had on the business decision in question.
It mentions providing tickets to sporting events, taking clients to dinner, offering gifts to clients as a reflection of good relations, and paying for reasonable travel expenses in order to demonstrate goods or services to clients as acceptable if they are reasonable and proportionate for the business.
24 March 2010 Insurance Premium Tax – Latest News
The Pre-Budget Report – issued in December 2009 – raised the spectre of bringing certain fees charged under a
separate contract in connection with personal lines insurance into the scope of IPT. The wording employed was
imprecise, and open to an interpretation that many broker fees would be chargeable.
In this week’s budget, the legislation has been clarified, and it is clear that most broker fees will not be included
within the scope of IPT. Those that are will be akin to those which were charged by Homeserve, and which gave
concern in the first place to the Revenue that IPT was being avoided by classifying “premium” as “fee”
The change applies to payments made on or after 24th March 2010
The vast majority of cases it will be applicable to consumers not commercial clients
Situations not covered by this IPT charge on Fees.
- Commercial cases
- Cases where the insurance is underwritten, and the assessment of risk determines premium, terms
and/or conditions
- Fees for extended credit
Situations covered by this IPT charge on Fees.
- Non-commercial cases
- No underwriting
- It now appears that not only inception and renewal will be affected, but also Mid-Term Adjustments.
However, as cases are not underwritten, it is unlikely that MTAs will apply
The following classes of insurance spring to mind (no doubt there are others):
GAP and related products (Return to Invoice)
Legal Protection
ULR
Tyre/MOT/Keys
Motor Breakdown
Mobile Phone (including Unauthorised Calls)
23 February 2010. FSA has reminded insurance intermediary firms that they must have adequate financial resources at all times. The message is conveyed in a letter sent to large insurance intermediaries, which is also available to smaller insurance intermediaries via the FSA website. The letter says the FSA is particularly concerned about this issue in view of the continuing challenging business environment. It says that insurance intermediary firms who have not recently undertaken a financial resources assessment should do this, and if they are not complying with the requirement to have adequate financial resources, they should immediately strengthen their financial position. The letter adds that firms should be in a position to share their current assessment of the adequacy of their resources with the FSA on request. The requirement for regulated firms to have adequate resources, including financial resources, at all times is set out in Threshold Condition 4 in the FSA Handbook.
25 February 2010. Biba has warned brokers after the government stepped up plans to impose heavy fines for data security breaches. Under the reforms, approved by Secretary of State Jack Straw, the Information Commissioners' Office will be able to impose fines of up to £500,000 on companies that leak data as of 6 April. The fine will vary depending on the size of the organisation at fault. The government's decision to strengthen its stance comes in the light of several high profile cases of data loss from various government departments, including the DVLA. Since November 2007 there have been 235 data security breaches reported to the ICO from the private sector. In July 2009, the Financial Services Authority fined HSBC Insurance Brokers £700,000 for data security breaches.
Client Money
The FSA have written one of their “Dear CEO” letters to a investment and insurance broking firms. This is one way they have of communicating their concerns to the market.
Their focus has been on client money for some time. They see this as an area of potential consumer detriment as the money makes its way from consumer to insurer. They raised these concerns again due to their assessment of the economic climate and an increased risk of intermediary firms becoming insolvent in their 2009 Financial Risk Outlook. They created a CASS Risk team in March 2009. They are a team of specialist supervisors who are tasked with the measurement and mitigation of risks to client money and assets.
Also in March 2009 they wrote a “Dear Compliance Officer” letter explaining firms’ obligations to protect their clients’ money and assets and promising a series of visits. These visits they have completed in the last six months and the findings do not make good reading.
They found weaknesses and issues in
- poor management oversight and control;
- lack of establishment of trust status for segregated accounts;
- unclear arrangements for the segregation of client money and
- incomplete or inaccurate records, accounts and reconciliations.
These failings have led to enforcement actions; skilled person reports, two Enforcement Referrals and a number of other firms under active consideration for Enforcement Referrals, private warnings, a freeze on assets, a ban on the use of Appointed Representatives and a ban on taking on new business
Their conclusion us that compliance with CASS (the Client Money and assets section of the Handbook) across the industry is poor. They have initiated remedial work at a number of firms and expect this number to increase during 2010 since the protection of client money and assets will continue to be a regulatory priority in 2010. Specialist visits will continue throughout the coming year.
They anticipate increasing the enforcement resources they devote to client asset cases and our investigations will consider the conduct and competence of Approved Persons as well as the firms themselves. The case of Fabien Risk Services illustrates this with two Directors and the Office Manager banned for the misuse of client money.
FSA’s key findings:
- Inadequate senior management oversight and control was often the underlying cause of more serious CASS breaches.
- Overly complex processes around client money and assets led to an increased risk of human error.
- Operational and systems changes during transitional periods posed a high risk of segregation errors.
- Unclear allocation of duties by senior management led to confusion between staff or a lack of accountability.
- Client money processes had in some cases been delegated too far, leading to a lack of senior level responsibility and accountability.
- There were inconsistencies between Terms of Business Arrangements (TOBAs) and client money calculations.
- Review and sign-off processes surrounding client money calculations and reconciliations were not always evidenced.
- Some firms had failed to perform sufficient due diligence to assess client money risks arising from an acquisition.
- Whilst Non-statutory trust bank accounts can be used to extend credit for funding insurers’ and clients’ normal insurance transactions, client money was being utilised for other purposes.
- Unallocated cash and legacy balances were not being reduced promptly enough.
- Firms over-relied on CASS audit reports rather than perform their own checks.
Nearly all of their visits resulted in actions for firms to improve their compliance with CASS. They insist that the actions they have taken so far show that their tolerance level for CASS compliance failures is low. In line with this, they are to continue to take a more intrusive approach to the protection of clients’ money and assets
CASS visits to follow-up on specific issues and risks will carry on throughout 2010. Now is a very good time to review to review your client money arrangements. For example:
- Review whether risk transfer agreements mean you are not holding client money all.
- Review the controls you have in place. How far down are the tasks delegated? Is oversight sufficient?
- A theme running through the report is the lack of evidence. Check you have an exchange of letters with your Bank(s). If you have a Non-Statutory Trust do you have a copy of the Board minute?
- Keep copies of all your Client Money reconciliations and also your Bank Account Reconciliations.
- Do you need a Client Asset Report from an auditor?
- Review unallocated cash and legacy balances