Corporate Insurance & Financial Serviceshttps://www.rpc.co.uk/rss/corporate-insurance-financial-services/RPC Corporate Insurance & Financial Services RSS feeden{EAAD00A4-C5D8-42C5-955D-735A2A47202A}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/consumer-duty-and-claims-handling/Consumer duty and claims handling – beware of sludge practicesWed, 10 May 2023 12:00:00 +0100Corporate insurance and financial servicesJonathan CharwatThe Consumer Duty is a new regulatory framework developed by the Financial Conduct Authority (FCA) aimed at creating a higher standard of consumer protection in the retail markets. The FCA expects the Consumer Duty to be a significant shift for the market in terms of its expectations on firms and in this blog we consider this shift in the context of insurance claims handling.

The Consumer Support outcome

The new Consumer Support outcome requires firms to provide support to meet the needs of customers throughout the lifecycle of a product or service. The new rules and guidance give detail on the expectations of firms for this outcome and include useful examples of good and bad practice.

The sale and distribution of an insurance product has been subject to prescriptive and regularly updated regulation for many years under the Insurance Conduct of Business Sourcebook (ICOBS) and therefore some of the updates in the Consumer Duty relating to insurance selling and distribution are complementary to existing rules.

In contrast, the administration and claims handling of insurance has been subject to much less detailed regulation - the main source of the rules is set out in ICOBS 8.1.1 and this has not been updated since 2008. Therefore, the Consumer Support Outcome represents a significant rule change for insurance claims handling.

The FCA's key standard or metric for the Consumer Support outcome seems to be that it should be at least as easy to make a claim and obtain support on an insurance product as it is to take out the insurance product in the first place. The FCA speaks of getting rid of unnecessary and harmful barriers and friction (which it refers to as 'sludge' and 'sludge practices') which unreasonably restrict a customer or prevents a customer from taking certain actions.

These sludge practices can be intentional (driven by commercial incentives to deter customers to do things such as make a claim or complaint) or unintentional (which could be caused by firms failing to have the right systems and control in place or monitoring practices). The FCA guidance gives an example of a potential sludge practice being a claims handling process requiring customers to provide hard copies of all evidence and not adequately considering requests from customers to waive this requirement.

Monitoring and data

A key focus of the Consumer Duty rules is to proactively ensure compliance. In the past, firms may have taken a possibly more reactive approach to judge the compliance and suitability of a product. For example, by monitoring and resolving complaints and making changes to the product or services where complaints are justified/demonstrate the need for change.

Under the Consumer Duty, firms may need to do more to monitor customer outcomes and prevent foreseeable harm from happening. Existing data metrics such as complaints and claims rates should continue to be used but new (for some) management information may need to be used too such as considering query rates (indicating a possible lack of understanding of a product), mid-term adjustment rates (indicating a possible lack of product suitability for the target market), and actively seeking feedback from customers throughout the life-cycle of a product.

In a claims handling context, firms may begin seeking more feedback from customers during the various stages of a claim such as enquiring whether the customer feels able to process the claim through the available channels/medium or needs additional support.

Firms may also look to further utilise existing data and MI sets. For example, considering communications and responses from customers such as requests from customers to waive certain evidentiary requirements as given in the example of a potential sludge practice above.

Look out for a further blog from us next week on the consumer duty's guidance on customers with vulnerable characteristics and protected characteristics which will also consider management information.

Final thoughts

Our experience of the insurance market's claims handling arrangements is that in general they are already aimed at providing good outcomes to customers. On this basis, for some firms, the new consumer duty rules could be viewed as codifying existing market practice and providing helpful guidance and structure for some improvements to meet the expectations under the Consumer Duty. These firms should focus on reviewing and updating their processes, policies, and systems and evidencing their compliance.

However, for those in the market which have been operating at lower levels of compliance in terms of post-sale support of customers, the new Consumer Duty could represent a more significant regulatory change.

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{931BCFF4-0157-4932-B1C1-AF5E2081FB6C}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/pra-and-fca-joint-forum-publishes-guidance-to-all-firms-on-climate-related-financial-risks/PRA and FCA joint forum publishes guidance to all firms on climate-related financial risksTue, 30 Jun 2020 11:18:16 +0100Corporate insurance and financial servicesEdward ColvilleThe CFRF is a forum established by the PRA and the FCA in March 2019 to consider and advise on the UK financial sector's response to climate change.  The members of the CFRF and its related working group include banks, insurers and asset managers. This guide, along with earlier statements from the PRA and FCA, stress the significant impact that UK regulators expect climate change to have on the financial services sector and consumer decision-making. The CFRF draws on the examples of climate risk on insurance (where failure to adequately plan for climate risks could increase the cost of insurance for some consumers and reduce the availability of insurance for others) and banking (where management of climate-related risks could affect a borrower or counterparty's credit rating).

The guide is the first of its kind published by the CFRF, and is being promoted as "written by industry for industry to help firms approach and address climate-related financial risks". The guide aims to help firms understand the risks that arise from climate change, and to provide support on how to integrate these risks into their decision-making processes. The key areas identified to help firms develop their own climate risk strategies are:

  1. Risk management - embedding climate-related financial risk into governance and risk management processes
  2. Scenario analysis – modelling and considering a range of possible scenarios to better understand and manage future risks, and transition to a net-zero carbon economy
  3. Disclosures – improving transparency by making effective climate-related financial disclosures
  4. Innovation – developing novel products, services, policies and approaches to adapt business to the potential impacts of climate change, benefit consumers and deliver the change required to meet climate goals

Each chapter within the guide provides practical tools, experience, knowledge and case studies from the authors. Throughout the guide, the CFRF urges firms to act now, to start considering their climate strategy, and to iterate their approach. The guide stresses that while the full impact of climate change may not be known for many years, the challenge firms will face becomes bigger with every year without meaningful action.

UK regulators are increasingly placing a greater focus on climate change, amid pressure from consumers to lead a green recovery from the economic impacts of COVID-19. The Bank of England in particular is looking to take a leading role in this area, and there is expected to be continued pressure on firms in all sectors to consider their sustainability strategy ahead of the rearranged COP26 UN Climate Change Conference, now due to take place in Glasgow in 2021. 

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{A55F415D-9E72-4AB3-8B5E-E92F7C84C6D3}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-issues-final-report-in-the-wholesale-insurance-broker-market-study/FCA issues Final Report in the Wholesale Insurance Broker Market StudyWed, 20 Feb 2019 17:10:22 ZCorporate insurance and financial servicesMatthew Griffith, Jonathan CharwatThe study, which was launched in 2017, considered competition, transparency and conflicts concerns arising from changes in the market, including an increased use of broker facilities. The FCA's report can be found here.  

Relying on responses from the market and interviews with customers (together with its own qualitative and quantitative data), the FCA has found no evidence of significant harm. Unusually, the FCA has also issued a final report (bypassing the issuance of an interim report) based on a lack of need for regulatory intervention. 

The FCA has however taken the opportunity to remind firms of their obligations in respect of conflicts of interest and the information needs of, and disclosures to, customers. These reminders are unsurprising given that these areas have been revised to some extent by the implementation of the insurance distribution directive in October last year.


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{C379D473-B7D2-427A-88F0-33B83B68095F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-wi-tool-in-ma/The W&I tool in M&AMon, 20 Aug 2018 13:46:00 +0100Corporate insurance and financial servicesNeil BrownThe use of warranty and indemnity (W&I) insurance has rapidly increased over the past few years, becoming a strategic tool in the toolbox of any M&A negotiator. We set out here the reasons behind this ever-increasing trend, together with some of our observations on how W&I has been effectively deployed.

What is W&I?

W&I insurance covers financial liability for a seller’s breach of warranty and/or tax covenant under a sale and purchase agreement (SPA).

It covers the unknown risks on a transaction, with actual knowledge of the buyer and the seller being specifically excluded, including (for the avoidance of any doubt given the name of this type of policy!) indemnities given by the seller in the SPA.

It is, however, also possible to obtain insurance to cover specific known risks, including tax risks, although these tend to take longer to place and are generally more costly.

Costs of W&I

One reason for the increased use of W&I insurance is that the W&I market has become more accessible financially.

Whereas premiums for W&I insurance used to be somewhere in the region of 2-3 percent of the limit of insurance sought (known as the “rate on line”), premiums can now be obtained in the region of as low as 1 percent, depending on the insurers’ appetite for the industry in which the target company operates.

So what are the costs? Each insurer will have a minimum premium that it needs to achieve on a transaction. As the premium is calculated based on the rate on line, this can mean that you ultimately get more limit for your money. There are also a number of underwriters established in the last couple of years that focus purely on mid-market M&A transactions, and therefore offer premiums within a very competitive price range.

In addition to the cost of the premium, once the underwriting stage has begun, there is usually an underwriting fee, in the region of £15,000, to cover the underwriter’s costs. However, this is often waived by the insurer if the policy is ultimately taken out, and is therefore, in effect, a break fee in the event the policy is dropped from the transaction.

What to use it for

The motivations behind the use of W&I insurance have also diversified in recent years. We set out a few of these below, from both a buyer’s perspective and a seller’s perspective.

Seller’s perspective  

  • Seller clean exit: as the cost of W&I premiums have gone down, sellers on transactions are using W&I insurance as a means of ensuring that their liability is limited (if not extinguished) post-completion.
  • Escrow account: as security for warranty claims, sellers are often required to place a certain percentage of the sale proceeds into a third-party escrow account. Depending on the amount of the excess under the policy (see below), this requirement may be removed altogether.
Buyer’s perspective

  • Differentiate an auction bid: W&I insurance can be deployed very effectively on auction sales by bidders seeking to differentiate their bid.
  • Private equity: the motivation here is clear – it can be very difficult to sue your own management team for breach of warranty.
  • Insufficient seller liability cap: where the seller is in a particularly strong bargaining position, there may be a low seller liability cap in the SPA, so a buyer may seek W&I insurance to sit as an extra layer of cover on top of this.
  • Concerns over long-term security of the seller: a buyer may want to obtain W&I insurance as a “sleep easy”, just in case the seller has solvency issues in the future.

The skin in the game

The amount of the excess under the policy – the “skin in the game” – usually matches the basket in the SPA (and can either be fixed or tipping), and is calculated based on the enterprise value of the target company (i.e. including the amount required to repay any debt). It is, however, not impossible, depending on the industry, to obtain a W&I policy with a nil excess.

An important point to note is that W&I insurance does not operate as a substitution for a negotiated transaction.

To avoid holes in coverage, the underwriter will want to see that the tyres on each warranty have been kicked, and that the sellers have made the effort to limit their liability by going through a thorough disclosure process.

The W&I timeline

Generally, from the moment a broker is engaged on a transaction, to when the deal completes, it takes around two to three weeks to place W&I insurance. However, the W&I process can be expedited to around two weeks, which is where your broker’s understanding of the market’s appetite and particular underwriter’s ability to meet the transaction timeframe becomes particularly invaluable (see more on this below).

It is, of course, wise to assess whether W&I insurance is an option on a transaction as early as possible, most suitably in conjunction with the negotiation of the liability piece.

The placing of W&I process is broadly split into two stages.

Stage one: this involves an introductory call with the broker where the broker will ask about the background details to the transaction (including whether a buy-side or sell-side policy is sought – the former being more common), the enterprise value of the target, limit of insurance sought and structure of the transaction.

Following that, the broker will go out to the market to request nonbinding indications from insurers, to including pricing and initial coverage comments. To do this, the broker will need the latest SPA (preferably the buyer’s mark-up of the seller’s draft, as this will show the worst possible warranty position), accounts for the target and the information memorandum or sales brochure.

From the non-binding indications received, the broker will prepare a report setting out the key details of the non-binding indications received, together with their recommendation.

Stage two: once an insurer has been selected, underwriting will start and the underwriter will require access to the data room, copies of the latest drafts of the transaction documents and the final due diligence reports.

From this, the underwriter will produce a set of questions ahead of an underwriting call with the deal team.

A draft policy will then be circulated, which the broker will negotiate on the proposed insured’s behalf. The policy will incept on completion of the transaction.

The key factors that can have a significant impact on the timeframe of placing W&I are as follows:

  • the domicile of the insured;
  • the governing law and jurisdiction of the SPA; and
  • the scope of the due diligence undertaken.

Benefit of the broker

When seeking to obtain quotes for W&I insurance, we would always recommend going via a broker, who are able to provide the following additional value:

  • experience of the “ultimate sweet spot” and appetite of each of the underwriters;
  • history of negotiating dozens of policies with underwriters, and will know if an underwriter has taken an unreasonable stance on policy coverage;
  • awareness of the capability of an underwriter to underwrite a risk where the insured is incorporated in a jurisdiction overseas; and
  • crucially, which underwriters can meet the timeframe of a deal. 

This article was first published in Insider Quarterly.

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{CB1CE5C1-4991-4A0B-BA51-78F089EA3AD5}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/scope-of-duty-narrows-for-accountants/Scope of duty narrows for accountantsWed, 30 May 2018 11:32:45 +0100Corporate insurance and financial servicesRobert Morris, Matthew WatsonThe recent decision in Manchester Building Society v Grant Thornton UK LLP is likely to provide some considerable comfort for accountants and their insurers.

Following a five week trial (and input from 9 expert witnesses) the Court decided that despite an accountant's negligent use of a specific accounting treatment that caused a foreseeable loss of over £48 million to their client, the accountant was only liable for £315,000.

The case is of importance because of its application of the Supreme Court's decision in Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029 to a claim against an accountant/auditor.  The decision clarifies the limited scope of an accountants' duty of care when preparing/auditing accounts; the judge going so far as to say that it would be surprising if an accountant advising on the accounting treatment of a client's business activities should be liable for all the financial consequences of those activities, even if the client can prove certain loss making activities would not have occurred but for the accountant's advice. 

Following this case, it will be harder for claimants to assert that all of the losses they suffer in relation to a transaction can be recovered from their accountant where the accountant only advises on accounting treatment, tax implications or other discrete issues. As occurred in this case, this principle will apply even if the claimant would as a matter of fact not have entered into the transaction had the accountant provided correct advice.  

In this legal alert we consider the points raised by the court and some of the practical implications that can be taken from the case. 

Summary of Case Background


The claimant building society arranged life-time mortgages, which were equity release products under which no repayment was due until after the death of the mortgagor. They were therefore of indeterminate terms but were expected to last for 15 to 20 years. The mortgages were provided at fixed interest rates and the interest was rolled up into the mortgage debt. This posed a risk to the building society as the interest fixed on the mortgage could be lower than the rate the building society had to pay on the funds it borrowed to finance its business. Accordingly, the building society wanted to hedge against that risk and bought interest rate swaps, some of which had terms in excess of the anticipated terms of the mortgages; in fact some were for 50 years in duration.  

The building society had to record the swaps it bought on its balance sheet at their fair value.  Since the value of the swaps would fluctuate in accordance with changes in interest rates, the value of the swaps in the accounts would go up and down each year. On the other hand, the accounting treatment for the mortgage instruments hedged by the swaps had to be amortised - or recorded at their historic cost.  

A critical point, therefore, was that the swap value fluctuated while the mortgage values didn’t.  As a result, the profits of the building society, and hence its capital, would fluctuate. As a regulated entity, the building society had to comply with minimum capital adequacy requirements and in these circumstances that became problematic. Accordingly, the building society wanted to use 'hedge accounting’ that would allow for the fair value of the mortgages to be recorded in the accounts in the same way as the swaps were valued. This meant that, in broad terms, as the value of the mortgages went up, the value of the swaps would go down and there would be less volatility in the capital of the building society.  

The defendant was the accountant and auditor of the building society. The advice of the defendant was that the building society could use hedge accounting and it was duly used from 2006 until 2013. This advice, however, was wrong: the building society was not entitled to use hedge accounting and this was discovered in 2013.  In the meantime, the financial crisis of 2008 had unfolded, interest rates had plummeted and the swaps became a significant liability on the building society's accounts. Not being able to record the fair value of the mortgages against the (now significant) liability of the swaps had a very detrimental effect on the building society’s capital as shown in the accounts.  

Having discovered the error and realising that the capital was becoming a problem in light of the regulatory requirements, the building society felt it had to close out the swaps to avoid future losses and generate capital.  It did so and sold some books of its mortgage business too.  Its ensuing alleged losses amounted to £48 million. The building society therefore made a claim against the accountant arguing that it would not have entered into the swaps and suffered these losses if the accountant had correctly advised it that it could not use hedge accounting in 2006 and thereafter.    

The Court's Findings 

The accountant admitted that it had made an error in its advice on the accounting treatment of the mortgages. The question for the court was therefore whether the losses suffered by the building society were recoverable from the accountant. To determine this, the court examined four main issues.  

  • Factual cause of the loss

The first question was whether the loss suffered by the building society was caused by the accountant’s negligence as a matter of fact. This is often called the `but for’ test. That is, but for the negligence, would the loss have been suffered? The court concluded that the accountant's negligence was the cause of the loss: if the accountant had advised the building society it could not use hedge accounting, it was more likely than not that the building society would not have taken out the swaps; and if the building society had not entered into the swaps it would not have closed them out and suffered the losses being claimed. 

  • Legal cause of the loss

A second question was whether the negligence was a cause of the loss as a matter of law.  Here the accountant argued (based on the decision in Galoo v Bright Grahame Murray [1994] 1 WLR 1360) that the negligence only provided the opportunity for the building society’s losses and that the real or effective cause of the losses was the financial crisis and the drop in interest rates. The court did not agree and found that the accountant’s negligence was the effective cause, in law, of the losses.  

  • Remoteness of the loss

The third issue was whether the losses were too remote to be recoverable. The court concluded that, if the accountant could be found to have assumed responsibility for the type of loss being claimed, it could not be said that the losses incurred were too remote – by definition, they would be foreseeable losses and so would be recoverable. 

  • Scope of the accountant's duty

The fourth, and most crucial, issue that the court examined was whether the losses claimed by the building society fell within the scope of the accountant’s duty of care.  

In this context, the judge considered the Supreme Court's decision in Hughes-Holland v BPE Solicitors [2017]. In BPE the Supreme Court drew a distinction between those cases where a professional gives advice on the full range of risks and issues involved in the client entering into a certain transaction and those cases where the professional provides information or advice on only limited aspects of the transaction.  The Supreme Court held that where a professional gives advice on all the risks involved, it is likely to be liable for all foreseeable losses the client suffers having entered the transaction.  However, where a professional gives information or advice on a limited aspect of the transaction (even if that is found to be a crucial aspect from the client's perspective), the professional will not necessarily be liable for all of the client's losses, even if they were foreseeable. Instead, the professional will only be liable to the extent that losses fell within the scope of the more limited duty assumed.

In this case, the judge concluded that the accountant only provided one piece of the information on which the building society based its more general commercial decision as to whether to enter the swaps (i.e. the accounting treatment of the swaps, not whether they should be entered into at all or what overall risks might be involved). Therefore the accountant was only concerned with the manner in which the swaps and the mortgages were presented in the accounts and not with protecting the building society from losses which would flow from its purchase of the swaps in the face of a sustained fall in interest rates. As such, the judge concluded that the accountant did not assume responsibility for the building society’s losses on the closing out of the swaps, which therefore fell outside of the accountant's duty of care and were not recoverable.  

The judge’s reasoning behind his decision on this issue was complex, but he specifically noted: 

"Ultimately, as with so many questions with which courts must wrestle, it is necessary, having examined the evidence and the opposing arguments, to stand back and view the matter in the round. Having done so it seems to me a striking conclusion to reach that an accountant who advises a client as to the manner in which its business activities may be treated in its accounts has assumed responsibility for the financial consequences of those business activities."

Accordingly, the judge found that the vast majority of the claimed losses did not fall within the scope of the accountant's duty of care; only £420,000 of losses did fall within the scope of the accountant's duty of care and so were potentially recoverable.  

Contributory Negligence  

The decision is also of interest as the court additionally concluded that the building society had been contributorily negligent and so could not, in any event, recover in full from the accountant.  

The judge decided that the building society's decision to buy 50 year swaps, when the expected lifetime of the mortgages was only 15-20 years, was an unnecessary and imprudent risk to take.  He then considered the relative blameworthiness and the causative potency of each party's negligence. He decided that the fault of the accountant was more blameworthy but that the building society's acquisition of the 50 year swaps had more causative potency, at least in respect of the losses incurred on closing the swaps. As a result, the judge held that if he had awarded the building society all of its claimed losses, including the losses on closing the swaps, it would have been 50% contributorily negligent. However, because the losses on closing the swaps were not recoverable, the building society should only bear 25% of the damages for which the accountant was liable - so the building society was eventually only awarded £315,000 plus interest.

Statutory relief

One last point to note is that the accountant argued that it was entitled to rely on s.727 of the Companies Act 1985 and on s.1157 of the Companies Act 2006 and sought relief from the court from liability.  These provisions set out that in relation to any claim of negligence against an auditor (amongst others) and where the auditor may be liable for negligence but acted honestly and reasonably, the court has a broad discretion to release the auditor in whole or in part from liability.  It was accepted that the accountant acted honestly but the court concluded that it had not acted reasonably. Although the judge acknowledged that in theory a professional could act negligently but still reasonably, the accountant's negligence in this case was not minor in character but was "pervasive and compelling", therefore the judge did not have the discretion to allow relief.

Practical Implications


On paper the claim against the accountant had the makings of a good case.  The accountant's advice on accounting treatment was negligent. Had correct advice on accounting treatment been given, the loss making transactions would never have been entered into.  As a result, the judge found that the accountant's negligence had caused (in fact and in law) the building society's foreseeable losses. However, the losses were not recoverable as the accountant had not assumed responsibility for the financial consequences of the building society's business activities. A case of being so close and yet so far.

The court's ruling is likely to provide further armoury in the defence of claims against accountants as it indicates that, in order to recover all losses incurred on a transaction entered into in reliance on an accountant's advice, claimants will need to demonstrate that the accountant specifically assumed responsibility for all the financial consequences of that transaction. This is likely to be a high hurdle to overcome in most cases given that, generally speaking, accountants will not advise on all aspects of a commercial transaction but only discrete elements, such as accounting treatment or tax implications.

The decision may also prompt claimants to take a sobering look at their own responsibility for transactional losses when seeking to bring a claim against an accountant or other professional.  In this case the judge said that had he been minded to award the claimant all of their losses he would have reduced the damages by 50% due to the claimant's contributory negligence in any event.

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{0A4A7455-2EF2-4C45-86A7-DD354F563E70}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/part-vii-insurance-business-transfers--fcas-finalised-guidance/Part VII insurance business transfers – FCA's finalised guidanceWed, 30 May 2018 11:31:41 +0100Corporate insurance and financial servicesNeil BrownBackground

Yesterday, the FCA published finalised guidance on its approach to reviewing insurance business transfer schemes under Part VII of the Financial Services and Markets Act 2000.  This follows on from the proposed guidance published in May 2017, which we summarised here. The guidance is designed to help firms familiarise themselves with the FCA’s process and what information the FCA is likely to take into account when reviewing an application. Although the PRA leads the Part VII process, the guidance highlights the FCA’s active role.

Changes made to the proposed guidance

The FCA has updated the proposed guidance in response to the feedback it received. The following changes are particularly noteworthy:

  • 'Comply or explain' - in response to comments that the introduction of the proposed guidance suggested a 'comply or complain' approach, the FCA has clarified that the purpose of the guidance is to help firms identify areas of the transaction that differ from the expectations and examples covered in the guidance early in the process to avoid delays closer to court dates.

  • Definition of "materiality" by Independent Experts – the FCA has clarified that while it is are aware that Independent Experts sometimes provide definitions of "materiality" in their reports, it is not an FCA requirement for them to do so.

  • Transferring liabilities - the proposed guidance stated that the Scheme document should be specific about the liabilities that are being transferred with the business (as we discussed here). The FCA has provided further clarity of their expectations and has updated this section of the guidance to include examples of Scheme wording on transferring business and transferring liabilities (see paragraph 5.7 of the finalised guidance).

  • Changes to FOS and FSCS coverage - some respondents sought clarity over the FCA's expectations for the analysis of regulatory protections post-transfer, particularly in light of the UK's withdrawal from the EU. The FCA has added detail on this at paragraph 6.12: in the context of an EU withdrawal they would expect applicants to preserve FOS at least until the point of policy renewal.

  • Definition of "policyholder" – as previously discussed, the FCA's interpretation of the definition of "policyholder" is very broad. The FCA's view on this remains the same, but it has clarified that, where appropriate, it will be open to firms applying for dispensations that would achieve the same outcome as a narrower definition of "policyholder".
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{D94E3663-CD60-47C0-B08C-C4FC5694B42C}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/a-step-closer/A step closerMon, 27 Nov 2017 11:57:00 ZCorporate insurance and financial servicesMatthew Griffith, Neil BrownThe use of Lloyd's special purpose syndicates, or special purpose arrangements (SPAs), to give them their up-to-date terminology, continues to evolve.

Whatever the underlying rationale - increasing underwriting capacity or taking advantage of growth opportunities mid-year - the first generation SPAs were, in many cases, an innovative way for an existing Lloyd's carrier to leverage third-party capital. Early SPAs mostly provided reinsurance capacity, while new businesses setting up in Lloyd's generally looked to establish a new standalone syndicate, often managed by an experienced managing agency or turnkey operator, or to execute an M&A deal.

But fast-forward a few years from the early days of SPAs, the achievement of broader and longer-term strategic goals - and Lloyd's market entry for new capital providers - is often at the heart of SPA transactions.

Stepping stones

Using an SPA as a stepping-stone - an interim step for a capital provider or non-Lloyd's carrier towards establishing a standalone syndicate - to gain exposure to, and experience of, the Lloyd's market has become more prevalent.

Acappella, China Re and Credit Suisse all followed this route, setting up SPAs and transitioning them to standalone syndicates, each within a relatively short period after their initial launch.

But longer-term partnering has been a theme in some of the more recent transactions. Chaucer's recent alliance with Axa has both the stepping stone and the strategic aspect, combining the global insurance giant's local distribution network with Chaucer's Lloyd's underwriting expertise for the development of African specialty business and the parties continuing to work together developing Axa's ability to establish its own Lloyd's business in the future.

But this is not always at the centre of the strategic thinking, as illustrated by Novae's recent US property excess and surplus lines SPA backed by major insurance-linked securities fund manager Securis. The deal provides significant commercial benefits to both parties with seemingly with no current intention for Securis to set up its own syndicate down the line.

Why choose SPAs?

Establishing a standalone syndicate would enable a new capital provider to underwrite its own business plan but it can be a time-consuming process, taking on average 12-18 months to pass through the application process (according to Lloyd's) and requiring significant resources to be deployed.

The process can be simplified, and significantly de-risked, by utilising the services of a turnkey managing agent, but it will rarely be advisable for a new entrant with limited experience of Lloyd's to move straight to the simultaneous formation of a syndicate and a newly authorised managing agent.

If an appropriate target were available, M&A may also be an option, though the cost of buying a Lloyd's platform, with everything already in place, can be significant, as can the risks of acquiring and integrating an existing business.

Setting up an SPA - a vehicle that writes a single quota share reinsurance contract of its host syndicate and is managed by the host's managing agent - is potentially a faster route to access Lloyd's business. The requirements that Lloyd's applies to SPA applications are less wide-ranging, so the timetable can be shorter, and the dates within it are generally more flexible.

Unlike providing capital to support an existing syndicate, where underwriting by a new capital provider can start only at the beginning of an underwriting year of account, SPAs can commence mid-year, giving significant flexibility for host syndicates and capital providers to pursue business opportunities as and when they arise.

SPAs may also be used as an alternative option in the event that plans to launch a standalone syndicate run into difficulties or delays, ensuring that capital is deployed into the market, albeit in a different way.

Supporting a syndicate directly exposes a capital provider to all classes of business underwritten. In some cases, this may take the investment outside the capital provider's risk appetite. SPAs are considerably less rigid in that they need not reinsure all of the host's business.

The underlying quota share reinsurance contract may, for example, be limited to cover only specified lines of business rather than a broad whole account quota share (again, the Novae/Securis deal is a good example of a class-specific SPA) and also to apply only to one or more defined years of account. Exposure to the host syndicate's previous underwriting years can be excluded from the reinsurance coverage.

Key legal documents


In addition to customary items required to establish a new Lloyd's-approved corporate member and certain standard Lloyd's documents, such as the managing agent's agreement with the corporate member and agreements for the provision of its underwriting capital, the key items will include business plans for the SPA and the host syndicate, the reinsurance agreement and, typically, a framework agreement between the managing agent and the corporate member - particularly in an SPA involving a longer-term strategic partnership.

The reinsurance agreement will set out clearly the business to be reinsured by the SPA. Lloyd's has helpfully developed a standard form SPA reinsurance contract that, if used as the basis of the arrangement with modifications clearly identified, will help expedite the Lloyd's review.

As to key commercial terms, Lloyd's would generally expect the host syndicate to retain a sizeable proportion of the business. Its current guidance states that this should be at least 20 percent to ensure alignment.

The framework agreement, if there is one, will supplement the standard Lloyd's managing agent's agreement and govern the parties' SPA relationship.

This may detail, for example, the business to be ceded to the SPA, budget and financial provisions for the venture, and arrangements for the cross-secondment of staff between the managing agent and the capital provider's group. It may also include exclusivity provisions to ensure that business is channelled to the host syndicate and to limit the parties' involvement in competing businesses, the use of the parties' brands and the ownership of key business assets such as customer data. And, as in most "joint venture" type agreements, the framework agreement may contain termination rights specifying when the arrangement may come to an end (for example, on a change of control).

Where it is a feature of the deal, the process and timetable for converting the SPA into a standalone syndicate should also be documented.

Assessment criteria

Lloyd's assesses the viability of the proposal and how it will add value to the market. Proposals that, for example, develop new specialist business, introduce market-leading underwriters, source business from new territories - in line with Lloyd's own Vision 2025 - or add global diversification to the market's capital base may be viewed as accretive.

The Lloyd's application process broadly comprises initial stages involving preliminary discussions and presentations leading to "in principle" approval, followed by further reviews culminating in formal approval.

The main elements Lloyd's will look at include, among other things: the nature and quality of the syndicate business plan and the rationale behind the SPA business plan; the classes of business and geographies involved; how new business or premium will be derived; and any impact on compliance with Lloyd's franchise guidelines.

Lloyd's is currently working on a new guide for setting up an SPA which, when it becomes available, will provide useful insights into its requirements and expectations and the decision-making process for SPA formations. But for now, and perhaps even more importantly pending the release of the new guidance, the first key step is to engage in early informal discussions about any new SPA with Lloyd's.

These discussions are held on a confidential basis within a dedicated group within Lloyd's and will help the parties to explore the proposal, its benefits and any potential stumbling blocks with Lloyd's before significant time and resources are incurred on the project.

The article was first published in the Insider Quarterly.

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{CD170F39-36EA-4718-9BC4-CECB6FCCC337}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/schemes-and-offers-where-drags-dont-work/Schemes and offers where drags don't workMon, 06 Nov 2017 10:17:00 ZCorporate insurance and financial servicesJames Mee, David WallisIn our previous article, we explained some of the issues that arise when the use of drag-along rights may be required.

However, there can be situations where the key shareholders in a company are looking to sell and there are too many of them to sign a sale and purchase agreement (SPA), but there are either no drag-along rights or there is a risk that the drag-along rights don't work. The latter is surprisingly common.

If drag-along rights might not work or don't exist, it will be necessary to try to achieve the sale using one of two statutory mechanisms – the first being a takeover offer and squeeze-out, the second being a scheme of arrangement.

Neither is easy, and either will increase the transaction costs well beyond those incurred when an SPA can be signed.

Takeover offer and squeeze-out

An offer can be made to acquire all of the shares of the company being sold. The documentation required on the sale of a private company by way of an offer is generally easier than when a listed company is being sold (as certain regulations won't apply), but is still complicated.

A few examples will illustrate this. The "offer document" will need to set out clearly the terms of the transaction, including pricing and any changes to price through completion accounts.
It will also need to set out details of any amounts held back by way of escrow or deductions from the purchase price for transaction fees and/or any premium for a warranty and indemnity policy.

Explaining a complicated transaction in a document to be sent to shareholders can take some doing. Warranties can be included. Where there are lots of shareholders, typically only key/management shareholders give warranties on the state of the business (all shareholders usually give warranties that they own the shares they are selling).

A buyer may want key sellers to sign a "transaction agreement" that will contain those business warranties – and it will also include other key terms such as restrictive covenants.
So, at a very basic level, the number of documents starts to increase. And how they fit together needs some care.

From a buyer's perspective – and when planning a sale on the sell-side – there is no substitute for having all key sellers sign up to the transaction agreement (which is akin to a SPA, but only signed by them), as the "squeeze-out" can't be used to impose terms such as restrictive covenants on sellers that don't accept them.

The document will also contain details of how to accept the offer (which is normally by the signing and return of a "form of acceptance" sent with the offer document). A form of acceptance can itself be complicated if there are different types of consideration.

This may be the case when certain shareholders are being required to "roll over" part of their investment in the company being sold into equity (or commonly convertible/exchangeable debt) in the acquirer/holding company. This is particularly common with a private equity-backed buyer, but we also see this where the acquirer is listed.

If the offer is structured correctly then the acquirer will, in broad terms, be entitled to buy out dissenting shareholders if the holders of 90 percent by value of the "shares to which the offer relates" have accepted the offer. This forced acquisition is referred to as the "squeeze-out".

It will by now be clear that using an offer is not simple. Sometimes the issues that arise when a drag provision may not work also surface when an offer is being planned.

If the reason the drag won't work is that a different consideration is being offered to different groups of shareholders (e.g. if certain shareholders are being required to "roll over"), then the structure of the offer becomes more complicated. Under the Companies Act, the offer must be on the same terms for all shareholders holding each class of share.

To treat different groups of shareholders differently, different "classes" of shareholder are required. In practice, new classes of share may need to be created through changes to the articles of association.

As with making changes to the articles of association when using a drag, that brings with it the risk of objecting shareholders going to court. And segmenting the shareholder base may make it more difficult to achieve the 90 percent threshold that will need to be achieved in respect of each class of share.

It is also important to factor in the wording of the rules of existing share option and incentive plans, and work out carefully how the offer will interact with those rules. They don't always dovetail neatly.

Scheme of arrangement

The second statutory mechanism is a scheme of arrangement. Schemes have been used to transfer insurance books of business (now usually under a "Part VII" transfer), but what we are considering here is a scheme between a company and its shareholders to sell the company to a buyer.

A scheme requires approval by shareholders and also by the court. Once approved, it binds all shareholders irrespective of whether they voted in favour.

Under a scheme, the shares in the company being sold are automatically transferred to the buyer in exchange for the buyer paying the agreed consideration directly to the selling shareholders.

One advantage of a scheme over a takeover offer or using a drag-along is that it can be easier to make changes to the articles and know that once the court has approved them shareholders are bound.

Also, the court can approve changes that "mop up" shares that come into being after the change in ownership (for example, following the exercise of options).

Care is, of course, needed in structuring a scheme and in making changes to articles of association, as the court has discretion to approve or reject a scheme.

As with structuring an offer, one has to look carefully at the number of "classes" required for scheme purposes. The approval of each scheme class is required by separate resolution (this is analogous to a takeover offer having to be accepted by the threshold percentage in each class).

As with an offer, different considerations being offered to different shareholders will – and sometimes different sell-side and/or buy-side incentives being offered to certain shareholders may – create a need for different scheme classes.

Whether a scheme or an offer makes sense will require a detailed analysis of the shareholder base, and the different classes needed for an offer or a scheme.

There is a dual approval threshold under a scheme: (1) 75 percent of those by value of those voting at the relevant class meeting; and (2) a majority by number of those shareholders voting at that class meeting. Thus, a long tail of minority shareholders in any class may be able to block a scheme.

As with an offer, if management hold a significant shareholding and receive a different "deal" to non-management employee shareholders, the non-management employee shareholders may have an effective veto; and care is needed around existing share options and incentives.

In summary then, if the chips are down there are statutory solutions available, but these are complex and costly. It is much better to have prepared earlier for a successful sale by checking and, if needed, amending drag-along provisions well in advance of that sale, when time and opportunity are on your side.

This article was first published in the Insider Quarterly.

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{0177E103-1286-44B1-8609-1D18E25B002C}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/special-relationship/Special relationshipMon, 04 Sep 2017 11:57:00 +0100Corporate insurance and financial servicesDavid Wallis, James MeeThere are differences in private M&A market practice between the US and the UK that we believe commercial teams need to know in order to avoid these issues coming up too late in the process if lawyers are only engaged later on.

By some measures, 2015 saw an increase in the value of insurance sector deals, although volumes globally were down compared with 2014. A good proportion of the deal activity in the UK market tends to be driven directly or indirectly by US capital (the relative proportion of US money versus money from other jurisdictions ebbs and flows of course, but rare is a process where there is no US involvement).

Our work so far in 2016 has seen a continuation of US buyers looking at a range of assets, both carriers and brokers.

Deal teams on either side of the Atlantic often approach negotiations differently, and bring different experiences and market norms to bear. To avoid unnecessary friction in any process, those closest to the negotiations need to appreciate the differences in culture, style of negotiation and documentation, and bear these in mind at the very start.

Culture and approach

Many M&A advisers will say that a "US-style" approach to negotiation can be more direct and more confrontational than a "traditional UK" approach. Whilst there is some truth in this, we also see large differences in style between individuals and teams from across Europe.

As all readers will know, dealing with people from different countries and cultures can involve additional complexity, and requires special care to be taken in communication. Even amongst English speakers, as the joke goes, we can often be divided by a common language.

The governing law can make a difference. Cross-border deals around the world are done under many governing laws, but most US/UK deals will either be done under English law or New York law.

Both US- and UK-style acquisition agreements tend to be longer and are more heavily negotiated than agreements under the laws of continental Europe, which are often very different.

Subject to exceptions, under English and New York law, the parties can essentially record what they want in their agreement.

A US-style acquisition agreement can be more buyer friendly – the converse of a UK-style acquisition agreement. The approach to "representations and warranties" and "disclosure" is the clearest example of this.

Limitations on liability under UK-style agreements can, however, be more buyer friendly – so there is some balance here. There are differences in the approach to "walk away rights" too.

Warranty breach

Under English law, a buyer usually needs to prove that the target company is worth less overall as a result of a warranty breach. So the fact that an asset is missing, for example, does not necessarily mean that a successful claim will be able to be made.

US buyers often find this incomprehensible – they are used to being able to recover on what is called "an indemnified basis" – i.e. on a dollar for dollar basis.

The US approach to disclosure against warranties requires the seller to list qualifications to warranties (i.e. the exceptions to the statement that make the statement untrue) in a disclosure schedule.

It is far less typical under a US-style deal to allow a seller to qualify a warranty by reference to a document in the data room.

The US approach puts a lot of risk on the seller, and the disclosure exercise can be expensive and time-consuming for management as well as external advisers.

Whilst always a matter for negotiation, it is common under the UK approach for a seller to benefit from information contained in the data room. Buyers almost always require a seller to make "specific disclosures" too, but there is the potential safety net for the seller of being able to rely on information provided to a buyer in the data room.

This could be abused, of course, with sellers looking to hide needles in haystacks, and this has led to the concept of a "fair disclosure" override, whereby (in short) the information needs to be reasonably obvious to qualify a warranty, but the fact that it wasn't included in the disclosure schedule (usually a separate "disclosure letter" in the UK) doesn't in itself mean the seller is sunk.

Financial limitations

There is a great deal of "market" information available about US deals, given the filing requirements of EDGAR (the Securities and Exchange Commission's publicly available database of US securities filings, including sale and purchase/merger agreements), and lots of reports are written each year profiling, for example, liability caps.

Liability caps tend to be lower under US deals, with 10-20 percent of the equity value of a target common. Practice is currently very mixed in the UK, and from the position 15 or 20 years ago where liability caps of 100 percent of the equity value were seen, especially for smaller deals, a number closer to 50 percent is now more typical.

We increasingly see caps closer to the US level, particularly in competitive auction sales.

Under US deals, claims cannot usually be brought until the aggregate amount claimed exceeds a deductible level, whereas under UK deals a so-called "tipping basket" is more common (i.e. once a threshold amount has been reached, all claims up to and beyond that amount are claimable, subject to any de minimis exclusions).

Walking away

Whenever the closing of an acquisition takes place some time after the deal is signed and announced (e.g. because the regulators' consents are needed), buyers often require a material adverse change (MAC) clause, sometimes referred to as a material adverse effect. This concept protects the buyer if something of significance happens between signing and closing.

US buyers, especially those that are listed, almost always insist on a MAC clause. Unlike in the UK, there is a relatively sizeable body of law on MAC clauses.

Such clauses are always heavily negotiated. From a seller's perspective, a "narrow" clause will provide the greatest deal certainty. A buyer will, however, want the broadest clause possible.

One relatively recent development in US/UK practice has been to include Delaware law-governed MAC clauses in English law-governed acquisition agreements.

Typical Delaware-style clauses tend to be construed by the state’s courts in a way that makes it difficult for a buyer to walk away. US buyers are generally comfortable with these clauses. What we are seeing though is that buyers then seek to add further specifics – for example around capital requirements.

Actuarial matters

It is difficult to draw too many jurisdictional conclusions on the approach to actuarial matters. As a gross simplification, we tend to see US buyers looking for greater levels of warranty protection on actuarial matters than is typical in a UK context. This can be a really difficult area on insurance deals, as these matters obviously go directly to value.

Mention of even a few of the differences between what a US and a UK party may expect shows that what might be seen as "legal" points are in fact anything but, and it is beyond the scope of this article to highlight other important differences such as financing conditions and break fees.

We've seen problems arise when commercial negotiating teams aren't familiar with these differences (and unless they've done a lot of US/UK deals, why should they be?), and/or they don't involve appropriate legal advisers early enough.

A reference to "customary terms" in a US/UK term sheet almost always leads to some difficult discussions...

This article is provided for educational and information purposes only and is not intended and should not be construed as legal advice.

The article was first published in the Insider Quarterly.

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{DEC19812-5645-445F-B86F-2F2260B3E8FA}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/signed-sealed-delivered/Signed, sealed, deliveredFri, 11 Aug 2017 12:29:40 +0100Corporate insurance and financial servicesMatthew Griffith2015 saw some landmark deals, not least the largest insurance industry transaction to date – Ace’s $29.5bn acquisition of Chubb. There were other insurance megadeals that grabbed the headlines and many more sizeable transactions were executed across the life, non-life and broking sectors.

The momentum has continued into 2016, although, with continued market volatility and uncertainty about a potential Brexit, it remains to be seen how things will unfold and how this may impact the appetite for transactions and deal dynamics in the months ahead.

What is clear is that delivering on ambitious growth plans organically has become more challenging.

Businesses are looking at, and have closed, transactions that they would not have considered just a few years ago. M&A has been on the agenda, with boards turning to transactions to help deliver their strategic plans.

Despite economic and political headwinds, boosting revenue, reaching new customers and geographies, broadening product sets, accessing new or innovative distribution capabilities and realising potential cost efficiencies are likely to remain on the list of strategic drivers.

M&A may be the solution but, with many businesses facing similar challenges, there is often stiff competition for attractive assets, particularly with continued private equity interest in the sector. This has intensified in the current climate, with some market participants having surplus cash to deploy and more affordable funding available in a low interest rate environment.

This competitive dynamic was certainly a feature of the market last year, with many potential buyers dedicating cash and resources in auction processes which, by definition, can only be successful for one bidder or consortium.

So how can businesses prepare for successful M&A in a competitive environment from a legal point of view?

The A Team

Choosing the right external advisers is important but getting the right internal team in place and ready to go is vital, particularly where speed of execution is key.

The in-house team, knowing the business better than anyone, will have the keenest eye during due diligence and a key role to play in planning the all-important post-deal integration.

Freeing up capability in key business units and corporate functions such as finance, tax and HR can therefore make a real difference.

Ensuring that the team understands the strategic drivers is key and briefing them about the M&A process, and what to expect, helps them see their input in the wider context.

Due diligence

Due diligence is often a major and multi-disciplinary workstream, requiring significant cost and internal and external resources. Getting maximum value out of the exercise is essential.

On the buy side, it is all about planning ahead and targeting key issues, particularly when under time pressure in a competitive process. Which things do you want to see, what really matters and what will make you walk away? Discovering a deal-breaker late in the day is in nobody's interest.

Ensure that the process is co-ordinated across disciplines so that, for example, the legal or regulatory ramifications of an issue emerging in the technology review are considered.

Importantly, use due diligence to fully test valuation assumptions and feed the outputs, as positive actions, into the integration workstream and the post-deal 100-day plan.

Differentiation

In a competitive market, building relationships with potential targets, investment banks and financial advisers well ahead of a deal can pay dividends later.

But when it comes to submitting non-binding offers, being razor sharp on the differentiating features of your bid can set your proposal apart. Price is obviously key, but is often not the only evaluation criteria.

There is value in emphasising the underlying rationale for the deal, any ongoing roles in the combined business for key employees and selling shareholders (in owner-managed businesses) and why the proposed bid is the right one for the sellers and the target company.

Think carefully about changes to the seller's draft documents and be as clear as possible on any required closing conditions and the actions that will be taken to satisfy them.

Deal structure

Buyers need to look carefully at the proposed transaction structure to anticipate potential issues.

Can any non-core subsidiaries or businesses be hived off pre-closing? Is a share sale or a purchase of the target's business and assets the preferred route and what are the risks and benefits of one against the other?

Critically, is a formal process required in order to effect the transaction or could a different structure such as a reinsurance deal combined with a renewal rights transfer achieve the same economic result?

A Part VII insurance business transfer may be required in the UK to move a portfolio of policies from one insurer to another, which requires the involvement of the regulators (in the UK and often elsewhere in the European Economic Area), a regulator-approved independent expert to opine on the scheme and the sanction of the court to proceed.

It is now a well-trodden path, but there are some potholes for the unwary and, like any major project, a Part VII transfer requires significant time and resources to complete.

Regulatory application

Considering well in advance how the potential buyer, and its plans for the business, are likely to be perceived by the regulator and how the bid might be modified to alleviate any potential concerns, is time well spent – particularly if the buyer is unfamiliar to the regulator.

Getting ahead of the game with the change of control documentation, assembling all of the required supporting information and having a clear process to manage the application will reduce the time required to complete, submit and receive the necessary approvals.

In the UK, there are time limits within which the Financial Conduct Authority (or Prudential Regulation Authority) must respond, but the clock does not start to tick until the regulator has acknowledged receipt of the complete application.

Expect questions to be raised and be ready to answer them clearly and quickly to avoid delays.

Multiple sellers

If a private company target has a significant number of individual investors, looking at the current shareholding structure to anticipate any challenges is also important; and, in any case, making sure that all of the major selling shareholders are on-side is vital.

Sometimes shareholdings are widely spread, which can make getting everyone to sign up to a conventional sale agreement a challenge.

In these cases, and sometimes when there are unwilling or untraceable shareholders, there are different ways to approach the deal – for example, a private company offer or, possibly, a court-sanctioned scheme of arrangement. But the implications of either route (not least to the timetable and cost) need to be considered.

Ensuring clarity regarding the deal’s impact on any share options, and the tax treatment available to any individual selling shareholders, will also avoid misunderstandings and delays further down the track.

These are some of the practical considerations to take into account in successfully getting M&A deals over the line.

Once the ink is dry, post-deal integration, cultural alignment, talent retention and the evaluation of deals against the base and stretch case acquisition criteria after completion are also vital in assessing the ultimate success of any transaction, but those are important topics for another day.

This article was first published in the Insider Quarterly.

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{E4AF1613-BD3D-4661-9198-E51F91C63622}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/what-a-drag/What a drag
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Fri, 11 Aug 2017 12:20:00 +0100Corporate insurance and financial servicesJames Mee, David WallisPicture the scene. It's early Friday evening at a fictional insurance broker. The overworked in-house lawyer is looking at her long "to do" list and working out what documents she should take home to review over the weekend.

Her concentration is broken, though, by the sound of fast footsteps coming her way. Only one person walks that fast – the CEO.

The CEO steps into our lawyer's office with a big smile. Oh dear. He talks even faster than he walks and our lawyer is just about able to follow his monologue: "We're selling the company to my favourite private equity fund…I have agreed price and key terms… obviously I will be staying on as CEO… management are on board and we need to sign at the end of next week at the latest… all of the employee shareholders will be selling their shares. That's ok, though, we have a drag in our articles." However, our lawyer is anxious. She has a gnawing doubt about whether so-called "drag clauses" really work…

Employee shareholders

Many insurance companies and brokers have a wide employee shareholder base. Shares are often issued rather than options (for tax and other reasons). This can give rise to a number of problems when the company comes to be sold – particularly if former employees hold shares and/or some shares are issued partly paid.

The simplest way to effect a sale is for all shareholders of the target company to enter into a share purchase agreement (SPA) with the buyer, which sounds simple until one realises that there could be dozens or even hundreds of shareholders!

Corralling this number of people and persuading them to enter into a lengthy legal document, all the while maintaining deal secrecy, is not an easy task. Shareholders may need to take independent advice on the terms of a deal that has already been struck with the buyer. At the very least this causes delays and uncertainty. And tax issues can really complicate this process.

The next simplest approach is to use a "drag along" provision. In simple terms, a typical drag right allows a third party buyer to acquire all of the shares in a company once shareholders holding a specified majority of the value have accepted the deal. As such, this can involve most of the shareholders by number being forced to sell their shares, whether they want to or not, normally at the same time and on the same terms agreed by those majority shareholders.

A drag provision can be found in a company's articles of association (articles) or in a separate shareholders' agreement.

Problem 1: Equal treatment


Most drag provisions rely upon a dragged shareholder being required to sell shares on the same terms as the majority shareholders. However, in practice, it is rare for every single shareholder to end up selling shares on exactly the same terms.

For instance, an institutional investor in a company (such as a private equity fund) will most likely require other shareholders to provide business warranties in the SPA, but will not provide this level of cover itself.

In addition, key management may be asked to accept a mix of cash, shares and loan notes in exchange for selling their shares, and may also receive sale bonuses, so their consideration may be different to the dragged shareholders.

All these terms of the deal can mean that shareholders are not being treated equally. This complicates the analysis of whether the drag works.

Many buyers won't want to take the risk of shareholders refusing to be dragged. It may be possible to amend the drag provisions to make clear, for example, that different groups of shareholders can be offered a different mix of consideration. But this needs to be looked at carefully, and the buyer ultimately needs to agree that this works.

Problem 2: A spanner in the works

Traditionally, drag provisions in articles provide that a minority shareholder who does not sell his shares – typically referred to as a defaulting shareholder – was deemed to have appointed a director of the target company as his attorney, giving that director the right to sign documents on his behalf.

A power of attorney must however be granted by way of a deed – a document that says it is a deed, and which is signed in a particular manner in front of a witness (or in the case of signature by a company following certain other rules).

The Companies Act 1985 made clear that articles were deemed to be a deed, and so a power of attorney included in articles would be effective. However, for some unknown reason, this approach was not included in the Companies Act 2006 and, therefore, power of attorney provisions in articles no longer work.

This problem is not present where the drag is included in a shareholders' agreement executed as a deed. But where there is a diverse shareholder base, with some shareholders holding only a small interest, sometimes not all shareholders will have signed the shareholders' agreement.

One solution may be a provision appointing a director of the target company as a defaulting shareholders' agent, rather than attorney – but this only works if the dragged shareholder is not being asked to sign any documents as a deed (as a power of attorney would be required to do so).

Help! My drag doesn't work

As each drag provision is different, a buyer – and the target company – will need to examine its terms carefully and consider whether it fits the proposed sale.

A drag is a limitation on the property rights of a shareholder – because a shareholder's assets, the shares, may be taken from him – and so any ambiguities and uncertainties are likely to be construed by a court against the majority shareholders trying to force the minority shareholders to sell.

It is best practice to include a well drafted drag provision from the outset – a court is more likely to object to the inclusion of a new drag-along provision, given that it affects the property rights of a shareholder, than to the subsequent amendment of an existing provision. Many drag provisions are, though, not as well drafted as they might be…

The courts have shown themselves willing to give the directors of target companies scope to propose amendments to articles, particularly where those amendments are "tidying up" changes that help give effect to the operation of the drag and do not change the overall commercial bargain.

The courts will also look at whether amendments to articles have been put forward for a proper purpose – that is, the courts will not look kindly on changes that are designed to affect minority shareholders in an adverse fashion.

In essence, if a change doesn't "feel right" when all shareholders' interests are taken into account, the change probably doesn't work and may be at real risk of challenge.

We have seen too many companies that hand out shares at different prices, with different amounts unpaid, and that don't take shares back when shareholders leave employment; and too many companies that don't have well drafted articles and shareholder agreements.

Not taking care of the share capital of a company and the key documents can make a sale much more difficult and expensive than it might otherwise be.

This article was first published in the Insider Quarterly.
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{F36EC7CE-48D9-4F81-B87C-443B9D7F494F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/new-corporate-tax-evasion-offences-the-clock-is-ticking/New corporate tax evasion offences – the clock is ticking!Thu, 03 Aug 2017 10:20:39 +0100Corporate insurance and financial servicesRegulations have been made that will bring into force the new corporate offences on 30 September 2017. The regulations also mean that the Chancellor of the Exchequer is now required to publish guidance for firms about procedures to prevent the commission of these offences.

In their recent briefing our tax colleagues have explained the new corporate tax evasion offences.   The Criminal Finances Act (Commencement No. 1) Regulations 2017 (SI 2017/739) bring most of Part 3 of the Criminal Finances Act 2017 (CFA) into force on 30 September 2017, including both of the corporate offences of failure to prevent the facilitation of tax evasion.

 

These two new strict liability offences for corporates (including partnerships) of failing to prevent the facilitation of tax evasion, both in the UK and overseas, mirror the offence created by section 7 of the Bribery Act 2010.  Indeed, like the Bribery Act, the CFA has wide jurisdictional reach, covering UK based companies and foreign companies with a UK office, and criminalises the conduct of individuals anywhere in the world.  These offences will result in a company being held criminally liable for the actions of its staff, agents or other persons associated with it, unless it can demonstrate it had reasonable "prevention procedures" in place to prevent the facilitation of tax offences.

 

As a precursor to the coming into force of the offences, the regulations also brought section 47 of the CFA into force on 17 July 2017. Companies will need to ensure they have prevention procedures in place in advance of the offences under the CFA coming into force and section 47 concerns the publication of guidance about the prevention procedures.  Section 47 specifically requires the Chancellor to publish guidance about the prevention procedures that relevant corporates should look to have in place (the guidance is likely to be published by HMRC on behalf of the Chancellor). Under this section, the Chancellor may also endorse guidance prepared and published by others, meaning that overarching guidance can be supported by consistent guidance more closely tailored to a particular sector.

 

Draft guidance has previously been published by HMRC and it is likely that the finalised guidance will resemble this in many regards. The draft guidance is designed to be of general application and is formulated around the six guiding principles (which mirror the principles in the guidance relevant to the Bribery Act):

  • Risk assessment.
  • Proportionality of risk-based prevention procedures.
  • Top level commitment.
  • Due diligence.    
  • Communication (including training).
  • Monitoring and review.

Whilst the six principles are identical to those required to defend a charge under section 7 of the Bribery Act 2010, it will not be enough for firms to rely on existing policies and procedures.  Instead, companies must thoroughly assess the risks they will face and implement new policies and procedures or at least tailor what is already there.

 

Mindful of the limited time available until the coming into force of the new offences, firms should commence reviewing their prevention procedures in the light of the draft guidance.  If the finalised guidance, when it is published, differs in any material way firms can then revise the relevant specific aspects of their policies and procedures accordingly.

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{EDA31184-DF81-4A18-A0AF-77CE72950549}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/sm-cr-what-should-the-insurance-sector-be-doing-to-prepare/SM&CR: what should the insurance sector be doing to prepare?Thu, 27 Jul 2017 16:15:50 +0100Corporate insurance and financial servicesThe new regime, which will replace the approved persons regime, is far broader in its application and is likely to require significant change within many firms.  The extension of the SM&CR is due to be implemented in 2018, and therefore firms will need to prepare for this change in parallel with other key regulatory initiatives due for next year. The papers below set out the key elements of the regime and highlight the key activities insurers and insurance brokers should be looking to commence shortly.

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{C929C893-74F2-4DB7-A438-5D12C35EA7C7}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/pra-consultation-to-promote-diversity-on-boards-of-large-insurers/PRA consultation to promote diversity on boards of large insurersThu, 06 Jul 2017 09:39:52 +0100Corporate insurance and financial servicesThe PRA's consultation paper entitled Strengthening accountability in banking and insurance: optimisations to the SIMR, and changes to SMR forms proposes changes to SIMR and also, to a lesser extent, the Senior Managers Regime (SMR).

 

SIMR is the PRA's regime for personal responsibility and accountability for insurers and mirrors, in part, the SMR, which is the regime for senior management accountability in banks. At present the FCA has in place a modified version of the old 'approved persons' regime for insurers, however this is due to change when the Senior Managers and Certification Regime (SM&CR), of which the SMR is one component, is extended to all authorised firms next year.  The 'optimisations' being proposed by the PRA to SIMR should be seen in the context of this very significant change to personal responsibility and accountability across financial services.

 

The most significant proposed amendments, which are focussed on SIMR, are contained within chapters 2 and 3 of the CP and include:

 

  • Creating a new Chief Operations function (SIMF24)

  • Creating a new Prescribed Responsibility for the firm's performance of outsourced operational functions and activities

  • Creating a new Head of Key Business Area function (SIMF6)

  • Requiring the Chairman and CEO function not to be held by a single individual at 'large firms'

  • Requiring any Non-Executive Director oversight role, at a 'large firm', to not be performed by an executive within the relevant firm's wider group

  • Requiring firm's to have in place a policy to consider a broad set of qualities and competencies when recruiting board members and to have a policy to promote diversity among board members.

A number of these proposals, such as the creation of the Head of Key Business Area function and Chief Operations function, will result in SIMR more closely resembling certain elements of the SMR. In the light of the proposed extension of the SM&CR it is unsurprising that there is some limited harmonisation between the two regimes overseen by the PRA.

The significance of these changes should not be lost either in the fact that they are badged as 'optimisations' nor in the noise that will surround the FCA's forthcoming consultation about the extension of the SM&CR.  These reflect substantial changes; for example, the new Prescribed Responsibility for outsourced functions and activities could have a significant impact where activities such as underwriting or claims handling have been outsourced.  Recent thematic reviews by the FCA show how significant a responsibility that will be.

Furthermore the new proposal relating to board-level diversity reflects a significant and encouraging step by the PRA to promote diversity by following the UK Corporate Governance Code.

Submissions for Chapters 2 and 3 of the consultation paper close on Friday 22 September 2017. ]]>
{B6928129-9643-446C-8CFA-ABF8DE8E542C}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-automated-and-electronic-vehicles-bill/The Automated and Electronic Vehicles BillTue, 04 Jul 2017 11:52:40 +0100Corporate insurance and financial servicesRichard Breavington, Jonathan CharwatIn May 2015 we blogged on the Government's efforts for the UK to lead the way in driverless technology by investing in four driverless car schemes.

 

The Queen's Speech on 21 June 2017, continuing in this vein, announced the Automated and Electric Vehicles Bill. The Bill seeks to cement the UK as a research and development hub for modern transport technologies and a world-class infrastructure providing automated vehicles to a mass market of consumers - official research indicates that the market will be worth an estimated £28bn by 2035.

 

Following a Department for Transport consultation last year on the issue of self-driving car insurance, the Government earlier this year proposed to extend compulsory motor (under Part VI of the Road Traffic Act 1988) to include the use of automated vehicles, and establish a single insurer model, where an insurer covers both the driver's use of the vehicle and the automated vehicle technology.

 

Where an insured autonomous vehicle has caused an accident, the insurer will be liable for the loss caused by the accident. Cover can be excluded under the insurance policy only where the vehicle owner has neglected to install a necessary policy update or made unauthorised changes to the car’s software.

 

Implementation of the Bill remains in its infancy as there are consultations on the specifics of the regulatory framework and the ambit of vehicles classified as "automated" will be a matter for the Secretary of State to determine.

 

However the proposed single insurance policy is considered to be the most effective way to support a functioning market for automated vehicles which ensures that innocent victims of an automated vehicle collision receive compensation quickly, fairly and easily, whilst allowing flexibility for the insurance industry to decide which insurance products they wish to offer.]]>
{74B50BBC-2DC2-4868-8B8E-13015C47496F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/continued-fca-focus-on-appointed-representatives-more-regulatory-interventions-in-london-market/Continued FCA focus on appointed representatives – more regulatory interventions in the London MarketTue, 27 Jun 2017 10:46:53 +0100Corporate insurance and financial servicesJonathan CharwatAs part of its June Regulation round-up, the FCA has announced that it has carried out follow up supervisory work on insurance intermediaries with developed networks of ARs. The FCA has visited 20 principal firms and undertaken interventions in more than a third of those visited.

 Last year, we blogged on the significant failings identified in the FCA's Thematic Review of principal firms and their ARs.  The Thematic Review, which sampled 15 principal firms in the general insurance market, found that a significant number did not understand the risks of using ARs and did not have in place effective systems and controls to monitor the risks. As a result of the review, the FCA took early intervention with five principals.

This more recent supervisory work has focused on London Market insurance intermediaries and the FCA found that the issues identified in the Thematic Review exist in a wider sample of firms in this market. In the same vein as the Thematic Review, the FCA found widespread failings of a principal's oversight of ARs. The FCA has summarised its findings, expectations and the actions taken in a helpful one-pager on its website.

 As a result, voluntary requirements have been placed on the permissions of seven principal firms and the FCA has commissioned two s166 skilled persons reports.

 This is clearly an area of supervisory focus and follows a slew of publications / activity in 2016, including:

 The PRA publication on its approach to supervising insurers in March 2016

  • The FCA Thematic Review (outlined above) in July 2016 (our blog here)

  • The FCA Dear CEO letter to CEOs of principal firms operating in the general insurance sector in July 2016

  • The International Association of Insurance Supervisors application paper on approaches to supervising the conduct of intermediaries (our blog here)

In its latest round-up, the FCA also identified significant shortcomings in the sale of warranty insurance products and examples of potential mis-selling because of customers not receiving adequate information. In its sign-off to this section, the FCA reminds principals who have ARs to consider its Thematic Review, conduct a gap analysis of their current activities against the findings and their regulatory obligations to ensure that customers (whether through ARs or not) are at the centre of business models and consistently treated fairly. As we can see from the high number of regulatory interventions, the FCA clearly feels this is an area for continued scrutiny.

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{720B4F8C-5181-4B9E-8EC2-A59F0EBBADB4}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/impact-of-the-eus-distribution-regime-remains-unclear/Impact of the EU’s distribution regime remains unclearFri, 02 Jun 2017 09:40:03 +0100Corporate insurance and financial servicesMatthew GriffithThe Insurance Distribution Directive (IDD) is set to become part of UK law well before the UK leaves the EU. But with industry consultation ongoing (and more to come before the new rules can be finalised), its impact is not yet clear.

 

The February 2018 deadline for implementing the IDD in the UK and across Europe is fast approaching. Broader in scope than its predecessor – the Insurance Mediation Directive (IMD) – the IDD introduces requirements in a number of new areas and has consumer protection at its core.

 

Despite Brexit, the UK’s Financial Conduct Authority (FCA) is pressing ahead with its IDD plans, so the rules will be in place as the UK leaves the EU in less than two years’ time. The FCA is not proposing to change existing UK provisions, which gold-plate the IDD’s requirements, and more stringent provisions are proposed in some areas, so the FCA’s implementation of the IDD might be seen as a further tool in the context of the wider regulatory agenda, focused on conduct and accountability.

 

For businesses across Europe preparing for the IDD, a level of uncertainty remains. The FCA’s first IDD consultation is under way (with responses due by June 5), but the European Commission’s IDD work with the European Insurance and Occupational Pensions Authority (Eiopa) is ongoing and a number of significant areas (such as the FCA’s approach to the directive’s standardised insurance product information document, product oversight and governance and the conduct of business requirements for life business) remain to be covered by the FCA’s second IDD consultation later this year.

 

At the same time, HM Treasury is consulting on the IDD implementation and the definition of “advice” in the Regulated Activities Order 2001 and the results of these initiatives may also have an impact on the FCA rules.

 

As the requirements of the IMD were gold-plated in a number of areas by the then-Financial Services Authority in 2005, the impact of the IDD should not be as extensive in the UK as in some other EU jurisdictions. But there are still significant points to consider and areas firms should focus in the run up to 2018, some of which are highlighted below.

 

Customer’s best interests rule: the IDD requires all insurance distributors to act “honestly, fairly and professionally in the best interests of their customers” and a new rule reflecting this is proposed to be added to ICOBS. This is consistent with the FCA’s treating customers fairly approach and the continuing focus on conduct. For an insurance broker, who already owes duties to the insured customer, it should be relatively easy to apply, but it is less clear at present how this requirement will apply practically to intermediaries that owe their primary duties to the insurer, such as managing general agents (MGAs).

 

Remuneration requirements: the IDD requires insurance intermediaries to disclose the nature and basis of the remuneration they receive in relation to the insurance contract, whether that is a fee, commission, any other type of remuneration or any combination of these. Under the FCA’s proposals, remuneration which is not guaranteed or which is contingent on meeting targets is expressly included within the rules. This would appear to include profit commission payable to an MGA or other intermediary sharing with the insurer in the profitability of the underlying business, such as distribution partner in a profit-sharing bancassurance or other affinity distribution arrangement. Insurers must disclose the “nature” of the remuneration paid to their employees, an element which may require some thought and, potentially, the reworking of processes, communications and scripts. The IDD requires insurance distributors are not remunerated, and their employees are not remunerated or assessed, in any way that conflicts with the duty to act in the customer’s best interests. This is aimed particularly at arrangements that could act as an incentive to recommend a particular product when another product which would better meet the customer’s needs could be offered.

 

Demands and needs: with the aim of avoiding cases of mis-selling, the IDD provides insurance distributors must specify, on the basis of information obtained from the customer, the demands and the needs of that customer, adding:

 

“Any contract proposed shall be consistent with the customer’s insurance demands and needs.” The FCA recognises for non-advised sales, firms are not expected to carry out a detailed investigation of the customer’s circumstances but highlights the need to identify demands and needs early on in the sales process and to “take this into account when designing their customer journeys”.

 

For advised sales, a new requirement to provide a personalised explanation of why the proposed product best meets the customer’s demands and needs will apply.

 

Pre-contract disclosure: although the FCA’s second consultation on IDD later this year will cover IPIDs, this area merits some attention now, not least from those involved in commercial business, as the FCA has asked for views on the provision of IPIDs or other forms of pre-contract disclosure to commercial customers. Given the broad range of product types available in the commercial market, with varying degrees of complexity and, potentially, customer groupings with different information needs, the standardised approach for retail customers may not be appropriate in the commercial context.

 

Passporting: the IDD brings in some potentially helpful changes to the passporting regime, including a publicly available “single information point” for accessing to each member state’s registers of intermediaries and a requirement member states publish their “general good” rules applicable to insurance and reinsurance distribution. While these aspects of the IDD are likely be implemented in the UK ahead of Brexit, their application may be short-lived as, more fundamentally, the continued availability of passporting rights for insurance intermediaries will fall away when the UK leaves the EU, unless alternative arrangements or transitional provisions are agreed.

 

Given the flight path towards a “hard” Brexit and the lack of any certainty as to the existence or shape of any transitional provisions, many UK and EU insurance intermediaries are looking at their businesses and structures and, where necessary, drawing up and implementing contingency plans. For UK intermediaries with EU business, these may include setting up or acquiring a regulated subsidiary in the EU and using that subsidiary to passport elsewhere in the EU post-Brexit and, similarly, EU intermediaries with UK business will be looking at ways to ensure business as usual post-Brexit.

 

With significant regulatory change on the horizon, not least with the FCA’s new rules and other changes taking effect to implement the IDD from February 23, 2018, businesses involved in insurance distribution at all levels should be reviewing their business models and structures and planning for change now, even as new rules evolve and the consequences of Brexit continue to unfold.

 

This article was first published by Insurance Day on 18 May, 2017 . 

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{C0FC1500-F0A0-4206-B691-5622AF43DD1F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/part-vii-transfers-through-the-fcas-microscope/Part VII transfers – through the FCA's microscope Wed, 24 May 2017 14:35:47 +0100Corporate insurance and financial servicesNeil BrownBackground

The FCA recently released draft guidance on its approach to reviewing Part VII insurance business transfers. The draft guidance is intended to supplement the existing FCA guidance at Chapter 18 of the Supervision manual in the FCA Handbook.  It is proposed to help industry practitioners better understand the FCA's approach, and to help reduce the time and cost required to undertake a Part VII transfer.  This helpful objective can only be welcomed, in particular at a time when many insurers are considering Part VII transfers as part of their Brexit-related restructurings.

Consultation

The FCA is asking for comments on the draft guidance by close of business on 15 August 2017.  Please feel free to contact us at RPC if you would like to route any comments through us or have any questions.  The guidance is available here

Some key issues 

The draft guidance is relatively detailed, and is 63 pages long.  However, we have picked out below a few of the key points:

  • Transferring liabilities – the Scheme document should be specific about the liabilities that are being transferred with the business.  In particular, attention is drawn to the need to be explicit as to whether or not mis-selling liabilities are transferred.  This echoes the need to for rigorous drafting accuracy, as highlighted by the recent Supreme Court case of Wood v. Capita Insurance Services Limited [2017] UKSC 24 (for more information on this decision, please see our article in Insurance Day).    

  • "Two-way challenge" – the independent expert should challenge the information received from the applicant firm and other involved parties, and the applicant firm should challenge the conclusions of the independent expert. The purpose of the "two-way challenge" is to ensure the independent expert has not overly-relied upon information provided by involved parties, and ultimately, that the Court, the regulators and Policyholders are in a position to be able rely on the conclusions and recommendations of the independent expert report.   

  • Communications to Policyholders; who is a "Policyholder"? – the FCA takes the view that the definition of  "Policyholder" remains very broad. The FCA guidance sets out a few examples that in the FCA's opinion would fall within the definition of "Policyholder", including third-party claimants under motor policies and potential claimants where the possibility of a claim is remote. The FCA acknowledges that applicants may take a different view on the scope of this definition and remains open to waiver applications for certain classes of Policyholders as a practical way of approaching differences in interpretation.

  • The Aviva Judgment helpfully, the draft guidance gives specific endorsement to the judgement of Norris J in Re Aviva International Insurance Limited [2011] EWCH 1901 (Ch.) (the Aviva Judgment), and adds further detail to the way in which it would be interpreted.  This case sets outs the factors that should be taken into account in deciding whether to grant a waiver from the requirement to notify a particular group of Policyholders of the transfer.

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{7211F2B3-4065-42B0-8998-4AC801DB2209}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-publish-consultation-paper-on-the-insurance-distribution-directive/FCA publish consultation paper on the Insurance Distribution DirectiveWed, 19 Apr 2017 15:05:58 +0100Corporate insurance and financial servicesJonathan Charwat   
The IDD replaces the Insurance Mediation Directive and seeks to strengthen consumer protection. It aims to deliver a number of requirements of a professional, organisational and prudential nature as well as dealing with complaints handling and out-of-court redress requirements. The new rules will apply to all persons who conduct insurance distribution to consumers, and introduces a new category of firm - ancillary insurance intermediaries (AIIs). An AII is a firm which meets the following requirements: their principal professional activity is not insurance distribution, and they only distribute insurance products that are complementary to goods and services they provide as their primary professional activity. 

"Minimum knowledge" requirement
In terms of professional and prudential requirements, the IDD requires staff of re/insurance intermediaries to have "minimum knowledge" of product coverage, the claims process and insurance regulation. The FCA propose to implement this but extend its scope beyond intermediaries to all those involved in re/insurance undertakings. They also propose to require staff directly involved in distribution activities to undertake 15 hours of continuing professional development in line with IDD requirements. Professional indemnity (PI) insurance requirements in the IDD do not require implementation as current FCA requirements for PI insurance already exceed the levels required. 

Complaints Handling
The IDD also sets out complaints handling requirements, specifically for re/insurance to have a process in place for customers and other eligible parties to register complaints and receive replies, and for EU Member States to have adequate and effective, impartial and independent out-of-court complaint and redress procedures. Amendments to DISP in the current FCA regulatory framework are proposed to reflect the IDD's requirements.

Pre-contract disclosures
The IDD builds on the existing pre-contract disclosures rules in ICOBS, with a number of new additions, such as a new rule requiring insurance distributors to act honestly, fairly and professionally in the best interests of their customers (the "customer's best interests" rule). Significantly, ICOBS currently only applies to intermediaries who are in contact with the customer, and not all intermediaries in the distribution chain. Proposed changes to the Handbook mean that certain new IDD requirements will apply to all intermediaries in a distribution chain, irrespective of whether such intermediary has contact with the customer. 

Finally, under the IDD, re/insurance undertakings and intermediaries are required to use only authorised or exempt insurance intermediaries for insurance distribution. This is more restrictive than current FCA rules which apply only to insurance and reinsurance undertakings. Amendments to MIPRU are proposed to reflect this change. 

Consultation is still in its first phases, and more guidance is expected when the second consultation paper is published later this year. This paper is expected to cover the implementation of the Insurance Product Information Document (IPID) requirements, the conduct of business requirements for life business and product oversight and governance. In the meantime, the first consultation paper provides a preview of the FCA's approach, building on the current framework rather than rewriting it, and confirms that the IDD will be implemented despite Brexit.

This article was co-authored by Rob Paine, Trainee Solicitor in RPC's Corporate Insurance and Financial Services team.
 
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{FAEF02DA-FDD4-4222-85FA-81771074355E}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-insurance-block-exemption-the-end-of-an-era/The Insurance Block Exemption: The End of an EraMon, 13 Mar 2017 16:14:39 ZCorporate insurance and financial servicesMelanie MusgraveFollowing the European Commission's unsurprising, but rather muted, announcement not to renew the Insurance Block Exemption (the "IBER") in any guise, the final countdown has begun and the IBER will now simply expire at the end of this month (on 31 March 2017).

What is perhaps disappointing is that the European Commission has chosen, at this stage at least, not to offer specific guidance for the insurance sector.

The IBER

The IBER currently provides two exemptions for agreements relating to the joint compilations, tables and studies and to co-(re)insurance pools for the common coverage of a specific category of risks. The benefit of the IBER has been that, provided an agreement fell within its specific conditions (which needed to be assessed carefully rather than presumed), it was automatically exempt from the prohibition on anti-competitive agreements under EU and UK competition law. Consequently, the agreement did not require individual assessment from a competition law perspective.

The European Commission's decision not to renew the IBER

As previously noted, the scope of the IBER has been reduced over time since its first incarnation was adopted in 1992 and the European Commission has been moving away from sector-specific rules in preference for a more general principles-based approach. Against this backdrop and the European Commission's preliminary view, set out in its Report on the functioning of the IBER of March 2016, that it was "no longer necessary to maintain sector-specific block exemptions in this field", the IBER's demise has been reluctantly anticipated by the insurance industry.

Further consultation, studies and an impact assessment reinforced the European Commission's preliminary view, which was also supported by the National Competition Authorities. Insurers were unable to convince the European Commission that the absence of the IBER would create legal uncertainty and additional compliance costs.  Indeed, the European Commission has expressly stated that it does not expect the cost for insurance premiums to increase as a consequence.

The European Commission has concluded that its Guidelines on horizontal cooperation agreements, with a section on information exchanges, provides appropriate guidance to assist the competition law assessment of agreements relating to joint compilations, tables and studies. In addition, it considered that renewal of the co-(re)insurance pools exemption was not justified due to "its limited use and relevance and the concrete risks of misapplication". The European Commission has pointed out that the insurance sector is not alone in needing co-operation on large projects in order to spread the risks and costs involved.

What Happens on 1 April?

In reality, there will be no dramatic changes. April 1st will not suddenly see all arrangements between insurers, which benefitted from the IBER only the day before, suddenly becoming anti-competitive and, therefore, illegal. As the European Commission has confirmed:

"The expiry of the IBER does not mean that these forms of co-operation become unlawful under Article 101 TFEU. Rather, insurers, as all other companies doing business in the EU, will need to assess their co-operation in the market context to see whether it is in line with antitrust rules."

Thus, this is not the end of all co-operation in these areas. The European Commission, throughout the review process, has acknowledged the need for co-operation within the insurance sector.

Nevertheless, this does not mean that insurers should simply ignore this development. If a competition law assessment has not yet been undertaken, insurers, with the assistance of their competition law advisors, should assess on an individual basis any existing agreements, for which there has been reliance on the application of the IBER.

It is important to ensure that existing agreements either do not raise any competition law concerns under Article 101(1) of the TFEU (the EU prohibition on anti-competitive agreements) or, if they do, that they satisfy the exemption criteria of Article 101(3). These criteria require that an agreement: (i) contributes to promoting technical or economic progress; (ii) whilst allowing consumers a fair share of this benefit; (iii) without imposing any indispensable restrictions; and (iv) without the possibility of eliminating competition.

All proposed arrangements going forward will require self-assessment for compliance with competition law rather than with the scope of the historic IBER.

The Future

The European Commission has indicated that it will monitor the impact of the expiry of the IBER. Over the first year, it will review whether the expiry leads to "pronounced legal uncertainty" and, if so, it will consider whether further guidance is required. 

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{3EE87257-3CC2-4D0C-A5A6-0034B9F25790}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/m-and-a-deal-trends/M&A deal trendsMon, 06 Feb 2017 09:52:46 ZCorporate insurance and financial servicesJonathan CharwatRPC's Nigel Collins has written about deal trends in UK M&A for the ALM country-by-country guide to the global M&A landscape.

Amongst other things, Nigel, head of RPC's Japan Desk, explains that Japanese companies are continuing to push into the UK to secure growth through outbound M&A. This seems particularly true in the insurance market where Japanese insurers have been making major acquisitions to expand their presence in the UK.

Nigel also speaks about the UK's openness to "direct foreign investment" in an age of growing protectionism. This is very relevant to the insurance market given the outlook for 2017 (including Brexit), the creation of a new insurance linked securities market (bringing new investment opportunities in the reinsurance market) and the continued development of InsurTech (investment in innovative technology in the insurance market by way of M&A or through organic growth and internal investment).

For a link to the full article about deal trends around the globe, please click here (registration required).

This article was co-authored by Dil-veer Kang, Trainee solicitor in RPC's Corporate Insurance and Financial Services team.

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{9C74D4A3-07A3-4EEF-BE13-5DB75523C3BD}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/insurance-companies-and-the-modern-slavery-act/Insurance Companies and the Modern Slavery ActTue, 17 Jan 2017 11:58:43 ZCorporate insurance and financial servicesJonathan CharwatRPC has previously written about their general applicability and now will examine its impact on insurance companies.

Whilst insurance is probably not a sector where the risk of SHT is as high as retail or mining, the increasingly globalised way in which the insurance industry operates means that supply chains are becoming longer, further reaching and more complex.

This development in supply chains is a result of increases in the number and form of investment vehicles and the growth of insurance in new markets and new territories. In particular, the use of outsourced call centres and of claims handling arrangements, often in developing countries, is increasingly providing cheaper models of insurance business, using low-paid and/or temporary work. Such arrangements can complicate the supply chain and create physical barriers between a director, who signs the SHT statement, and a supplier's (or a supplier's supplier's) employee, whom the statement aims to protect. 

RPC's Patrick Brodie is conducting a seminar on Modern Slavery on 19 January 2017 at RPC's offices. This will look at how the SHT statement's narrative can act as a pillar for good corporate governance, employee engagement and regulatory integrity. For further information please email us here.

This article was co-authored by Dil-veer Kang, Trainee Solicitor in Corporate Insurance & Financial Services.

 

 

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{5F05CDD5-BCDA-486F-AFE8-A37B4E432B6F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/refine-but-not-replace-solvency-ii-declares-the-abi/"Refine but not replace Solvency II" declares the ABIMon, 21 Nov 2016 14:24:53 ZCorporate insurance and financial servicesJonathan CharwatSome commentators in the market have called for Solvency II to be completely dropped in the event of Brexit. However, the ABI considers that the Solvency II text should be adopted into UK legislation and then reassessed to make sure the rules are flexible for the UK market.

"Change should be avoided for its own sake, hence we do not support a fundamental replacement of Solvency II. Further, there is no current consensus on what would replace it"

The response goes on to remark that Brexit is an opportunity to make refinements to the Solvency II regime to ensure that it is more appropriate for UK insurers and customers. Such refinements would relate to the risk margin levels and to compliance, reporting and governance requirements which are seen by some as excessive and creating disproportionately high costs, particularly for small and mid-sized insurers.

In its response, the ABI also questions whether the PRA's interpretation and implementation of the rules has gone beyond the requirements of Solvency II and what is necessary for financial stability. Therefore prior to Brexit, the ABI considers that there are things that could be done now to change the impact of Solvency II.

Note that the deadline for written submissions to the Select Committee has now passed.]]>
{FB08F249-5337-47AA-A2E0-2B8F98EBE95B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/approaches-to-supervising-the-conduct-of-intermediaries-iais-paper/Approaches to supervising the conduct of intermediaries, IAIS paperMon, 21 Nov 2016 14:11:53 ZCorporate insurance and financial servicesJonathan CharwatThe IAIS is a voluntary membership organisation of insurance supervisors and regulators from 200 jurisdictions.  Its paper sets out ideas on the approaches firms should consider when developing or revising a regime for supervising its intermediaries.

The paper draws on examples and responses from a survey of more than 60 of its members globally and notes that the nature and risks of a chain of intermediation is influenced by local traditions and developments in each intermediation market. The paper considers approaches to, for example, organisational processes, eligibility requirements, corrective and preventative responses/measures, off-site and on-site monitoring, inspections, and the use of supervisory tools and management information. The paper notes, in relation to the use of supervisory tools and management information, that supervisors will need to adapt their approaches to supervision to reflect the emergence of new distribution channels (as a result of emerging technology) and the changing expectations of customers and insurers.

We are hosting a seminar about insurance distribution on Wednesday which, amongst other things, will demonstrate 'RegTech' solutions for monitoring and managing intermediaries, including appointed representatives and delegated underwriting arrangements.

Our seminar will also consider the increasing supervisory focus on intermediaries and the implications of the FCA's recent thematic review which identified significant shortcomings in the control and oversight of appointed representatives by principal firms.

If you would like to attend on Wednesday at 9 am, please get in touch with seminars@rpc.co.uk.

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{9CE6922A-457D-4ABB-8FB8-ED62C9B51D69}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/insurance-europe-argues-draft-delegated-acts-must-be-consistent-with-idd/Insurance Europe argues draft delegated acts must be consistent with IDDWed, 19 Oct 2016 14:34:02 +0100Corporate insurance and financial servicesIE, which is the body representing national insurance associations across Europe, has published a response to EIOPA's July 2016 consultation paper on draft delegated acts under the IDD. In its response IE has identified a number of instances where it believes that the proposals in EIOPA's draft technical advice go beyond the level 1 requirements in the IDD.

IE's primary concerns are summarised in the accompanying press release:

  • Product oversight and governance. IE said that "consumers should remain free to purchase insurance products that meet their individual demands and needs, even though they fall outside of the pre-set target market. Distributors should therefore be able to sell outside of the pre-set target market where appropriate".  IE is concerned that requirements that prohibit sales outside the "target market" run against the interests of consumers and exceed the level 1 requirements. IE also states that there should "not be a requirement to specify a ‘negative’ target market" and that the "proposals are not intended to lead to any price controls or detailed provisions on product design, as this clearly goes beyond the identification of a target market".
  • Commission-based remuneration should not be viewed as a conflict of interest. IE stated that "there is no overarching ban on commissions under the IDD" and that "EU co-legislators decided to leave it explicitly as an option for member states". IE stated that notwithstanding that position EIOPA was effectively seeking to introduce rules that will give rise to a de facto ban on commission as they are proposing  to specify "a broad list of inducements that are considered to pose a high risk of detriment to the quality of the service" (including commission-based remuneration).
  • Assessment of suitability and appropriateness. IE also stated that "EIOPA’s list of high-level criteria to assess non-complex insurance-based investment products will result in a de facto ban on execution-only products".  IE pointed out that such an approach would also "undermine another explicit member state option in the IDD that permits the execution-only sale of non-complex IBIPs".

IE was clear that in its view it was "extremely important that the overall process for finalising the delegated acts is completed as soon as possible" because "many of the requirements will require significant changes to current business models and organisational structures, which will take time and significant costs to implement". Firms will therefore need time between the finalisation of the level 2 delegated acts and their implementation of the new rules.

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{4478FDBA-85F5-400D-9E61-1CB2CE26E864}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-consults-on-the-regulation-of-gcs/FCA consults on the regulation of GCsTue, 18 Oct 2016 14:29:48 +0100Corporate insurance and financial servicesOn 29 January 2016 we reported that the FCA had identified uncertainty about whether the GC/Head of Legal function should fall within the scope of the Senior Managers Regime (SMR).  The FCA has now published a discussion paper to open its consultation on the issue, in which it invites discussion about issues including how to handle legal professional privilege and whether its current proposal to regulate most of a GCs role should be modified. 

Whilst the FCA's open consultation only deals with GCs/Heads of Legal Functions at deposit takers and certain other designated investment firms, it has much wider implications across financial services.  Should the FCA decide that these roles should come within the SMR, then this will likely apply to all regulated financial services firms when the SMR is rolled out across the sector in 2018.  

The FCA consultation (which closes in January) states that its current position (which remains applicable now) is that all legal function activity - contracts, training, records management, people supervision etc is, "of course" under its regulation.  The one exception that the FCA identifies is those elements of advice given by in-house lawyers that might attract legal professional privilege (or what s.348 of FSMA calls 'protected items').  In essence this means that the FCA believes that it regulates much of the ordinary work of a GC (such as the giving of commercial and general business advice, conducting commercial negotiations, drafting corporate policies and taking board minutes).

The FCA noted that, whilst feedback had been received from respondents who were unsure (and indeed concerned) as to whether a Senior Manager would need to be appointed to have overall responsibility for a firm's legal function, no feedback was given about two other significant aspects of the new regime.  The FCA implied that it had taken this lack of feedback to be agreement for the propositions that: 1) all employees within a legal function (except ancillary staff) are subject to the Conduct Rules; and, 2) that the head of the legal function will be caught by the certification element of the new regime, even if they are not designated as a Senior Manager (and as such they would in any event be subject to similar direct personal regulation and potential sanctions).

RPC ran a pilot survey on these topics earlier this year and will now re-run the survey to see if we can provide an informed and representative view to the FCA - so please do contribute when we release it so that we can help shape the FCA's thinking.

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{EB0BBF7D-33D7-449A-A453-4041799D8E94}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/enforcing-the-duty-of-responsibility-against-senior-managers-the-regulators-view/Enforcing the duty of responsibility against senior managers: the Regulators' viewThu, 13 Oct 2016 09:52:47 +0100Corporate insurance and financial servicesUnder the duty of responsibility, the FCA and PRA can take action against senior managers if they are responsible for the management of any activities in their firm in relation to which

their firm contravenes a regulatory requirement, and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring

(or continuing). The duty of responsibility currently applies to persons performing senior management functions at deposit takers and PRA-designated investment firms. However the duty will apply to senior managers across the financial services sector when the senior managers and certification regime is extended from 2018.

 

Originally, HMT had proposed to introduce a presumption of responsibility, in which the burden of proof would have been on individuals rather than on the regulators. Following intense lobbying, HMT back-tracked and introduced the duty of responsibility instead. One significant concession that HMT made when ditching the previous plans was to specify that the burden of proof would lie with the regulators to show that a senior manager under investigation had failed to discharge their duty of responsibility. By setting out these ground rules for senior managers, the regulators have gone some way to reversing the burden of proof so that it will fall on individuals, because senior managers under investigation will need to be able to evidence how they have taken the actions and met the standards that the regulators have specified in this guidance.

 

The proposed guidance in the FCA's consultation paper (CP16/26)  and the PRA's consultation paper (CP34/16) set out:

  • The circumstances in which the regulators will apply the duty of responsibility;
  • A non-exhaustive list of considerations that may be relevant when determining whether a senior manager was responsible for the management of any of a firm's activities in relation to which a contravention of a relevant requirement by the firm occurred; and
  • A non-exhaustive list of considerations the regulators will keep in mind when determining whether or not a senior manager took such steps as a person in their position could reasonably be expected to take to avoid the firm's contravention occurring or continuing.

The proposed guidance issued by the FCA, which is not prescriptive, identifies a number of matters that it will take into account when assessing whether a senior manager has taken adequate steps to avoid a firm contravention occurring, including whether the senior manager:

  • exercised reasonable care when considering information available to them;
  • had, or should have had, knowledge of regulatory concerns;
  • acted in accordance with their statutory, common law and other legal obligations, including but not limited to, those set out in the Companies Act 2006, the FCA handbook (including
  • the Code of Conduct), and the UK Corporate Governance Code;
  • took reasonable steps to ensure that any delegation of their responsibilities, where this was itself reasonable, was to an appropriate person;
  • ensured that reporting lines, whether in the UK or overseas, in relation to their area, were clear to staff and operated effectively;
  • took reasonable steps to satisfy themselves, that, the firm had appropriate policies and procedures for reviewing the competence, knowledge, skills and performance of each individual member of staff in their area;
  • took reasonable steps to ensure an orderly transition when they were replaced in the performance of their function;
  • failed to take reasonable steps to understand and inform themselves about the firm’s activities for which they were responsible; and
  • took reasonable steps to ensure that, where they were involved in a collective decision affecting the firm’s activities for which they were responsible, they informed themselves of the relevant matters before taking part in the decision.

Whilst the FCA and PRA have produced guidance which is consistent the PRA has listed in the proposed revisions to the PRA's supervisory statement 28/15 other factors that it proposes to take into account when assessing the conduct of senior managers including whether the senior manager:

  • obtained appropriate internal management information, and critically interrogated and monitored that information;
  • raised issues, reviewed issues, and followed them up with relevant staff, committees and boards;
  • ensured that the firm and/or relevant area had adequate resources, and that these were appropriately deployed, including for risk and control functions; and
  • had awareness of relevant external developments, including key risks.

Both consultations close to responses on 9 January 2017.

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{F8E1C45A-A9DF-40B9-9072-ECE9CAD4AE67}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-and-pra-set-out-wide-ranging-rules-and-proposals-for-the-simr-and-smcr/FCA and PRA set out wide-ranging rules and proposals for the SIMR and SMCRTue, 11 Oct 2016 10:35:33 +0100Corporate insurance and financial servicesThe new measures are part of the regulators' continued focus on culture and are designed to help build on previous rules that help the regulators to identify and assess key individuals. The papers published by the regulators include:

 

  • Final rules from the FCA and PRA on regulatory references – these clarify the information that firms are required to share with one another as part of recruiting to key roles;
  • A Consultation Paper by the FCA on Guidance for Senior Managers on the ‘Duty of Responsibility’;
  • A Consultation Paper by the FCA on extending the conduct rules to all non-executive directors of banks and insurers;
  • A Discussion Paper by the FCA about how those heading up the legal function in firms should be treated under the Senior Managers and Certification Regime (this will apply to insurers in 2018); and
  • Supervisory statements from the PRA concerning the accountability regime in banks and insurers.

Whilst insurers have implemented the requirements under the SIMR, substantial internal change will be required to implement the SMCR from 2018.  Of particular interest for insurers will be the application of conduct rules to all staff except those in ancillary roles, and the implementation of the certification regime, which will cover staff such as senior claims handlers who are not currently caught by the Approved Persons regime.

 

The publication of these papers marks a significant stage in the development of the regime ahead of a further consultation about how the FCA proposes to extend the SMCR to all financial services firms including insurers.

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{D3535BE8-1C18-448F-A9BA-E8080471FBCC}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-plans-to-apply-conduct-rules-to-neds-in-banks-and-insurers/FCA plans to apply conduct rules to NEDs in banks and insurersWed, 05 Oct 2016 14:07:22 +0100Corporate insurance and financial servicesOn 28 September the FCA published a Consultation Paper (CP16/27) setting out its intention to apply individual rules of conduct to all directors, irrespective of whether they perform a senior manager role or other controlled function. The FCA was given the power to do this under the Bank of England and Financial Services Act 2016 the FCA.

The proposal will see the code of conduct rules (also referred to as COCON) apply to standard NEDs in relevant authorised persons (RAPs) (that is, banks, building societies, credit unions and dual regulated investment firms) and insurance firms (that is, firms defined as Solvency II firms in the FCA Glossary).  For the purpose of CP16/27, "standard NEDs" means those NEDs who are not subject to regulatory pre-approval under the senior managers regime for RAPs, or the PRA's senior insurance managers regime and the FCA-revised approved persons regime for insurance firms.

The FCA has stated that "Applying COCON to standard NEDs will help raise standards of conduct for these individuals and, by placing additional duties on them, aims to reduce the risk of future misconduct and mis-selling." This commentary is quite significant because it touches on the new Rule 4, which requires staff  to "pay due regard to the interests of customers and treat them fairly".  Rule 4 is one of the most significant differences between the new Code of Conduct and the previous Statements of Principle and Code of Practice for Approved Persons.

If, as seems likely, the FCA goes ahead with this proposal, standard NEDs will find themselves tackling the same issues facing NEDs who are already within the regime; how do you discharge your duties under these new more customer-centric conduct rules?

The deadline for comments is 9 January 2017.

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{B52C30ED-7013-446C-B9C5-E672EC55AEA8}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-avoids-full-market-study-but-what-next-for-big-data/FCA avoids full market study but what next for Big Data?Tue, 04 Oct 2016 13:45:23 +0100Corporate insurance and financial servicesRachael EllisAs discussed in RPC's Tech Hub, the FCA has announced in a feedback statement following its Call for Input on Big Data in retail general insurance that it has decided not to launch a full market study into the use of big data in general insurance.

However, while insurance firms may now rest a little easier, the spotlight on big data has not entirely dimmed:

  • The European Commission launched its digital single market consultation earlier this year and is expected to follow the FCA in making a call for information on big data before the end of the year;  
  • The French and German competition authorities have already published a joint paper on potential competition law issues raised by big data and the French competition authority has promised 'a full-blown sector inquiry into data-related markets and strategies'; 
  • The FCA made clear in its feedback statement that it was mindful that the increasing amounts of data from a wider range of sources, alongside sophisticated analytical tools, might lead to the use of reasons other than risk and cost in pricing becoming more prevalent. Therefore to assess how different pricing factors are used, they are planning to look at pricing practices in a limited number of firms in the retail general insurance sector later this year; and,  
  • The FCA will be co-hosting a roundtable with the ICO later this year on the use of data in retail general insurance. 

With all this in mind, firms should take heed of the concerns raised by the FCA in its feedback statement.

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{78005306-196C-48C2-87B2-CFE6230B2EDD}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/abi-releases-checklist-on-effective-counter-fraud-practices/ABI releases checklist on effective counter fraud practices Thu, 29 Sep 2016 16:49:19 +0100Corporate insurance and financial servicesJonathan CharwatThis ABI publication follows a growing focus on combatting financial crime in recent years and the checklist notes that financial crime is one of the FCA's top seven risks. In its business plan in 2015/16 and 2016/17, the FCA confirmed its focus on this area with the latter plan particularly focusing on taking action against firms and individuals who perpetrate scams.

 

In February this year, the FCA joined the newly-formed government initiative, Joint Fraud Taskforce. The Taskforce is a collaborative body comprising banks, law enforcement, and government, to promote shared intelligence and endeavour to reduce the operation and impact of fraud upon the public and businesses alike.

 

The checklist sets out how firms can contribute to the insurance sector's fraud strategy on a joined up basis and makes the point that unless everyone is "pulling in the same direction, fraud will simply shift around the market and prevail".

 

We recently blogged on the Treasury Committee's inquiry into the impact of Solvency II which will, amongst other things, consider whether Solvency II puts the UK industry at a competitive disadvantage. Looking at the competition point from a positive angle, the ABI checklist stresses that meeting regulatory expectations and firms contributing to the insurance sector's counter fraud strategy can ensure that the UK remains an attractive place to do business.]]>
{C159C5AD-BA1C-48FB-B919-F1DBF50C0536}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/select-committee-inquiry-into-the-impact-of-solvency-ii/Select Committee Inquiry into the impact of Solvency IIMon, 26 Sep 2016 12:19:40 +0100Corporate insurance and financial servicesJonathan CharwatThe committee's scope is to consider the implementation and impact of the new regime (specifically the costs to the insurance industry) together with the options available to the UK, post the Brexit referendum.

The website also publishes the committee's terms of reference which contains questions addressed to the insurance industry. The questions relate to the implementation, development and competitive implications of the regime as well as questions on financial reporting, safety and soundness and proportionality.

The deadline for written submissions to the committee is 11 November 2016.]]>
{4078366D-0F9B-4006-984E-241CFC1D4229}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-finds-shortcomings-in-principal-firms-control-and-oversight-of-their-ars/FCA finds shortcomings in principal firms' control and oversight of their ARsWed, 03 Aug 2016 14:32:00 +0100Corporate insurance and financial servicesJonathan CharwatOutcome of thematic review:

Of a sample of 15 principal firms, the FCA found that:

  • Almost half of the principals could not demonstrate an understanding of the risks arising from their ARs' activities and the risks these present to customers; 
  • Over half could not demonstrate that they had effective risk management, oversight and control frameworks to monitor their ARs' activities; and 
  • In a third of principals, the FCA found examples of potential mis-selling and customer detriment as a result of their ARs' activities.  

As a result of these findings, the FCA has taken early intervention action with five of the sample principals to protect the interests of customers, including imposing requirements to stop these firms taking on new ARs, asking two firms to cease or limit the sales activities of existing ARs and commissioning two section 166 skilled person reviews. 

Recommendations: 

The FCA's report reiterates a principal's regulatory obligations and sets out the FCA's expectations before a principal takes on an AR and throughout the course of an AR's appointment. These expectations include carrying out appropriate due diligence on the financial position of the AR and the principal's own resources prior to the appointment, and having robust systems and controls in place to oversee all elements of the AR's activities (including their sales practices and post-sale services). Acting as a principal is a considerable burden in terms of time and costs as the principal is responsible for the AR's activities and for compliance with the FCA Handbook (SUP 12.3.1 and 12.3.2G).

By way of background, SUP 12.2.2 G requires that an AR and principal must enter into a written contract to govern the appointment, and SUP 12.5 sets out the required contract terms. The FCA's review highlights the need for such contractual arrangements to accurately capture the nature and extent of the relationship between the principal and the AR. This includes provisions which clearly set out the full range of regulated activities that the AR is permitted to carry out, and those prohibited, or there may be a risk that an AR is carrying out unauthorised regulated activities. Additionally, the provisions should assist the principal in its supervision of the AR's activities. Principals should consider including audit provisions in their contractual arrangements with ARs entitling the principal to inspect and audit an AR's activities upon reasonable notice. 

The FCA report follows on from the Prudential Regulation Authority's approach to insurance supervision paper released in March 2016, illustrating a continual trend by the regulators to ensure that insurers are engaging with their supervisory functions. 

The FCA anticipates that this will remain an area of supervisory focus, and will be sending out a 'Dear CEO letter' to the chief executive officers of principal firms with ARs setting out its expectations.

Although the review was focused on the general insurance sector, the findings may also be applicable to principals and ARs operating in other sectors of the UK financial services industry.

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{1A49EA96-38D3-4BDC-9DE3-0C3F03F12D56}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/part-vii-transfers-court-protects-policyholder-interests-by-modifying-guarantees/Part VII transfers: Court protects policyholder interests by modifying guaranteesFri, 29 Jul 2016 11:11:15 +0100Corporate insurance and financial servicesJonathan Charwat, Matthew GriffithIn a recent Part VII transfer (Copenhagen Re), the High Court used its extensive powers under section 112 of FSMA to modify third party guarantees provided for the benefit of the transferor's policy holders, so that the rights under those guarantees continued to apply in the same way after the Part VII transfer.  Interestingly, the Court took this step despite there being no indication from the PRA, the FCA or the independent expert that they would object to the scheme in the event that the guarantees were discontinued.

Background

The Part VII transfer involved Copenhagen Re transferring its entire insurance business to Marlon Insurance Company; both entities are held by the ultimate parent company, Enstar.

Copenhagen Re had previously been a member of the Danish Alm. Brand Group.  Two entities within this group had provided guarantees in favour of the Institute of London Underwriters for the benefit of Copenhagen Re's policyholders. The guarantees provided that the guarantors would make payment to Copenhagen Re policyholders if Copenhagen Re were unable to do so.

The guarantees

To ensure that the policies written by Copenhagen Re continued with the benefit of the guarantees after the transfer became effective, Copenhagen Re and Marlon requested the guarantors to execute a deed of variation. This request was rejected by the guarantors, who said that Enstar should take their place. As a result, Copenhagen Re and Marlon sought that the Court include a specific provision in the order sanctioning the Part VII providing that references in the guarantees to "Copenhagen Re" should be read as references to "Marlon", such that the guarantees would continue to have effect.

The Court's approach

Section 112(1) (d) of FSMA gives the Court the power to make orders "with respect to such incidental, consequential and supplementary matters as are, in its opinion, necessary to secure that the [insurance business transfer] scheme is fully and effectively carried out". The guarantors argued that this power did not include modifying the guarantees, as the discontinuation of the guarantees would not materially prejudice the transferring policyholders. This was rejected by Snowden J on the basis that the continued existence of the guarantees was within the legitimate expectations of the policyholders, and an integral part of their commercial benefits.  Interestingly, the Judge also commented that "the power to secure that a scheme is "fully" carried out indicates that the court has the jurisdiction to go beyond the bare minimum without which the independent expert would withdraw his support for the scheme. Whether it should do so is, of course, a matter of discretion."

Key takeaways

Snowden J's approach, particularly in modifying the guarantees, shows the extensive powers of the Court to ensure that the schemes are effectively transferred without jeopardising the expectations, rights or benefits of policyholders. This case also underlines the level of protection the Court will afford to the interests of policyholders as, in this case, there was (as noted above) no indication from the FCA, PRA or independent expert that they would object to the scheme in the event that the guarantees were discontinued.]]>
{B7A7F26A-22B7-4CBB-8686-8ADEB3769DB6}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/brexit-a-legal-analysis-competition/Brexit - a legal analysis: CompetitionTue, 28 Jun 2016 14:18:00 +0100Corporate insurance and financial servicesAt one end of the spectrum the UK could join the European Free Trade Association and the European Economic Area, an avenue that is likely to generate the fewest changes. If the UK were to seek a total exit, falling back on World Trade Organisation (“WTO”) rules to continue trading with the EU, the potential changes would be more wide-ranging as outlined below.

Competition and anti-trust

The EU antitrust rules (Article 101 TFEU on anti-competitive agreements and Article 102 TFEU on abuse of a dominant position), apply to both EU and non-EU companies who carry on business in Europe or whose activities affect trade in Europe. The UK competition rules (the Chapter I and Chapter II prohibitions of the Competition Act 1998) currently mirror the EU antitrust rules and both EU and non-EU companies are therefore subject to a very similar regime where conduct affects the UK only. As such a UK exit from the EU would have limited impact.

While the UK is within the EU the UK competition authorities cannot investigate a case where the EU Commission takes jurisdiction. However a UK exit from the EU would mean that there will be more cases where both the EU and the UK could in parallel open an investigation and impose fines and other remedies for anti-competitive conduct affecting both the EU and the UK. This could potentially add to the risk and costs for affected businesses.

 

Merger control

In respect of merger control, the main impact of Brexit is likely to be parallel investigations. Under the EU Merger Regulation (EUMR) a transaction that qualifies under the EUMR is no longer subject to the merger control regime(s) of the relevant Member State(s) (subject to some exceptions).

If the UK leaves the EU, the EUMR and UK merger control regimes would run in parallel. A transaction that qualifies under the EUMR may also be subject to UK merger control (provided the jurisdictional threshold for UK merger control is met). This could add a burden and cost for businesses, in particular in view of the level of the UK merger fee (ranging from £40,000 to £160,000 depending on the UK turnover of the enterprises acquired) and the potentially longer time frames for UK merger control clearance.

 

Follow on damages claims

The UK is currently one of the most popular jurisdictions for follow-on damages actions for breach of EU competition law, where the claimant relies on an existing EU Commission infringement decision. Following a Brexit, EU Commission infringement decisions will cease to have a binding effect on UK courts and one expects that claimants may look to other jurisdictions when choosing the forum to bring such claims. However a number of claims dealing with historic conduct are likely to proceed under the current regime and looking ahead EU Commission infringement decisions, although no longer binding, are likely to be given significant weight by the UK courts and therefore EU competition law is likely to continue to be litigated in UK courts for the foreseeable future.

 

State aid and public procurement

Following Brexit, the EU State aid rules would cease to apply in the UK. The same outcome applies to the EU public procurement rules.

 

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{C7D789EF-6AB1-46D8-927E-207F3F137C90}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/pra-gold-plates-eu-audit-committee-requirements-for-significant-insurers/PRA gold plates EU audit committee requirements for significant insurersTue, 21 Jun 2016 16:10:30 +0100Corporate insurance and financial servicesTransitional provisions will allow insurers two years to recruit new independent non-executive directors, but the pool of available talent is considered by some in the industry to be limited.

On 18 May 2016, the PRA published policy statement PS16/16 setting out final rules for PRA regulated firms implementing the audit committee requirements under the revised Statutory Audit Directive (Directive 2006/43/EC).

The Statutory Audit Directive was amended to address weaknesses in the European audit regime highlighted following the 2008 financial crisis. Member states are no longer permitted to exempt non-listed public interest entities, such as directive insurers, from the Statutory Audit Directive's audit committee requirements.

The PRA's audit committee rules will apply to PRA regulated firms including Solvency II (re)insurers, the Society of Lloyd’s and managing agents.

The rules will require such firms to establish an audit committee as a sub-committee of the board complying with the following requirements, amongst others:

  • it must be composed only of non-executive directors;
  • a majority of the members, including the chairman, must be independent of the firm. For significant firms (e.g. PRA designated Category 1 and 2 (re)insurers), all members of the audit committee of the firm or its EEA parent must be independent; and
  • the members of the committee as a whole must meet competency requirements (in respect of the relevant sector and in accounting and/ or audit).

Once established, a firm's audit committee must perform its functions in accordance with the PRA's new rules and the Statutory Audit Regulation (EU Regulation 537/2014), which has direct effect in Member States.

To avoid duplication, an exemption to the application of the PRA's audit committee rules applies where a firm is a subsidiary of an EEA parent who complies at group level with the Statutory Audit Directive. This exemption is modified in the case of significant firms, potentially removing them from its scope.

The PRA's rules will apply in respect of financial years beginning on or after 17 June 2016, in time for external auditors to meet with a firm's audit committee as part of their audit planning cycle for that financial year. However, the rules are subject to a transitional period of two years during which a variety of transitional provisions will apply, depending on the significance of the firm and its current audit committee provisions.

The PRA has invited the smallest firms to apply for a waiver or modification of its rules, which, if granted, would mean that they need not have an audit committee - provided that they have a board performing equivalent functions to an audit committee.

PS16/16 also sets out the PRA's approach to independence, clarification of the PRA’s expectations regarding competence, aspects of audit committee functions and how the audit committee requirements will operate alongside the Senior Insurance Managers Regime (SIMR).

PRA authorised firms should already be thinking about how the new rules will affect the structure and composition of their audit committees and whether they will need to recruit new members. The PRA's competency and fitness and propriety requirements and any PRA approvals for members caught by the Senior Insurance Managers Regime will need to be taken into account.]]>
{72CA53C4-CF7A-494E-B467-47C0F269696B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-new-third-parties-rights-against-insurers/"New" Third Parties (Rights Against Insurers) Act and what corporates need to knowTue, 31 May 2016 16:31:00 +0100Corporate insurance and financial servicesJonathan CharwatThe Third Parties (Rights Against Insurers) Act 2010 and the late payment provisions in the Insurance Act 2015 changes are set out on our recent Regulatory and Risk blog. Below is a brief summary for our corporate readers. 

Third Parties (Rights Against Insurers) Act 2010

The Act has made it possible for a third party potential claimant to commence proceedings directly against insurers without restoring an insolvent company to the register.

From a practical point of view, insurers and brokers (amongst others) should now be prepared to respond to requests to provide detailed information relating to a policy to third party potential claimants. This will likely involve updating their systems, policies and providing training on the stricter rules imposed by the Act. They should also ensure that any outsourced service providers are equally prepared. Failure to comply with a request could result in a costs order against the insurer or broker by the court.

Insurance Act 2015 - late payment of insurance claims

Last year, we reported on the risks of retrospective reviews of claims handling procedures arising out of the FCA's thematic review of claims handling for SMEs. The review, which found that there was a gap between the actual claims services and SME's expectations, has prompted a late amendment to the Insurance Act 2015 - insurers now have a duty to pay sums due under a policy within a reasonable time, or otherwise face claims for damages.]]>
{8C1AA52D-C5D5-4755-AA22-C23B74D57750}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/insurance-claims-settlement-services-not-vat-exempt/Insurance claims settlement services not VAT exemptWed, 27 Apr 2016 11:54:00 +0100Corporate insurance and financial servicesThe EU VAT Directive provides that insurance transactions, including related services by insurance brokers and insurance agents, are exempt from VAT.

The key question in the case was whether the service provider performed services related to insurance transactions as an insurance broker or agent. While the service provider had a direct contractual relationship with the insurer, it acted as a broker or agent only if its services included finding prospective customers and introducing them to the insurer with a view to concluding insurance contracts. The ECJ held that the service provider's activities did not meet this test despite claims settlement being an essential part of insurance transaction, and the services were, instead, a division of the insurer's activities.

The issue for UK insurers is that currently UK VAT law provides that claims handling is an exempt service. HMRC had previously stated that it believed the UK's VAT exemption was too wide, and would need to be amended, but this proposal was shelved some time ago after lobbying by the industry.

In light of the Aspiro decision however it is likely that HMRC will want to review the position again and may well lobby the Government to amend the legislation so as to make claims handling a vatable service. This follows a number of recent HMRC successes in the courts regarding the extent of the VAT exemption for insurance-related services, such as the First Tier Tribunal case of Risktop Consulting which held that a company that analysed risk for insurers and liaised with the insured to help the insured reduce identified risks was not an "insurance agent".

Any such change would have a significant impact on insurers and might lead to increased premiums. Any developments in this area will need to be closely monitored.

 

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{CABC831A-F246-4035-AB90-1CFC6F78CC2B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-insurance-block-exemption/Insurance Block Exemption: does EC report signal beginning of the end?Fri, 18 Mar 2016 11:54:00 ZCorporate insurance and financial servicesMelanie MusgraveIts preliminary view is that specific rules for the insurance sector are no longer appropriate.

This news will be met with dismay by many in the insurance industry and possibly panic by some, who have argued during the consultation process that the removal of the Block Exemption would create legal uncertainty, increase compliance costs, adversely affect cooperation within the industry and lead to higher premiums for customers. However, in the absence of evidence to support these concerns, the European Commission is not convinced by these arguments.

Is this the end of the Insurance Block Exemption?

The European Commission has stressed that this is its preliminary view. Further studies are being commissioned and a stakeholder meeting is scheduled for 26 April. At the end of the consultation process, its final proposals will be put forward in early 2017.

However, it does now seem likely that the Insurance Block Exemption will not be renewed, whether in its current guise or with amendments. For some time now, the European Commission has been moving away from sector-specific rules in favour of a more general principles-based approach. The current Insurance Block Exemption is a shadow of its former self as it only covers two of four previously exempted categories of agreements.

If so, what does this really mean?

Arrangements in place on 31 March 2017 will not suddenly become illegal the next day due to the Block Exemption's demise. The current Block Exemption covers certain agreements between insurers to exchange information in the form of joint compilations, tables and studies and the common coverage of certain types of risk by means of co-(re)insurance pools. These arrangements are not going to be banned.

Indeed, in its report, the European Commission acknowledged that the exchange of historical data is "conducive to the efficient functioning of the insurance sector" and also that the requirements of Solvency II potentially increase the need for more precise and accurate risk information to calculate sufficient balance sheet reserves. However, it referred to the fact that joint studies on the profitability of different forms of investment do not fall within this category as they do not help in improving knowledge about an insured risk or the formulation of risk premiums.

In addition, the European Commission has recognised the evidence that cooperation between insurers is often required in order to cover certain large unconventional risks. It has also noted that alternatives to institutionalised co-(re)insurance pools have developed over time these risks. These variations, as well as market definitions and other considerations, can give rise to difficulties over the Block Exemption's application.

A block exemption is a useful tool, provided that a proper assessment is undertaken to establish that a particular arrangement falls squarely within its parameters. However, often there is not such a neat fit to provide certainty.

The European Commission has waived a potential olive branch to the insurance sector with the possibility of specific guidance. In many cases, guidance is likely to be of much wider and clearer benefit when assessing arrangements from a competition law perspective.

From a practical perspective, a proper competition law review should be undertaken of all new arrangements to establish whether there is potentially a competition law issue and whether the arrangement meets the general exemption criteria. As there is some evidence to suggest that that there has been undue general reliance on the Block Exemption within the insurance industry, now is also a good time to start a review process of existing arrangements.

Conclusion

Although we cannot go as far as advocating "keep calm and carry on", there is certainly no need for alarm. There is a potential opportunity to engage with the European Commission to influence the creation of specific guidance which would be of benefit to the insurance industry. It should be noted however that, irrespective of the outcome, there is no change to the underlying law. Hence, where arrangements raise potential issues, legal advice should continue to be sought.

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{8F872F2E-F066-4043-9A19-3A21F7B743D5}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/tax-treatment-of-insurance-spvs/Tax treatment of insurance SPVs – a cure for all ILS?Wed, 09 Mar 2016 12:17:00 ZCorporate insurance and financial servicesBen RobertsThis follows up on a promise made in the March 2015 Budget, with the stated goal of enabling London to compete in the growing market for alternative risk transfer. The UK government recognises that ILS, which allow insurers and reinsurers to transfer risk to the capital markets, is a valuable and growing part of the global reinsurance market in which the UK does not currently compete.

The consultation runs until 29 April 2016 and poses a number of questions in light of the UK government's initial thinking as to how best to create a:

  • regulatory;
  • corporate; and
  • tax

environment that will encourage ILS insurance special purpose vehicles (ISPVs) to base themselves in the UK.

Following consultation, draft regulations for any new regime will be published later this year. The document proposes the creation of a UK protected cell company (PCC) regime to best facilitate the emergence of a UK ILS market. It also makes a number of regulatory proposals. However in this blog I want to focus on the tax aspects of the consultation.

The issue

ISPVs have traditionally been established in low-tax, offshore jurisdictions as this minimises tax at the level of the vehicle itself. Investment in ILS, like any investment, works on the basis that investors wish to be taxed on their share of the ISPV's income in their home jurisdiction at applicable rates, without suffering an additional layer of tax in the investment vehicle. Jurisdictions such as Guernsey and Bermuda attract ILS business for this very reason.

A possible fix – debt-backed ISPVs

The consultation document seeks views on whether existing legislation (the 2007 Taxation of Insurance Securitisation Companies Regulations) could be amended to meet the stated objective and make the UK tax landscape attractive for 'debt-backed' ILS vehicles, such as those issuing CAT bonds. If the existing Regs were amended to apply to debt-backed ILS vehicles as proposed, the ISPV would be able to deduct interest payments to investors from otherwise taxable profits.

Interest payments from a UK based ISPV to overseas investors would need to rely on the UK's 'quoted eurobond' exemption so as not to be subject to UK withholding tax.

What about equity-backed ISPVs?

The existing Regs would not be suitable for adaptation to ISPVs that issue equity to investors (common in collateralised reinsurance deals) as the dividends paid to investors would not be tax deductible for the ISPV.

An alternative approach is therefore required to ensure a UK ISPV does not pay UK corporation tax on its profits, such treatment being considered vital to result in a commercially viable ILS structure where taxable profits effectively 'pass through' the vehicle to be taxed in the hands of investors.

The solution?

The consultation document therefore proposes a solution whereby a corporate ISPV (or cell(s) within a PCC) would be exempt from UK corporation tax, provided specified criteria are met. The stated preference is that this approach would work for both debt-backed and equity-backed ISPVs, to avoid having to operate two distinct regimes (not to mention swerving possible issues arising out of the OECD's proposals regarding the tax deduction of interest, as part of the Base Erosion and Profit Shifting project).

A number of possible criteria are suggested in the document (including that the ISPV provides (re)insurance risk mitigation, that there is clear and unambiguous risk transfer from cedant to the ISPV, and that the investors do not include any members of the cedant's group). Comments are sought as to whether these are reasonable requirements.

One issue for which a solution is not proposed in the consultation document is how to address UK withholding tax on dividends paid by an ISPV were the ISPV to be exempted from UK corporation tax. Whilst the UK does not generally levy withholding tax on dividends, it typically does for tax-exempt companies. The government seeks views as to how the withholding tax issue should be addressed.

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{6ED6BF94-210E-415C-BA3B-0D75015C7909}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/solvency-ii-concerns-raised-by-uk-treasury-and-bank-of-england/Solvency II: concerns raised by UK Treasury and Bank of EnglandMon, 15 Feb 2016 12:31:00 ZCorporate insurance and financial servicesMatthew GriffithThe Treasury recently produced a submission for the EU Commission, in response to its request for evidence and feedback on the framework.

The Directive (as amended by Omnibus II Directive) contains a clause inviting the Commission to review the methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement (SCR) within the standard formula within five years of application of the new regime. This was later brought forward to 2018 by a recital in the delegated act.

However, the Treasury's submission makes clear that there is a case for broadening the scope of the planned review, and bringing it forward still further, adding that Solvency II is "already raising issues around the impact of the framework on long-term investment and competitiveness of the European insurance industry". More specifically, the Treasury stated that the planned review of Solvency II should involve a "close examination" of its impact on:

  • Long-term investment: how does Solvency II affect EEA insurers' ability to invest in a way that contributes to stable, long-term growth in the European economy?
  • Competitiveness: how does Solvency II affect EEA insurers competing internationally, both against foreign competitors operating within the EEA, and when themselves operating in foreign markets outside the EEA?

The submission went on to stress the importance of conduct monitoring and peer review exercises going forward, to ensure that Solvency II is uniformly implemented across Europe.

Separately, the Bank of England has, in its own submission, voiced concerns over the 'Ultimate Forward Rate' under Solvency II, which is used to calculate insurers' long term liabilities. It stated that differences remain in the way that discount curves are derived and applied under different currencies and in different national markets, which "can lead to large differences in the solvency positions of firms according to where they are located in the EU".

"In order to establish a truly harmonised approach to insurance regulation, it is essential that the valuation of the insurance balance sheet is done on a consistent basis", it said.

While it is certainly promising for insurers that the UK authorities have been quick to engage proactively on the impacts of Solvency II, it is equally concerning that this has been required so soon after its implementation. We now wait with anticipation to see how these comments are ultimately dealt with by the European Commission.

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{4D734F19-42BB-42F4-9A3A-7AD27FB59B13}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/selling-buying-or-investing-insurance-broker-m-and-a/Selling, buying or investing: five practical tips for insurance broker M&AWed, 20 Jan 2016 10:54:00 ZCorporate insurance and financial servicesMatthew GriffithSo how can you prepare?

Deal success depends on a range of factors - the strength and delivery of the business plan and financials, realising expected synergies and, in many cases, the smooth integration of the acquired business into the buyer's organisation being key. A well organised and timely FCA change of control application process is also important, but there are some other practical things that can be done, at the early stages of an M&A process, or even well before it starts, that can help shape a successful transaction. The points below are viewed mainly through the "sell-side" lens, but they are at the heart of any M&A deal. Giving them proper focus, albeit from different perspectives, can deliver benefits for all concerned - selling shareholders, trade buyers and private equity investors alike, not least in speed and efficiency of execution.

1.  Check the house is in order

Investing time in getting organised, some months (or even years) before a planned sale, is time well spent. But even if time is short, thinking carefully about what goes in the data room, and anticipating the key things that buyers will want to focus on, will get the process off to a good start.  As well as the usual content (e.g. financials, corporate documents, technology and employment contracts and property leases), the data room should include business specific information, such as recent correspondence with the FCA, summaries of PI and other insurance covers, key corporate policies (including those on conflicts of interest and anti-bribery and corruption), customer documentation and TOBAs, details of insurance schemes and arrangements with providers and headline details of any complaints.  Clearly there is a judgement call to be made as to when sensitive commercial data, such as key client lists, goes across, but having the information readily available will be a big benefit when the time comes.  For those on the buy side, it is all about planning ahead – which things do you want to see, what matters and how much, what can you learn from gaps in the data and what will make you walk away? Think about how you can make quick early assessments of what you see and then focus your detailed consideration on the things that really matter – especially if you are under time pressure.

2.  Be on the front foot

As well as providing important content for any Information Memorandum describing the business, going through this internal review process early on may also flag up items that need to be dealt with, for example a lease that will fall for renewal right in the middle of negotiations.  Also, being firmly on the front foot if any issues emerge is key – it's infinitely better to know about the critical IT contract that could be terminated on a change of control at the outset than to have the problem come up in the buyer's due diligence review. Buyers can, understandably, get nervous if significant issues emerge late in the day, so getting ahead of the game will help head off last minute problems.

3. Think about tax

As well as ensuring that the company's own tax affairs are in order, it is critical to think about the tax treatment of the selling shareholders.  As long as the shares were originally issued for fair value and the right tax elections were made (if the shares are employment-related securities), capital gains tax will usually become payable on the sale of the shares in the company. Things should be relatively straight-forward if the sale price is paid in cash up front. But what if some of the sale price is deferred, or will only become payable under an earn-out? In that case, greater care needs to be taken to ensure that the price paid is properly subject to CGT and does not fall within the realm of income tax, unexpectedly attracting a higher rate of tax and national insurance contributions. This is an issue where the parties' views should be aligned as, although any income tax would be for the account of the seller, the company (as his or her employer) would be primarily liable to deduct the tax at source under PAYE and to pay employer NICs. Also, if entrepreneurs' relief is to be sought (taking the CGT down to 10%), checking at the outset that all of the qualifying conditions will be met may avoid difficult to solve issues emerging later in the process.

4.  Pick the right sale process

In many cases, there will be an auction on the back of an Information Memorandum and potential buyers will be asked to submit initial expressions of interest, followed by a further round or rounds of bidding to select a preferred bidder for exclusive final negotiations.  An auction process, and the competitive tension between rival bidders they create, can be advantageous for a seller, but it won't always be the right route. With multiple parties involved, the risk of a leak is greater, which can be destabilising, particularly for a business where the importance of people and relationships is key.  A tighter negotiation with one potential buyer is potentially easier to keep under wraps and is sometimes the better route, particularly if there are some issues in the business that need to be resolved.

5.  Review the shareholder base

If a broker is family owned, or owned by a significant number of individual shareholders, looking at the current shareholding structure to anticipate any challenges is also important; and, in any case, making sure that all of the key selling shareholders are on-side is vital. Sometimes shareholdings are widely spread, which can make getting everyone to sign up to a conventional sale agreement a challenge. In these cases, and sometimes when there are unwilling or untraceable shareholders, there are different ways to approach the sale – for example, a private company offer or, possibly, a Court sanctioned scheme of arrangement – but the implications of either route (not least to the timetable and cost) need to be factored into the thinking. Making sure that there is clarity on the impact of the deal on any share options will also be key and will avoid misunderstandings and delays further down the track.

These are just some of the practical considerations to take into account in the context of insurance broker M&A but, giving proper thought to these items can have a positive impact on the transaction for selling shareholders, potential buyers and private equity investors.

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{119A2726-D87C-4F8B-8658-8A460810BA42}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/eiopa-recommendations-in-relation-to-mobile-phone-insurance/EIOPA recommendations to mobile phone insuranceFri, 15 Jan 2016 13:17:00 ZCorporate insurance and financial servicesThe report also highlights the measures set out in the now agreed text of the Insurance Distribution Directive (IDD) that EIOPA expects will go some way to implement its recommendations.

The UK has one of the largest MPI markets in Europe, with most MPI products being sold on an exempt basis under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 "connected contracts exclusion". UK insurers that distribute their MPI products through exempt channels, such as mobile phone retailers, are already required to ensure that the retailer provides customers with ICOBS compliant policy documentation and that complaints and claims are properly handled. The IDD, however, will go further, imposing broader obligations on insurers, including in relation to the remuneration policies for the sales staff of exempt distributors.

EIOPA's report is based on data from 50 insurance undertakings based in 21 jurisdictions. It has been published against a background of recent, country specific thematic work on MPI in France, the UK and Belgium, which found similar failings in national MPI markets.

In the UK, in particular, the FCA has recently revisited its MPI thematic review from 2013 with a follow-up review, which it reported on in December 2015.  As a result of the follow-up review, a number of firms have already made further improvements to their claims and complaints handling, though the FCA will continue to address remaining issues with individual firms.

Some of the issues identified by EIOPA with the MPI market in Europe will be familiar to anyone who read the FCA's June 2013 Thematic Review into MPI. They include:

  • consumers not being properly informed about what is and what is not covered by their MPI product;
  • unreasonably long and burdensome claims procedures; and
  • consumers being unaware that they were purchasing MPI as an add-on when purchasing a mobile phone, opening a bank account or buying a credit card.

EIOPA makes a number of recommendations to address the issues identified in European MPI markets, which include requiring adequate training for MPI distributors and salespersons, and notes that the agreed text of the IDD will wholly or partly implement some of its recommendations. Under the IDD, insurers will be required to ensure compliance by their exempt MPI distributors (defined as "Ancillary Insurance Intermediaries") with certain requirements of the IDD, including:

  • The requirement for insurance distributors:
    • to act honestly, fairly and professionally in accordance with the best interests of their customers;
    • not to remunerate or assess the performance of their employees in a way that conflicts with their duty to act in accordance with the best interests of their customers; and
    • if MPI is sold as an add-on to or otherwise bundled with another product, to inform the consumer if it is possible to buy the different components separately and if so the price for doing so;
  • the provision of a pre-contract Product Information Document (PID) to consumers;
  • the carrying out of a needs and demands analysis prior to the conclusion of the MPI contract; and
  • the establishment of complaints procedures and provision of point of sale information to consumers about them.

It is clear that under the IDD insurers will have to take on more responsibility for the conduct of exempt sales of MPI and other ancillary insurance products sold on an exempt basis pursuant to the connected contracts exclusion. The IDD is not due to come into force for at least another 2 years, which should give insurers sufficient time to ensure compliance with the IDD.

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{589B841B-2685-4878-A387-D138D0C0B5D6}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/hmt-extends-and-radically-changes-the-senior-managers-and-certification-regime/HMT extends radical changes to Senior Managers and Certification RegimeThu, 29 Oct 2015 13:31:00 ZCorporate insurance and financial servicesHM Treasury has now radically changed the nature of the regimes and the breadth of their application.

On 14 October the first reading of the Bank of England and Financial Services Bill took place in the House of Lords. The second reading will take place on 26 October. In a policy paper published on 15 October the government has set out some of the rationale for the various significant changes that will be brought about by the Bill. The government envisages bringing these changes into force in 2018.Extension of the SM&CR

The government has decided, to extend the SM&CR to authorised financial services firms. The SM&CR will now cover insurers, investment firms, asset managers, insurance and mortgage brokers and consumer credit firms as well as banks. This change will result in the previously retained parts of the "discredited" Approved Persons Regime (APR) being withdrawn.

Whilst HMT acknowledged that SIMR and the changes to the APR applying to insurers made by the FCA "already incorporate some of the substantive ideas and principles underpinning the SM&CR" it is felt appropriate to extend the application of the SM&CR to insurers to ensure the consistent and comprehensive application of this regime across all of financial services. The extension of the Certification Regime, in particular, is likely to create significant additional work for insurers.

The principle of proportionality

In the policy paper it is acknowledged that a one-size-fits-all approach would not be appropriate when applying the SM&CR across financial services. Therefore the government intends that the regulators should ensure that they are guided by the principle of proportionality as they apply the SM&CR and that the extended regime appropriately reflects the diverse business models and the varying size and complexity of firms in the UK.

The reversal of the burden of proof

In addition to the extension of the SM&CR other significant changes were announced. In particular the government has decided to abandon the proposed reversal of the burden of proof (also referred to as the presumption of responsibility). The reversal of the burden of proof in disciplinary proceedings would have meant that senior managers in banks would have had to demonstrate that they were not responsible for regulatory failures in areas for which they had been ascribed personal responsibility. Instead the government has decided to introduce a statutory duty on senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility. This will apply across all authorised financial services firms.

In a press release responding to this aspect of the government's announcement Tracey McDermott said "While the presumption of responsibility could have been helpful, it was never a panacea. There has been significant industry focus on this one, small element of the reforms, which risked distracting senior management within firms from implementing both the letter and spirit of the regime." The regulator's disappointment at the ditching of this key change is quite palpable.

Application of the Conduct Rules to non-executive directors (NEDs)

In another significant change the Bill provides for the PRA and FCA to be able to make Rules of Conduct applying to NEDs. This change was introduced because it was felt that an unjustifiable lacuna had developed in the rules. During the implementation work on the SM&CR the regulators had decided that it would only be appropriate for certain NEDs with specific responsibilities, such as chairmen and the chairs of key board committees, to be senior managers. As a result, of the change, the regulators would not have had the ability to take enforcement action for misconduct against NEDs.

Removal of the obligation to report breaches of the conduct rules

The government has also decided to remove the requirement to report to the regulators all known or suspected breaches of conduct rules by any employees subject to the rules. The government noted that the original requirement for forms to notify the regulators of all breaches presented a "potentially very costly obligation for firms, especially the larger firms which employ large numbers of staff, as they have to put in place detailed systems and controls to ensure compliance." The proposed change to this rule will allow "the regulators [to] ensure that they are notified of any information about employee misconduct in a more proportionate way in their rules."

The key features of the extended SM&CR

In the policy paper HMT has suggested that key features of the extended SM&CR will be:

  • an approval regime focused on senior management, with requirements on firms to submit documentation on the scope of these individuals' responsibilities;
  • a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches in their areas of responsibility;
  • a requirement on firms to certify as fit and proper any individual who performs a function that could cause significant harm to the firm or its customers, both on recruitment and annually thereafter; and
  • a power for the regulators to apply enforceable Rules of Conduct to any individual who can impact their respective statutory objectives.

This high level summary of the core elements of the extended SM&CR reflects the sparse nature of the Bill. The devil will of course be in the detailed rules and guidance to be produced by the regulators in due course.

The costs of compliance

The government has suggested that the costs of preparing for this change will not be excessive because:

  • there will be a substantial reduction in the number of appointments that are subject to prior regulatory approval, (though it is accepted that each of these applications may be slightly more costly);
  • there will be some costs for firms in complying with certification requirements but these are not expected to be large since firms will already have systems in place for monitoring and recording information about employees' performance and suitability to meet their own HR needs; and
  • although there will be additional costs from putting in place systems to ensure employees are notified about, and receive suitable training in, the Rules of Conduct, these costs will not be significant.

However, HMT's assessment of the costs of compliance seem optimistic. Firms that have been readying themselves for 7 March 2016, will be able to attest to the significant costs associated with preparing for the new regimes.

Whilst banks and insurers might mention the potential costs of preparing for the regime, they will no doubt also highlight the importance of being well prepared for this change. For the many firms who will now come within the SM&CR early consideration of the implication of these changes is vital (even if the government may yet further shift the goal posts).

 

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{717C2606-4214-4CF5-AA54-7874F52BF3CF}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/risky-business-further-limits-on-the-vat-exemption-for-would-be-insurance-intermediaries/Risky business? VAT exemption limits for would-be insurance intermediariesThu, 08 Oct 2015 13:47:00 +0100Corporate insurance and financial servicesBen RobertsThe Tax Tribunal last week held that Riskstop Consulting Ltd was not an "insurance agent" and therefore did not make (VAT exempt) insurance-related supplies under the UK rules applicable to insurance intermediaries.

Riskstop was involved in the process of (i) evaluating for insurers the level of risk of a potential insured, and (ii) helping the potential insured to improve its risk profile.

Applying the test formulated in the recent decision in Westinsure (see our earlier blog on that decision), the Tribunal crucially found that Riskstop was not involved in bringing together the insurer and insured for the purpose of concluding insurance contracts.  It did not introduce potential prospects to insurers, nor did it put insurers in touch with prospects.  Riskstop could not therefore be an "insurance agent" under the VAT exemption legislation.  As it was accepted that Riskstop was not an insurance broker, that finding was fatal to Riskstop's claim for exemption.

It is worth noting in particular:

  • HMRC's submissions that the scope of the insurance intermediary exemption should be interpreted restrictively, and that Riskstop's position was "pushing the envelope" of the VAT exemption.
  • HMRC had on more than one occasion confirmed to Riskstop that its services were VAT exempt. However HMRC had subsequently re-examined the services with "fresh eyes", leading to a change of treatment (but not, it was claimed, of policy).

The effect is that Riskstop's services, and therefore other insurance-related services that are not provided by an "insurance agent" (or an "insurance broker") will not qualify for VAT exemption and will therefore be standard-rated.

The Tribunal noted that the decision in Westinsure is to be taken to the Court of Appeal.  Until such time the Westinsure and Riskstop decisions highlight that the VAT exemption must be interpreted narrowly.  Even service providers who are a "fundamental part of the insurance process" (as claimed by Riskstop) may not be able to rely on the VAT exemption, unless they are part of the chain that brings insured and insurer together.  

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{173005A7-34B7-4CD8-A417-7DD2BA2DA79C}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/new-fca-handbook-and-fs-register/New FCA handbook and FS register: Welcome to 21st CenturyFri, 11 Sep 2015 13:55:00 +0100Corporate insurance and financial servicesThe changes not only include a much-needed facelift but also some useful new features.

The FCA Handbook

The Handbook is now easier to navigate. It has a new timeline feature which should help identify relevant dates when changes have occurred. This will be helpful when pointing out that the rules and standards have changed over time. Previously, we would have to invite readers to re-set the 'as at' date.

'Toggling' the links to the statutory instruments that brought about particular rules still doesn't help identify the consultation papers and policy statements that brought them about.

The Handbook has been amended so that glossary definitions pop up in a box within the screen rather than taking you to a new screen. This will make reviewing the Handbook significantly easier for those like us concerned with its precise definitions.

FS Register

The FS register has taken a big step forward in attempting to help protect consumers against unauthorised and potentially fraudulent firms. For the first time, unauthorised firms now appear on the register. These are highlighted by their unauthorised status in red accompanied by a warning. Previously, such information could be sourced by reviewing the warnings published within the News section on the FCA website. The improved accessibility of this information will help consumers check that the firms they are entrusting to purchase financial services products from are authorised and are not simply a scam. This may not be sufficient to stop so-called clone firms but it all helps.

The register now includes consumer credit firms that have interim permission, so you do not have to search the Consumer Credit Interim Permission Register separately.

Comment

Whilst these are only modest improvements, any attempt to make navigating the Handbook or help protecting consumers should be encouraged.

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{A213CCA9-DF0F-4132-9F76-8BCEEA4403C2}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/new-gap-insurance-rules--1-september-2015/September 2015- New GAP Insurance Rules outFri, 28 Aug 2015 14:05:00 +0100Corporate insurance and financial servicesPlease see my blog on this topic on our Financial Services Hub.]]>{2DC5E0E7-A5B2-43A3-87CA-46CCABCCC2D5}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/broker-m-and-a--indemnity-revisited/Broker M&A – indemnity revisitedFri, 07 Aug 2015 07:44:00 +0100Corporate insurance and financial servicesJonathan CharwatFollowing an appeal, the Court of Appeal has recently reversed the decision, finding this time in favour of the seller (who claimed, of course, that the indemnity did not apply).  The court's thinking sets out a range of additional considerations that a good draftsman should have in mind when crafting an indemnity. These are as follows:

  • In interpreting the indemnity clause, the court's aim is to determine what a reasonable person (in possession of all the background knowledge reasonably available to the parties when they contracted) would have understood the parties' intentions to have been.
  • Care should be taken in using business common sense as a determinant. The fact that the deal might have been a poor one for the buyer did not mean that the indemnity clause should be interpreted in the way the buyer contended. The court was not privy to the negotiations between the parties, and what might appear to be lacking in common sense from one party's point of view might have been the product of a compromise necessary to reach agreement. Businessmen sometimes make bad bargains because of a weak negotiating position or poor drafting skills, and it was not for the court to improve their bargain or make it more reasonable by re-writing it. A balance should be struck between the indications given by the language and the implications of rival constructions. The clearer the language, the less appropriate it would be to construe it so as to avoid an "un business-like" result. The more un business-like the result of any particular interpretation, the more likely the court could favour an alternative interpretation. Thus, if the natural reading produced an un business-like result, the court might favour a less obvious reading, though business common sense was not to be invoked to undermine the importance of the natural language.
  • Although there was no good commercial reason to exclude the disputed matters from the scope of the indemnity, certain other facts suggested that it was indeed appropriate to do so, which include: (i) the buyer's recourse in respect of mis-selling was not dependent solely on the indemnity - the buyer would likely have a claim for breach of warranties (and damages as a result); and (ii) the indemnity was not subject to any monetary limit, suggesting that its scope was intended to be narrower (rather than wider).

Whilst these developments are interesting, we would never recommend reliance on these interpretive factors alone.  Indeed, I would not be surprised to see this latest decision appealed. As ever, there isn't much that can trump clear and comprehensive drafting; it is always worth spending a little lawyer time 'up front' to get these important clauses right.

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{3F445DF8-5A20-4ADF-A189-0729D9779634}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/mis-selling-liabilities-under-portfolio-transfers/Misselling liabilities under portfolio transfersTue, 16 Jun 2015 08:20:00 +0100Corporate insurance and financial servicesThis included a portfolio of payment protection insurance (PPI). A dispute subsequently arose as to whether the scheme operated to transfer mis-selling liabilities imposed by the Financial Ombudsman Service FOS in relation to that PPI business.

In a judgment released earlier this month, Mrs Justice Andrews gave an important ruling that any practitioner should have firmly in mind when constructing a scheme. Holding in favour of the transferee, the judgment underlined several key considerations, as follows:

1. Getting the drafting right. In the scheme document, the term "Transferred Liabilities" was defined as "all liabilities of the Transferor (other than the Residual Liabilities and any liabilities under or relating to the Excluded Policies) under or attaching to the Transferred Policies and the Transferred Reinsurances … but excluding, for the avoidance of doubt, the Excluded Liabilities and the Life Component Liabilities".

The principal question was whether this language operated to transfer liabilities other than insurance liabilities relating to the book. This could have been achieved by spelling out the liabilities expressly (or at least using the expressions "liabilities relating to" or "liabilities in connection with") but the judge said that that the words "attaching to" did not - as a matter of construction - achieve this. The judge also pointed out certain apparent inconsistencies in the drafting, pointing out that the draftsman used a wider expression in the very same definition to exclude "liabilities under or relating to the Excluded Policies" from its ambit. From this the judge felt able to deduce that the draftsman's intention behind the definition was indeed more narrow than the transferor had asserted.

2. The value of extrinsic evidence. The judge was willing to look to surrounding documentation for guidance and this included the independent expert's report. Although not a formal legal document, the judge felt able to take it into account when assessing the intended scope of the transfer. In particular, the judge placed weight on the fact that the report made no reference to PPI mis-selling liabilities, or any reserves related thereto, This was enough to persuade the judge that the parties had not intended to such liabilities to transfer (and which duly stayed with the transferor).

3. The court's commercial approach. This case underlines the continuing tendency of the courts to adopt a pragmatic, commercial approach. Indeed the judgement includes a heading as follows: "Does the drafting make sense in context and commercially?" In this section, the judge made clear that it was unlikely that the transferee would have intended to agree (for nil consideration) to "face the prospect of having to pay out millions of pounds, most of which had been received by someone else, as well as substantial amounts of interest, for that other person's wrongdoing. It is inherently unlikely to have agreed to have done so, let alone tacitly". Although the judge did not say this, it may be relevant that the PPI scandal had not, by 2006, really kicked off, meaning that it would not have been a particular issue in the minds of either party at the time of the transfer.

4. Regulatory fines. It was generally accepted that if the FCA were to levy a fine on the transferor for mis-selling the PPI business, the responsibility for paying that fine would remain with the transferor, regardless of the transfer of any other related liabilities to the transferee.

The message is simple. Parties to a scheme (and the scheme document itself) must be crystal clear as to the scope of what it is to transfer and what is not. As a related thought, any insurer that is faced with mis-selling liabilities arising from a book of business that has been the subject of a portfolio transfer in the past may do well to go back through the scheme documentation to assess whether such liability did in fact transfer.

Please contact George Belcher on george.belcher@rpc.co.uk or Vivien Tyrell or vivien.tyrell@rpc.co.uk with any questions arising from this article

 

 

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{416D8CDF-33F4-4FED-82FE-4C47D787CB62}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/private-equity-acquisitions--asset-stripping-rules/Private Equity Acquisitions - Asset Stripping RulesFri, 05 Jun 2015 08:30:00 +0100Corporate insurance and financial servicesIn this blog we look at one particular aspect of the regime, namely measures restricting "asset-stripping" by private equity buyers.

The insurance industry is highly regulated, and it is well known that a variety of regulations/ other rules require that leveraged buyouts of insurance companies be financed with substantially less debt than those in other industries. In the case of a private-equity acquisition, AIFMD adds an additional layer of regulation, and regardless of the business of the target in question.

The AIFMD came into full force in the UK in July 2014, and as such applies to all EEA (and in some circumstances non-EEA) managers of alternative investment funds, which in turn captures most UK private equity fund managers. Amongst its many provisions, the AIFMD contains a prohibition on asset-stripping. Under these rules, the manager of an alternative investment fund (or AIFM) is heavily restricted in the first two years of control (whether acting individually or jointly) of most listed or non-listed companies in its ability to extract assets from that company by way of distributions, capital reductions, share redemptions and buy backs. This includes targets that are insurers or brokers.

This has impacted a number of common private equity structures in particular where the company needs to pays dividends (or otherwise return capital) to the holding company to enable it to service its debt.

There are a number of factors which may allow a buyer to mitigate the effect of the AIFMD asset-stripping rules:

  • Control is defined to mean, broadly speaking over 50% of voting rights in the case of a private company and 30% of voting in the case of a listed company (a different figure may apply elsewhere in the EEA). It may be possible to structure an acquisition that does not trigger this requirement, e.g. by an acquisition of economic rights.
  • The asset stripping restrictions relate to shares and distributions thereon. They do not relate to debt. Hence it may be possible to establish intra-group debt arrangements that have the equivalent effect of a dividend stream.
  • The asset stripping restrictions do not appear to capture intra-group reinsurance, services and other arrangements, and the flexibility that these may offer for premia fees or commissions to be paid by the insurer to other entities in the group. Similarly, cash pooling arrangements and profit or loss sharing arrangements around the group may be means to enable debt service at holdco level. Note however that AIFMD will require an AIFM to have in place arrangements to ensure that any such agreement is on arm's length terms.
  • The parties may agree that certain arrangements are put in place after signing but before closing, e.g. to maximise shareholder debt or to declare dividends which in many cases will, once declared, constitute a debt to the incumbent shareholder at the time of payment. Once in place, it may possible to re-configure such arrangements post-closing.
  • The restrictions do not apply to acquisitions of SMEs, defined as a business with fewer than 250 employees and turnover not exceeding EUR50m or a balance sheet not exceeding EUR43m.
  • The restriction does not apply to distribution of profits that have arisen and are available for distribution in the ordinary course. Hence a high quality business that produces a good dividend steam will continue to be able to pay them. Also the rules would not seem to prevent a portfolio company from making disposals and retaining any gain for future distribution.

We are aware of similar developments in the US where, for example, the New York Department of Financial now requires, in the case of insurers owned by private equity firms, increased capital at target level, a trust account to be triggered where this capital falls below certain levels, prior regulatory approval of changes to the target's business plan and more extensive reporting requirements.

These requirements certainly add challenge to private-equity activity in this area, particularly in the case of weaker targets that require re-organisation. However with care there remains scope for inventive deal structuring in a manner that is both compliant and workable from a business perspective.

Please contact Peter Hill on +44 (0)20 3060 6171 or peter.hill@rpc.co.uk or George Belcher on +44 (0)20 3060 6552 or george.belcher@rpc.co.uk with any queries arising from this article.

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{8ECD49A6-48BE-4E65-A71F-E42B561A2398}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/claims-handling-review-could-lead-to-past-business-reviews/Claims handling review could lead to past business reviewsFri, 29 May 2015 08:39:00 +0100Corporate insurance and financial servicesBut there is an implicit threat of past business reviews where systemic problems are identified.

My concern arises from a rather technical interpretation of the comments in the FCA's press release. Linda Woodall, acting director of supervision at the FCA, said: "We expect all firms to carefully analyse the findings of the review and make any necessary changes to their approach to ensure that SME claimants are treated fairly. ... Where appropriate, firms may be asked to carry out an internal review to determine whether individual instances of poor claims handling reflects widespread issues within the firm." Whilst the identification of 'widespread issues' obliges firm to take remedial action to put things right going forward, there is also a potentially costly retrospective element.

Let me explain. SMEs are, typically, eligible complainants to FOS (under DISP 2.7.3(2)) and, therefore, the DISP rules apply (DISP 1.1.3) to the handling of their complaints. That means that the root cause analysis rules apply to firms dealing with any systemic issue. Under DISP 1.3.6: "Where a firm identifies (from its complaints or otherwiserecurring or systemic problems in its provision of, or failure to provide, a financial service, it should (in accordance with Principle 6 (Customers' interests [or TCF]) and to the extent that it applies) consider whether it ought to act with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by, such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those customers are given appropriate redress or a proper opportunity to obtain it. In particular, the firm should:

(1) ascertain the scope and severity of the consumer detriment that might have arisen; and

(2) consider whether it is fair and reasonable for the firm to undertake proactively a redress or remediation exercisewhich may include contacting customers who have not complained." (my emphasis)

So, if insurers do as the FCA has asked, review their SME claims handling, and find that there have been systemic or recurring failings, they ought – according to the rules and of their own volition – to conduct a past business review and pay redress where found due. This is worth keeping in mind as you read the FCA's report and measure your claims handling against its expectations – and when designing or revising your claims handling systems to meet these standards in future.

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{103E8BDD-2538-4994-B4FF-06E2F6C62355}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-finds-shortcomings-in-the-provision-of-premium-finance-in-the-general-insurance-market/FCA finds shortcomings in premium finance services to insurance marketThu, 14 May 2015 08:51:00 +0100Corporate insurance and financial servicesThis issue lies at the intersection of established and new regulatory regimes (insurance and consumer credit (as I have previously explained)); both of which are under renewed and intense scrutiny.

Focussing its review on the online purchase of private motor and household insurance products (which, according to the report, was estimated to account for 53.1% and 46.7% of UK private motor and combined household insurance sales respectively in 2014), the FCA's findings reveal shortcomings in the information provided by both those who arrange and provide premium finance to retail customers.

The report highlights the following key findings based on a desk-based review, up to the point of inputting payment, of the websites of 13 general insurers and 30 general insurance intermediaries (including four price comparison websites) between October 2014 and January 2015:

1.  There is a lack of clear and appropriate information on payment options and the different costs associated with these choices

(a)  Premium disclosure and finance options

Insurers and intermediaries are required in the initial stage of the customer's online purchase journey to provide sufficient, clear and consistent information on the overall cost of the insurance product and how this is affected if a customer chooses to pay for it in instalments.  In 43% of cases, this was not the position.

(b)  Information provided via a representative example

Where firms are providing premium finance under a regulated credit agreement or credit broking and where the financial promotion includes a rate of interest or an amount relating to the cost of the credit, it is a FCA requirement that customers are provided with a representative example.  The information required in the representative example must be of equal prominence, and more prominent than other cost information.  It must also be more prominent than any indication or incentive triggering the representative APR. 

The FCA found in the majority of cases either a representative example was not provided, or this did not include all the required information or it was not in the appropriate format. Furthermore, in 47% of cases, certain information was given undue prominence.

(c)  Annual Percentage Rate charged

The FCA identified a wide range of APRs charged.  In 50% of cases, the APR ranged from 26 to 40%.  In a small number of cases, no APR was shown.  The FCA notes that it is important that customers have appropriate information to compare pricing and understand the impact that the cost of finance has upon the overall cost.

Good practice involves:

  • Clearly show the total cost of paying for insurance by instalments against the cost of a single upfront payment.
  • Information required in a representative example contained in a financial promotion must be given equal prominence and greater prominence than any other information relating to the cost of the credit in the financial promotion.
  • A representative APR should be given greater prominence than any indication or incentive triggering the representative APR.

2.  There is a lack of appropriate information about the instalment option being offered

The lender or a credit broker acting on its behalf is obliged to provide a customer with a pre-contract information form (the SECCI) and also an adequate explanation of the proposed agreement (including the key risks and the principal consequences of non-payment).  The FCA notes that: (i) an adequate explanation was provided in only 34% of cases and was contained in a separate link in the majority of cases; and (ii) the SECCI was not provided in 81% of cases.

Good practice involves:

  • Pre-contract information and explanations should be provided early in the customer's purchase journey in order to ensure customers are treated fairly and their information needs are met to enable customers to make informed decisions about the options being presented.

3.  There is a lack of consumer understanding about the services being provided

Where firms are acting as credit brokers, the FCA expects firms to detail: (i) the identity of the lender (where known); (ii) the nature of the service that the firm provides; (iii) the basis of the firm's relationship with the lender (including whether it works exclusively with one or more lenders or works independently); (iv) the existence of any commission or remuneration arrangements between the firm and the lender that might affect the firm's impartiality in recommending a credit product or might have a material impact on the customer's transactional decision; and (v) the fee, if any, payable by a customer to the firm for its credit broking services.

(a)  Activity disclosure and relationships between parties

The FCA found that, in the majority of cases, the capacity in which the credit broker was operating and its relationship with the lender was unclear and the details of the lender was not always clearly presented prior to the first payment screen.

In addition, in over 75% of cases, the FCA notes that it seems likely that firms were not operating as independent credit brokers and had an exclusive arrangement with a lender which should be disclosed to the customer.

(b)  Financial arrangements between parties

Generally, firms acting as credit brokers did not provide, prior to the first payment screen, the existence of any financial remuneration paid by the lender.  The report notes that 83% of firms used third party finance providers and may be remunerated by the finance provider through a commission or other arrangement which the FCA would expect to be made clear to the customer.

(c)  Fee disclosure

The FCA describes the overall quality of the disclosure where credit broking fees (ie fees payable by the customer to access the credit facility) were charged was poor.  In some cases, disclosure was provided in separate terms and conditions and in other cases, the fee was not included in the representative example.

Good practice involves:

  • Ensuring that the customer receives sufficiently clear information that enables them to understand the basis on which a broker is acting for them in relation to each product they purchase and how the broker is being remunerated for this.

4.  More to come

The FCA has indicated that it will be taking a range of actions to address potential risks to customers which will include supervisory engagement with firms to ensure that they address specific issues identified during the review, requesting further information and taking appropriate action with individual firms where there is an indication of specific potential failing or poor practice and engaging with the wider industry, including trade bodies, and consumer bodies to provide feedback on its findings and expectations.

In light of this, insurers and insurance intermediaries should consider now the content of this report, review their customer purchase journeys in relation to providing or arranging premium finance for their general insurance consumer customers both in respect of online sales and other sales channels to ensure they comply with the FCA's expectations.

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{C2542856-2DB9-4CE1-AA77-843FEA648110}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/diverted-profit-tax-captive-insurers/Diverted Profit Tax - captive insurersFri, 08 May 2015 09:13:00 +0100Corporate insurance and financial servicesThe first example concerns a standard intra-group reinsurance arrangement with an offshore vehicle. The second example concerns a captive insurance arrangement.

In both cases, the question to be addressed is "whether or not, at the time of making the provision, it was reasonable to assume that the non-tax financial benefits referable to the insurance transactions outweigh the financial benefit of the tax reduction".

In the first example, the HMRC appears to accept that this test would ordinarily be satisfied, and hence the DPT would not apply.  This is because the tax treatment of the premium etc is secondary to the regulatory capital and other benefits that would arise.

In the second example, the HMRC does however raise some potential concerns.  The scenario described is relatively common, and deserves a little analysis.  In the scenario, a global "widget" manufacturer has in place an insurance programme some of which is placed with an offshore (intra-group) captive.  On the facts (more detail below), the HMRC concludes that the DPT would apply.  The salient (fictitious) fact pattern that supports this (imaginary) conclusion is as follows:

  • the functions performed by the captive are minimal;
  • most of the underwriting and actuarial risk pricing is outsourced to a specialist insurance consultancy;
  • assessment and management of the group's insurance risk is directed and performed by the group's parent;
  • the captive employees just three people part-time (including a senior underwriter);
  • the premium is on arms-length terms; and
  • the group has sufficient liquid assets to cover the amount insured by the captive.

The HMRC appears to take these factors together to arrive at a conclusion that the test in that case would not be satisfied - ie there are no commercial motives for the transaction other than the tax saving.

Is this however the right conclusion? For instance, the fact that a business is capable of absorbing a loss (absent insurance) does not render the arrangements a sham  It is of course entirely sound financial planning to guard against large exposures, whether or not the company could otherwise "afford" them.

Captive users and captive operators should nonetheless consider the extent to which their arrangements share any of the elements set out above, and to formulate their defences in the event of any HMRC challenge.

At a rate of 25%, a DPT charge on premiums payable to a captive would be an unwelcome surprise.

For any further information on this blog please contact George Belcher or David Gubbay.

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{1422733C-C110-469B-88F5-B7EDE93EEEA8}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/budget-2015-impact-on-insurance/Budget 2015 - impact on insuranceFri, 20 Mar 2015 09:22:00 ZCorporate insurance and financial servicesThe first concerns insurance linked securities (ILS). To date most ILS activity has taken place offshore, which George Osborne now seeks to change. What does this mean in practice? A number of ILS funds are already listed in the UK. The key is now to encourage them to undertake their substantive activity in the UK – i.e. to establish their entities (otherwise known as insurance special purpose vehicles) in the UK, and likewise to retain in the UK the proceeds of the notes that these ISPVs issue to the capital markets. So what can the government do? Broadly speaking it can consider Improving (i) the relevant regulatory regime; and (ii) the tax treatment of such arrangements.

Changes are already underway for the former, as a result of Solvency II which will be implemented across the EU from 1 January 2016. The PRA's current rules for ISPVs will be replaced in their entirety by the Solvency II ISPV rules. What does this mean? The PRA's current rules - which to date have hardly ever been used given the unpopularity of setting up an ISPV in the UK - are in fact quite light touch. These rely on a clever device whereby a cedant may only take credit for risk ceded to an ISPV if it obtains a PRA waiver, which the PRA will provide only if its case-specific requirements are met. This will be replaced on 1 January 2016 with a highly prescriptive and detailed set of requirements which are both mandatory and "maximum-harmonising".  So the government will not have much flexibility here – its hands are effectively tied. This shifts the onus onto the tax treatment of ILS arrangements, and we will watch this space with interest.

The second was the confirmation that the Diverted Profit Tax (DPT), announced in the December 2014 Autumn Statement, will be enacted with effect from 1 April 2015. Dubbed the "Google Tax", the draft DPT legislation is widely cast and could apply to a large UK insurance group which transacts with an associated offshore company which pays little or no tax. We will need to see how the legislation looks when the Finance Bill comes out next week, as there has been a lot of lobbying in the past two months. In addition HMRC has not yet published its guidance on how it will interpret and operate the legislation in practice.

The legislation is complex but as currently drafted in essence it will only apply where the offshore entity and/or the transaction lack economic substance. This will look at the financial benefit of the tax reduction or the contribution of the economic value.

As a broad matter it may be that the DPT will not apply in practice to insurance/reinsurance arrangements provided the sums paid are arms' length and the offshore entity has sufficient substance in terms of resources and personnel.

Last year a different anti-avoidance provision was enacted – see link - dealing with the transfer of corporate profits. HMRC guidance on this did include material on intra-group reinsurance to the effect that this would not normally be caught, and the rule would only apply if the normal commercial motives for reinsuring were absent.  See our earlier blog on this for further detail.

We will need to see if the revised legislation, and the guidance once published, contain any particular safe harbours for the insurance sector.

If you have any queries, please contact George Belcher or David Gubbay.

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{084EB2AB-202A-458D-9EA8-5E3F9ACFDC7E}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-prepares-for-consumer-rights-act/FCA prepares for Consumer Rights ActFri, 13 Mar 2015 09:32:00 ZCorporate insurance and financial servicesThe FCA stated that, whilst the removed undertakings are still binding as between the firms who gave them and the FCA, they may no longer reflect the FCA's current view on unfair contract terms. Accordingly, other firms should not rely on the content of them.

The Consumer Rights Bill is still passing through Parliament and the current expectation is that it will receive Royal Assent in Q2, 2015 and come into force in October 2015. The Bill brings together and builds upon the existing law on unfair terms currently contained in the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). As you'd expect, the Bill maintains much of the language of the Europe-derived UTCCRs but strengthens them in a number of areas, including by extending them to cover negotiated, as well as standard, terms in consumer contracts; and consumer notices relating to rights or obligations between a trader and a consumer.

The Bill also adds to the "grey list" of consumer contract terms that may be regarded as unfair, which is currently contained in the schedule to the UTCCRs. Of most relevance to insurers is the addition of terms that have the object or effect of requiring the consumer to pay for services which have not been supplied, if the consumer ends the contract. Under FCA rules implementing the distance marketing directive, insurers are currently required to reimburse the premium where a consumer cancels his or her policy within the relevant "cooling-off" period, but policies are often silent on what happens to the premium where the policyholder cancels after this period. Once the Bill is in-force, a proportionate amount of the premium will have to be returned – and policy documents amended accordingly.

The Bill retains the current UTCCR exemption to the 'fairness test' for terms that specify the main subject matter of the contract (e.g. coverage exclusions) or set the price but adds a new requirement that, to benefit from this exemption, not only must terms be drafted in plain and intelligible language (as is currently the case), but they must also be "prominent" i.e. brought to the consumer's attention in such a way that an average consumer would be aware of the term. Under the Bill, the exemption will not apply to grey listed terms.

The CMA's detailed guidance on unfair terms in consumer contracts, on which it is currently consulting (see above), will replace the OFT's guidance of September 2008 (OFT311) and will be the CMA's main guidance on the unfair terms provisions contained in the Bill. The CMA expects to issue this guidance in final form in May 2015.

In light of the above, firms should be reviewing the draft CMA guidance on unfair terms in consumer contracts and starting to think about how they might need to amend their product development and distribution policies and procedures to enable them to comply with the Bill when it comes into force, later this year.

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{73CEA45F-B29C-4088-8BD3-9B843FFC5140}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/senior-insurance-managers-regime-proposals-for-neds/Senior insurance managers regime – proposals for NEDsFri, 27 Feb 2015 09:40:00 ZCorporate insurance and financial servicesJonathan CharwatAt the time, the PRA and FCA had not yet consulted on how this would affect non-executive directors (NEDs) but have recently addressed this.

Under these proposals, the current PRA non-executive director (CF2) 'approved person' function would be replaced by: (i) PRA functions for NEDs who perform each of the following roles: chairman, senior independent director and chair of risk, audit and remuneration committees; and (ii) an FCA function for the NED who is chair of the nominations committee.
In this note we refer to these as 'pre-approved NEDs'.

Any NED outside of these roles (in this note referred to as a 'standard NED') would not require pre-approval. The proposals do however provide that such standard NEDs will be treated as 'key function holders' (described in our blog last year), and will consequently have to observe a number of the new 'Conduct Standards'. In addition, firms will be required, on an on-going basis, to assess such standard NEDs' fitness and propriety. See paragraphs 3.8 to 3.11 of the proposals for further detail on this.

The FCA had originally planned to include all NEDs in the pre-approval regime but rowed back on this, likely as a result of industry concerns that a blanket inclusion would encourage standard NEDs to take on a more executive role - and in turn impair their independence.

Furthermore, it is proposed that:

  • all Solvency II firms, other than incoming third country Solvency II branches (see below), will be required to have a chairman. They will only need to have other NED functions to the extent that function is required by other UK or EU legislation;
  • NEDs in third country Solvency II branches will not need to be pre-approved except where justified in light of the undertaking's business, organisation and management of its affairs;
  • employees and officers of group, holding or parent companies, who exercise significant influence on the affairs of the subsidiary firm, may also be subject to pre-approval as a group 'entity senior insurance manager'. An odd quirk to this is that a parent company NED, who exerts significant influence on a subsidiary firm would require pre-approval by the PRA, whereas an equally influential NED of the subsidiary firm may not.

Hence, on the one hand life may become arguably easier for standard NEDs who will no longer require pre-approval. On the other hand, life is set to become more difficult for those NEDs who will continue to require pre-approval, with a more defined roles and the revised conduct rules heightening the sense of regulatory scrutiny. Whilst no insurance NED will be subject to any principle of any presumption of guilt or "reverse burden of proof" as in the banking sector, they will feel increasingly exposed for perceived failures in their areas of responsibility.

The FCA and PRA have requested responses to the latest consultation by 27 April 2015. They intend to revert generally on both consultations in this area "in the coming months".

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{5A4B609A-D7E9-4818-9593-B9409B3E13DB}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/uk-vat-changes-following-skandia-decision/UK VAT changes following Skandia decisionThu, 12 Feb 2015 09:47:00 ZCorporate insurance and financial servicesBen RobertsThe announcement follows the European Court of Justice (ECJ) decision in the Skandia case, discussed here last year. The ECJ ruled that services provided by a US insurer to its Swedish branch were subject to VAT in Sweden, a decision that caused immediate concern for insurers and other financial services groups across Europe. The settled approach had been to disregard such intra-entity supplies for VAT purposes.

As noted in our earlier blog, the UK VAT grouping rules differ from those in operation in Sweden. Whilst in Sweden only the Swedish branch of an overseas company (and not the company itself) can be registered as part of a Swedish VAT group, in the UK the company (in its entirety) can be part of a UK VAT group.

In light of this differing approach, HMRC has taken time to consider what – if any – changes to the UK rules are required.

HMRC's conclusion is that no legislative changes are necessary. To adapt the facts of the Skandia case, if the US insurer had a UK branch the whole legal entity (US HQ and UK branch) can continue to become part of a UK VAT group. Supplies between the HQ and branch should remain disregarded for UK VAT purposes.

That said, the ECJ Skandia decision has led to a change in HMRC practice.

From 1 January 2016 (or earlier, by taxpayer election):

  • if a member state adopts a 'Swedish-style' approach to VAT grouping, whereby only the local branch (and not the entire entity) can be part of a VAT group, the local branch (Branch) will, for VAT purposes, be treated as part of a separate taxable person to the UK headquarters (HQ);
  • UK-based businesses must treat intra-entity supplies of services  by, or to, such Branch as distinct supplies attracting potential VAT charges;
  • services provided by Branch to HQ will usually, if taxable, be treated as taking place in the UK and subject to the VAT "reverse charge" rules;
  • services provided by HQ to the Branch will usually be treated as taking place outside of the UK (but may affect HQ's right to claim input tax credit);
  • the same treatment will apply to supplies between Branch and other UK VAT group members, if HQ is part of a UK VAT group.

HMRC has promised to confirm which of the other member states adopt a 'Swedish-style' approach to VAT grouping.

The revised UK VAT treatment could result in irrecoverable VAT for insurance groups and other financial services groups, if taxable supplies provided by a branch to its UK headquarters are now subjected to UK VAT.

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{278967D7-AF3C-47C9-A461-022956CA96B7}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/portfolio-transfers-in-2015-pra-update/Portfolio Transfers in 2015 - PRA UpdateFri, 23 Jan 2015 05:58:00 ZCorporate insurance and financial servicesThis is prompted by competing pressures on its limited resources and what it describes as a "spike" in the number of firms seeking to complete transfers in advance of implementation of Solvency II in January 2016.

The PRA will continue to work on transfers where the fee has been paid, and which are on track to complete in 2015. However, it will be more selective in committing to new transfers for the rest of 2015 and more specific about what it will and won't do. It will consider new transfers on a case by case basis, and only where the timetable is "credible and realistic". Where the PRA does commit to a new transfer:

- it will review only documentation in final draft form

- it must receive this - including the final draft independent expert's report (IE Report) - at least six weeks before the directions hearing

- if not, it may request the applicant to defer the directions hearing

- it will not review anything (e.g. policyholder communications and waiver requests) until it has received the IE Report.

Firms that fail to get their transfer done this year will then be reliant on the Solvency II transitional provisions to escape its effects. Given that these are in some cases as short as one year (e.g. for MCR) we can expect 2016 to be a busy year too.

If you have any queries related to this, please contact George Belcher on +44 (0)20 3060 6552 or Vivien Tyrell on +44 (0)20 3060 6153.

 

Transfers of Insurance Business under Part VII FSMA - letter from PRA Insurance Directors on 21 January 2015

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{06522F4B-377C-4938-9374-2EFC4830E766}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/annual-insurance-review/Annual insurance review]]>Fri, 16 Jan 2015 06:15:00 ZCorporate insurance and financial servicesJames MeeI am happy to inaugurate the Corporate Insurance Hub for 2015 with RPC's annual round-up of the key legal developments in 2014.  I trust you find this useful, and we look forward to keeping you informed throughout the year.

 

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{BB7F01BB-09D8-4290-8F10-9B1303D22518}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/senior-insurer-managers-all-change/Senior insurer managers – all change!Tue, 16 Dec 2014 06:30:00 ZCorporate insurance and financial servicesThe regime will replace the PRA's current Controlled Functions (CFs) with a number of new designations.  A helpful summary table is set out in Annex 1 of the associated FCA paper (discussed further below).

On one hand, the regime may be narrower than currently since it will no longer include the CF1 (director) function and hence will not necessarily cover all board members.

On the other hand, the PRA will require that so-called "key function holders" are fit and proper. This expression is left undefined – and the firm must itself determine what constitutes a key function – but this is intended to capture all other individuals who effectively run a (re)insurer. Note also the brand new CFs of Group Entity Senior Manager (designed to capture senior executives in insurance holding companies) and Chief Underwriting Officer (for general insurers and managing agents). In addition:

  • the PRA will revise the conduct standards for approved persons and set out a set of factors as to whether a person is fit and proper.
  • a firm will need to allocate each of the following prescribed responsibilities below to one or more approved persons (and possibly NEDs – see below): (i) ensuring that persons performing a key function are fit and proper; (ii) leading the development of the firm's culture and standards; (iii) embedding the firm's culture and standards in its day-to-day management; (iv) production and integrity of the firm's financial information and regulatory reporting; (v) allocation and maintenance of the firm's capital and liquidity; (vi) development and maintenance of the firm's business model; (vii) performance of the firm's ORSA; (viii) induction, training and professional development of all the protection of staff raising concerns; (ix) maintenance of the independence, integrity and effectiveness of the whistleblowing procedures, and the protection of staff raising concerns; and (x) oversight of the firm's remuneration policies and practices.
  • a firm will need to maintain a "Governance Map", providing details of those who effectively run the firm, including "key function holders", and to record individual responsibilities. In enforcement cases, the map would be used as evidence of individual responsibility for the area where the breach occurred. The PRA has said that it will use it to identify those individuals to whom specific regulatory queries should be directed as well as to identify which are ultimately responsible.

Financial Conduct Authority

The FCA has also proposed amendments to its own CF regime.  These will comprise (i) changes to the approved persons assessment process; (ii) additional "significant influence" CFs to replace those that would fall away from PRA supervision under the proposals discussed above; and (iii) new conduct rules.

Non-Executive Directors

What about NEDs? Neither the PRA's nor the FCA's proposals consult on the treatment of NED (other than to the extent necessary to implement Solvency II). This is because they have intentionally held fire on this, pending the outcome of a separate consultation undertaken in July 2014. This will be dealt with in a further paper in early 2015.

Read across to banking developments

These proposals do bear some parallels to the proposals for senior bankers made in July 2014. However, they will not include any presumption of guilt or "reverse burden of proof"; any criminal offence related to a decision causing a firm to fail or any "self-certification" regime.  That said, despite its name, the Banking Reform Act, did introduce some changes for all authorised firms, including (re)insurers. Section 28 of the Act, which came into force on 25 July 2014, extends the period within which the regulators can pursue relevant persons from three years to six years in certain circumstances. This will further sharpen the mind of anyone considering a senior role.

Timeline

Consultation on the proposals will close on 2 February 2015.  The new regime will come into effect on 1 January 2016.

Comment

Although this overhaul of the CF regime is not radical - it represents the continuation of a number of regulatory themes that are already well-entrenched - the aggregate effect is certainly a tightening of the noose.  We can expect lively discussions within firms as to who is doing what and how this will be portrayed on the dreaded governance map. A senior executive will need to think long and hard about taking up a role - not just how he will perform it, but also the situation that he will inherit. This includes the hapless "key function holder" who will find himself in the unenviable grey area of not necessarily being an approved person but all the same subject to oversight, and conceivably regulatory sanction. We can expect increased due diligence and both ways – from the firm to the individual, but also vice versa. Nobody wants to be the PRA's or FCA's first scalp.

Co-authored by Erica Lehmann

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{08566D03-DD7F-4389-B582-0B90B7765C6F}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/ensuring-the-end-of-terror/Ensuring the end of terror?Thu, 04 Dec 2014 06:36:00 ZCorporate insurance and financial servicesIf successful she will go some way to restoring the Ransom Act of 1782 which made the payment of any ransom illegal (until it was repealed in 1864). The relevant clause in the Bill is set out below.

(1) The insurer under an insurance contract commits an offence if –

(a) the insurer makes a payment under the contract, or purportedly under it,

(b) the payment is made in respect of any money or other property that has been, or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism, and

(c) the insurer or the person authorising the payment on the insurer's behalf knows or has reasonable cause to suspect that the money or other property has been, or is to be, handed over in response to such a demand.

Terrorism is defined, for these purposes, in the Terrorism Act 2000, which is clear enough, but how would the new provisions work in practice? To take an example, would this apply to ransoms paid to pirates? On the East Coast of Africa it may be easy to find a link with the religious/political terrorism which Theresa May intends to capture. But otherwise do the terrifying activities of pirates themselves constitute terrorism? This may not always be clear, particularly given the opacity of many terrorist organisations. In a 2010 case, it was held that payment of a ransom to Somali pirates was neither illegal nor contrary to public policy, and further there was no public policy which would prevent an insured from recovering a ransom payment from his insurer. How would this case be decided under the proposed legislation? It will be important to get clarity on these points, not least because the clause goes on to extend culpability to a director, manager, secretary or similar, as well as the insurer itself.

We will monitor the progress of the bill with interest.

Counter-Terrorism and Security Bill

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{A693752C-75A8-4F33-B43F-863186470C25}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/broker-m-and-a-how-far-does-your-indemnity-go/Broker M&A –how far does your indemnity go?Fri, 28 Nov 2014 06:41:00 ZCorporate insurance and financial servicesJonathan CharwatIn 2010, Capita Insurance Distribution acquired Sureterm Direct, a specialised motor insurance broker. Shortly after the acquisition, Sureterm's employees raised concerns about former sales processes. Sureterm duly informed the FSA and agreed to carry out a customer remediation exercise as a result of which Sureterm was obliged to pay £1.35m to customers in redress.

Capita then sought to rely on an indemnity given by the sellers in the sale agreement to recover this amount, together with costs and interest. The indemnity was expressed to cover: "...all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company...."

The issue was whether this language captured the redress payments, given that these resulted not from claims or complaints registered with the FSA, but from a voluntary approach to the FSA by Sureterm. The court found that the indemnity did indeed capture the amounts claimed. This was the result not just of a close legal analysis of the language of the clause, but also of the commercial and regulatory context in which the clause was negotiated.  The court pointed out that the indemnity would have been triggered regardless of the manner in which the FSA became involved, giving in particular the following examples: employee whistleblowing, management audit/review, a market-wide review, or a consumer complaint. It stated that the indemnity would apply regardless of whether the company had invited customers to lodge a claim or simply sent customers a cheque in the absence of a formal claim in fulfilment of its obligations (note this differs from the general position under a professional risks liability policy, where a payment is generally only covered if it follows an express customer claim or review opt-in).

This case is interesting since it demonstrates the court's awareness of the changed regulatory environment that brokers operate in and the self-regulation that they are increasingly expected to undertake and it is clear to us that the court was in turn influenced by these developments. It is also reminiscent of the court's approach in a case in 2012 where it upheld a professional indemnity claim by Standard Life in respect of a pre-emptive settlement amount it had paid in advance of a fully formulated legal claim, as required by the policy. It is clear that the courts are increasingly willing to look beyond the black letter of the contract to the reality of the commercial environment. Notwithstanding the court's approach in this case, we would strongly advise buyers that indemnities of this nature be clearly expressed to cover all forms of regulatory redress, whatever the origin.

Recent case

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{4D89831F-B274-4445-9832-1D8FA76841BE}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/in-the-garden-without-pay/In the Garden without PayMon, 10 Nov 2014 06:46:00 ZCorporate insurance and financial servicesHe rolled the dice, choosing not to give notice and refusing to work.  The employer responded: affirming the contract and withholding salary.  The employee lost.  Although the facts relate to an equity derivatives broker, they would apply equally in the case of an insurance broker.  With substantial consolidation, restructuring and yes, ship-jumping, afoot, employers and employees should heed the warnings and learn the lessons contained in this alert from Kelly Thomson in our Employment team.

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{5A67315B-B3B9-4A94-A7BF-2E072D1C8251}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/limits-on-the-vat-exemption-for-insurance-intermediaries/Limits on the VAT exemption for insurance intermediariesThu, 06 Nov 2014 06:49:00 ZCorporate insurance and financial servicesBen RobertsBackground

For insurance "intermediary" services to be VAT-exempt, all of the following must be met:

  1. an insurance broker or agent;
  2. provides services of an "insurance intermediary";
  3. where those services relate to an insurance transaction; and
  4. are provided by the broker/agent in the course of acting as an intermediary

Bringing together would-be insurers and insureds counts as "insurance intermediary" services for these purposes.

Facts

The taxpayer (Westinsure) provides an 'interface' between brokers and insurers. The brokers pay a joining fee and annual membership fee (calculated by reference to the premium income generated by the broker) to join the taxpayer's alliance. The taxpayer identifies suitable insurers to offer 'exclusive' products, and beneficial commissions, to its member brokers. These insurers pay an annual commission to the taxpayer.

According to the published decision, the advantages of the Westinsure arrangement are that:

  • the buying power of the broker members is harnessed to elicit more favourable terms and commission from insurers;
  • minimum business requirements, often imposed on brokers by insurers, are waived.

Westinsure argued that its services to broker members were VAT-exempt insurance intermediary supplies. HMRC disagreed, stating that the services should be standard-rated for VAT.

Decision

The Tribunal held that the taxpayer was not entitled to the VAT exemption:

  • the exemption applies only to services provided by an agent or broker.  The question to ask was whether the taxpayer's activities amount to what an agent or broker typically does.
  • a person is not an agent or broker if there is no relationship (direct or indirect) with the potential insured.
  • on the facts, the taxpayer was not an agent. It was not acting on behalf of insurers.
  • the taxpayer could only be a broker if it provided a service to a potential insured by finding a suitable insurer. On the facts, the taxpayer was not a broker. It did not negotiate the terms of specific transaction, nor act for would-be insureds, nor assess the needs of would-be insureds. There was no relationship with the potential insured.

Comment

Although recent decisions in this area (notably InsuranceWide) have demonstrated that indirect relationships with a potential insurer and insured may be sufficient to enable a supply of services by an intermediary to qualify for VAT exemption, it remains critical that the intermediary is part of the chain bringing insurer and insured together. In Westinsure, the taxpayer merely facilitated its broker members forming such a chain.

Tax Tribunal decision

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{5D97C3F5-2514-40B3-A171-1CD33272CCCC}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/insurance-contract-law-reform-a-reinsurance-angle/Insurance contract law reform – a reinsurance angleTue, 04 Nov 2014 06:55:00 ZCorporate insurance and financial servicesRichard BreavingtonAs there are no special rules relating to reinsurance, and it is possible to contract out of the new provisions, some might think that reinsurers will be able to continue as before and ignore the new regime. We explain why this might not be the best approach.

The Consumer Insurance (Disclosure Representations) Act 2012 came into force on 6 April 2013. The changes made in Act in relation to consumer insurance been the forerunners to many of the changes in the Insurance Bill relating to business insurance. However, consumer insurance is a long way from complex reinsurance arrangements between two large and sophisticated businesses.

Disclosure and misrepresentation

The key changes in the Bill relate to disclosure and misrepresentations. They can be summarised as follows:

  1. There is a duty on the insured to make a "fair presentation" of the risk. This is largely similar to the Courts' current interpretation of the duty of disclosure.  However, the insured only has to provide enough information to put a prudent insurer on notice that it needs to make further enquiries for the purposes of revealing material circumstances.  This could be seen as a movement towards the insurer having greater responsibility for asking questions.
  2. There remains a duty on the insured to avoid any representation which is not substantially correct and made in good faith.
  3. Where these duties are breached:

a)  If the breach is deliberate or reckless, the insurer can avoid.

b)  Otherwise, the remedy will be "proportionate".  If the insurer would not have entered into the contract if it had known the information not disclosed, the insurer can avoid.  If the insurer would have insisted on different terms, those terms will apply. If the insurer would have charged more premium, the quantum of any claim will be proportionately reduced.

So, what issues could this leave for reinsurers and reinsureds?

Firstly, the shift in onus towards underwriters' enquiries could leave reinsurers more reliant on their reinsureds' underwriters to ensure that appropriate questions are being asked, particularly in relation to treaty reinsurance.  Currently, if the underlying insured has made a material non-disclosure, the reinsured can avoid and the reinsurer will have no liability.  If the underlying insured can successfully counter this by indicating that the reinsured did not ask the right questions, then the reinsurer will face a liability, even though the questioning by the reinsured is outside of the reinsurer's control.

Secondly, where the underlying insured has made a material non-disclosure, the reinsurer's liability could depend on the reinsured's attitude towards the non-disclosed information.  Currently, the situation would be simple: avoidance or cover.  Under the reforms, the reinsurer's position would depend on the attitude of the reinsured, and the attitudes of reinsurer and reinsured might not match.  For example, suppose a reinsurer has a large layer in a catastrophe excess of loss tower.  A non-disclosure relevant to the chances of a major catastrophe might have only a limited effect on the attitude of a reinsured (whose liability is effectively capped by the excess of loss reinsurance).  It might lead to a change in premium only – so that there will still be cover for a proportion of the claim.  However, the non-disclosed facts might well have been enough for the excess of loss reinsurer to refuse cover or to insist on a higher excess.  Nevertheless, the reinsurer will be stuck with it.

Warranties

The changes in relation to warranties that have made it into the Insurance Bill are limited. A warranty will be suspensory only – once it is remedied, there will be cover from that time.  While this provides increased fairness at an insurance level, many of the warranties contained in a reinsurance contract will not be capable of being remedied.  For example, warranties in a reinsurance treaty as to the type of business which has been declared to the treaty will be breached if the wrong business is ceded to the treaty.  However, the "excluded" cession might be difficult or impossible to undo.

Contracting out

It will be possible to contract out of some or all of the effects of the Insurance Bill.  There are specific requirements as to clarity and transparency that any contracting out clauses must meet.  In particular, the reinsurer must take sufficient steps to draw to the attention of the reinsured any terms which are more disadvantageous than the regime in the Bill.  Any such terms must also be clear and unambiguous as to their effect.  These requirements are unnecessarily cumbersome given that reinsurance contracts will be agreed between sophisticated parties.  However, the practical effect is that careful drafting will be needed in order to avoid leaving room for potential challenge, particularly until case law and established market practice as to the application of the transparency requirements has developed.

Even aside from the transparency requirements, from a reinsurer's perspective, it might not be possible to contract out of some of the effects of the Insurance Bill unless they are replicated in every policy issued by the reinsured.  For example, if an underlying insured has failed to disclose a material fact but there is still cover because the reinsured would have written the cover anyway (on different terms or for different premium), the reinsurer cannot contract out of the effect of this on its liability.  The reinsurer might have contracted out of proportionate remedies between it and the reinsured, so as to allow avoidance if the reinsured makes a material non-disclosure.  However, the reinsurer cannot so easily contract out of the effect of the reforms at the underlying insurance level if the underlying insured makes a material non-disclosure.

Conclusion

The reforms in the Insurance Bill have been a long time in the making.  However, they do not make any allowance for the particular subtleties of reinsurance and so issues such as those identified above will be left to the reinsurance industry to address.  The first step

is an awareness of how to contract out and the potential gaps and effects which might not have been at the forefront of reformers' minds (and hence this article).  The challenge then will be how best to address these once the Insurance Bill comes into force.

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{6BEBAE92-704E-4536-A25D-ECBD3B4A7688}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/root-and-branch-changes-to-eu-vat-rules-on-intra-entity-supplies/Root and branch changes to EU VAT rules on intra-entity supplies?Thu, 25 Sep 2014 07:05:00 +0100Corporate insurance and financial servicesBen RobertsThe facts of the case concerned the supply of externally-purchased IT services by the US arm of Skandia (USHQ) to its branch in Sweden. The Swedish branch, which was registered as part of a Swedish VAT group, then on-supplied the IT services to other Skandia group companies (both within and outside the Swedish VAT group).

The Swedish tax authorities assessed the Swedish branch to VAT on the supplies it had received from USHQ.

The ECJ held that the Swedish branch was not an independent "taxable person" for VAT purposes in its own right. However, it was part of a Swedish VAT group the members of which, when taken together, do constitute a single "taxable person". The result, in the
eyes of the ECJ, was that USHQ was deemed for VAT purposes to have made a supply to the VAT group and not to its Swedish branch. Of potential significance is that the USHQ was not itself a part of the VAT group. This resulted in a Swedish VAT charge on the supply between USHQ and its Swedish branch.

Before going any further it is important to recognise that, despite attempts by the European Commission to harmonise the way in which each Member State provides for VAT grouping, the rules differ from jurisdiction to jurisdiction.

In Sweden, only the Swedish branch of an overseas company (and not the company itself) can be registered as part of a Swedish VAT group.

The UK VAT rules, in contrast, bring an overseas company (in its entirety) with a UK branch within a UK VAT group.

It remains to be seen whether the UK government feels it necessary to amend the UK VAT grouping rules, in light of the ECJ decision. The ECJ appears to have upheld the principle that supplies within a single legal entity do not give rise to a VAT charge, except where the non-EU company and its EU branch are separated by an existing VAT group. Where both the company, and its branch, are brought within the VAT group (as under current UK rules) it is far from clear how – if at all – the ECJ decision in Skandia would apply.

The existing UK VAT rules also contain an anti-avoidance provision that ensures that externally-purchased services, bought in from outside the UK, are subjected to VAT when supplied between UK VAT group members.

What is clear is that groups with branches in EU Member States will no longer be able to recharge services between their non-EU headquarters and EU branches with the same degree of confidence that no VAT charges will arise. It will be necessary to consider each branch jurisdiction and the way in which the VAT group rules have been implemented locally.

Any increased VAT charges resulting from the Skandia decision will of course most adversely impact insurance groups, and other financial services businesses, as such charges will not be recoverable.

Case C-7/13, available here

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{5B4FC499-4D13-4C39-8320-3F18EDD8744A}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/cma-brings-car-competition-probe-to-conclusion/CMA brings car competition probe to conclusionThu, 25 Sep 2014 06:59:00 +0100Corporate insurance and financial servicesThe publication comes at the end of a three-year investigation, during which my team has been adviThe Competition and Markets Authority (CMA) – the UK's leading consumer and competition authority – yesterday published measures which it expects will increase competition and reduce premiums in the car insurance market. sing major insurer RSA.

The results of the high profile probe have been widely reported, and could have a significant impact both on drivers and their insurers, albeit that the CMA has opted not to address one of the principal failings in the market, which drives up premiums for customers: some of the practices of credit hire companies providing temporary replacement cars following an accident to drivers who were not at fault.

Among the CMA's measures are a ban on price comparison websites from striking certain exclusive agreements with insurers, and the availability of better information on the costs and benefits of no-claims bonus protection.

But the story may not be over yet. The CMA opted not to impose a cap on the cost of temporary replacement hire cars, prompting the ABI to comment that, far from driving down excessive costs, the CMA's u-turn on their proposed cap on these charges is likely to lead to higher charges for consumers.

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{DA38C6E9-17BE-4179-9DD4-31D9EEE0A83B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/good-or-bad-news-on-the-flood-insurance-front/Good or bad news on the flood insurance front?Thu, 11 Sep 2014 07:30:00 +0100Corporate insurance and financial servicesIt is therefore not surprising that insurers have been talking to the government about ways of continuing to provide affordable flood insurance to those people at most risk.  In June 2013 these talks resulted in a decision to establish a fund, called Flood Re, to insure the highest risk properties.  The aim is for Flood Re to be in operation by June 2015, though some consider that this is an optimistic timescale.

Background

In most countries, insurance against flooding is subsidised by the government, since if left to be provided by insurers alone, those properties at greatest risk of flooding would be uninsurable.  The UK is therefore unusual in that since the 1960s flood cover for householders and small businesses has been automatically provided as standard, with insurers in effect ensuring that low risk properties subsidised the high risk ones.  However, with the risks increasing on every side, the insurance industry considered it could not continue to provide the same level of cover without some form of government support.

Features of Flood Re

Insurers had envisaged that the government (i.e. all taxpayers) would fund Flood Re, but it has refused to.  Instead, homeowners will fund Flood Re through increased premiums which insurers will charge and put into the fund.  This is intended to produce £180m each year for the next five years.  Accordingly, the cost of providing affordable insurance to those in high risk properties will fall on all the other householders (with houses in the higher council tax bands paying proportionately more).  Controversially, the following are currently excluded from the scheme:

  • properties in Council Tax Band H and its equivalent, even though they will still have to pay the highest extra flood premiums;
  • businesses (with the possible exception of bed
  • and breakfasts);
  • properties occupied by tenants;
  • homes built after January 2009, after which time properties should not have been built in flood plains.

Implications

While the proposals (seen by some as unfair and unworkable) may change, if they remain as they are the implications will include the following:

  • many properties will fall outside the scheme, whilst still being in flood prone areas, so becoming either much more expensive or impossible to insure;
  • flood prone areas may become blighted, also affecting businesses in those areas;
  • owners of homes built in flood plains after January 2009 would be penalised for the actions of planners and developers;
  • should there be a flood event which wipes out Flood Re, the fund will need to be built up by further premium increases;
  • if flood defences are not made more effective, the fund is likely to be exhausted more quickly;
  • homes which are outside the scheme are likely to lose value and be worse security for lenders;
  • the effects of climate change can only make it more difficult for the scheme to work.

Hopefully the scheme, in whatever form, will work.  If it does not, then the only viable solution may be for the UK to fall into line with most other countries, with the government providing more financial support.

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{9D8F4122-5FFE-45C9-BBB4-06365C225B57}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/dividends-under-solvency-ii/Dividends under Solvency IIThu, 11 Sep 2014 07:27:00 +0100Corporate insurance and financial servicesThe Solvency II Regulations (otherwise known as the Level 2 measures) look set to take this a step further. From the latest draft that we have seen, an ordinary share would not meet the tier 1 criteria unless the firm is able - in certain circumstances - to cancel a dividend that has been declared but not yet paid. The circumstances in question are where the firm is in breach of its solvency capital requirement (SCR), or where the payment of the dividend would put it in breach. The PRA has in its latest Solvency II consultation adopted this with a draft rule, and associated Supervisory Statement. So far so good, and indeed it seems quite legitimate for the EU and the PRA to specify what may or may not constitute Tier 1 capital for regulatory purposes.

However, the PRA goes further. It goes on to say that: "The PRA considers that where a firm's articles of association do not prohibit the cancellation of a dividend at any time, including after declaration, then they may be said to allow such cancellation so that the firm may be able to declare a dividend on a conditional basis, allowing cancellation of the dividend at any time prior to payment, if the applicable conditions are not met. Firms should ensure that they review their own articles to establish the absence of any such prohibition. Firms should also consider whether it is appropriate to amend their articles to include a specific power for the firm to declare dividends subject to conditions or even for all declarations of dividend to be conditional."

This statement merits some careful consideration. Under English company law, a final dividend when declared and approved by shareholders becomes a debt of the company. Is it right that a company may declare a conditional dividend without express powers to do
so?

One can imagine scenarios where problems in following the PRA's analysis may arise, particularly in the case of a delay between declaration and payment. For instance, where the firm suffers a material adverse change. Or where the SCR simply increases, e.g. where the PRA imposes a capital add-on. There may be additional considerations for a firm with publicly traded shares for which an 'ex dividend' date applies. These firms will likely have disclosure or other obligations arising from their listing arrangements in relation to possible non-payment of a declared dividend. How would shareholders/ buyers respond to being told that a declared dividend was to be pulled? Not well, one suspects.

The legal fix would be for a firm to amend its constitutional documents to expressly provide for payment of dividends to be conditional in this way. This should be a relatively simple exercise, although this may raise questions amongst the investor base. Alternatively a firm may choose to rely on the PRA's interpretation of company law. But it will need to brace itself for shareholder challenge if things turn bad. We would strongly suggest that a firm takes its own advice on whether such an approach will stand up in the face of this.

If you would like to know more about this topic, please contact George Belcher or Peter Hill.

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{BE7BBEAA-70FC-441E-8DB9-CA040A1F5357}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-fines-general-insurer-8-4m-for-tcf-and-conduct-risk-failings/FCA fines general insurer £8.4m for TCF and Conduct Risk failingsMon, 11 Aug 2014 07:40:00 +0100Corporate insurance and financial servicesThe FCA has fined insurer Stonebridge International Insurance Limited £8,373,600 for breaches of Principle 3 (Management and Control) and Principle 6 (Customers' Interests).

The breaches relate to the period April 2011 to December 2012, during which Stonebridge sold Personal Accident, Accidental Death and Accident Cash Plan insurance policies over the phone, targeting middle-to-low income consumers without degrees or professional qualifications. These products were underwritten by Stonebridge but the sales and post-sales customer services operations were outsourced to authorised intermediaries.

The FCA found that Stonebridge failed to treat its customers fairly by following a business strategy that maximised sales at the cost of the fair treatment of customers.  The FCA identified a number of failings, including sales processes designed by Stonebridge that automatically channeled customers towards more expensive products. Sales processes also encouraged outsourced sales personnel to highlight cancellation rights as a feature of the products whilst its training for post sales cancellation processes encouraged staff to overcome customers' objections, which resulted in customers not succeeding in cancelling policies despite several attempts.

In relation to management and control failings, the FCA found that Stonebridge failed to provide adequate oversight of its outsourced service providers, which resulted in various other TCF failings and customers being put at an unacceptable risk of being mis-sold products.

The FCA's Final Notice to Stonebridge is notable as it sets out Stonebridge's conduct risk management and control failings. We are advising numerous clients on the development of their conduct risk systems and controls and the Final Notice provides a rare glimpse of the FCA's specific expectations in this regard. The Final Notice provides the following examples of Stonbridge's conduct risk failings:

  • "the committee responsible for setting remuneration was not instructed to consider 'TCF' objectives when determining the incentive schemes for its own staff and the staff at the outsourcing companies"
  • "board and executive committees within Stonebridge did not effectively oversee whether the outsourcing companies were adequately addressing the risks affecting customers"
  • "inadequate focus on considering customer specific risks and regulatory obligations when setting remuneration guidelines [...] Stonebridge did not give sufficient weight to addressing the risk of customer detriment when setting up incentive schemes for staff"
  • "Stonebridge did not obtain adequate management information from the outsourcing companies to enable it to identify, measure and manage risks to the fair treatment of customers".

As is usual in cases where the amount of revenue generated by a firm from a particular product line or business area is indicative of the harm or potential harm that its breach may cause, the level of Stonebridge's fine was calculated by the FCA as a percentage of the firm's revenue from sales of the relevant products. Stonebridge's revenue was almost £94m and the FCA fined Stonebridge 15% of this less deductions for mitigating factors and Stonebridge's early settlement.

As well as providing useful conduct risk systems and controls guidance, this award serves as a timely reminder to insurers of the importance of having in place adequate processes for the supervision of outsourced service providers. It is no defence that the service provider is itself an authorised firm with its own regulatory obligations to treat customers fairly.

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{6234BA1D-F55F-415E-B2BC-1C83B5DAB0EF}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/transfer-of-corporate-profits-update/Transfer of corporate profits – updateMon, 04 Aug 2014 07:54:00 +0100Corporate insurance and financial servicesBen RobertsNew section 1305A of the Corporation Tax Act 2009, inserted by the Finance Act 2014 which received Royal Assent on 17 July, is now in force and has retrospective effect in respect of payments made on or after 19 March 2014.

The text of section 1305A has not been amended.  As a reminder, the new measure applies where:

  • two companies (A and B) are part of the same "group";
  • A and B are party to "arrangements"
  • the arrangements result, in substance, in A (directly or indirectly) making a payment to B of "all or a significant part" of A's profits (the profit transfer); and
  • one of the main purposes of the arrangements is to secure a "tax advantage".

If the new measure applies, A's profits are recalculated for corporation tax purposes as though the profit transfer had not taken place.

On 24 July HMRC published revised guidance on the new measure.

Revised HMRC guidance

The revised guidance considers certain particular situations in greater detail and includes a number of further examples setting out HMRC's views as to when the new measure is, and is not, likely to apply.

As far as reinsurance is concerned, HMRC's published view is that intra-group reinsurance would "not normally" be caught by section 1305A. This was included in the original guidance published in March 2014. The revised guidance goes further so that, in HMRC's view:

  • the rule will only apply where the "normal commercial motives" for reinsuring are absent;
  • a payment of premium to a reinsurer would "not normally" be considered a profit transfer;
  • tax planning in choosing a location for an intra-group reinsurer will not, of itself, mean that section 1305A is activated.

More generally, the updated guidance seeks to draw out a distinction between:

  1. payments which essentially (for tax reasons) divert a pure income profit payment to another group company (caught by the rule); and
  2. payments incurred in earning profits, on commercial terms, which need to be deducted in determining profits (not caught).

As an example of the second type of payment, the revised guidance refers to services provided by a non-UK group company to a related UK, intangible asset-holding, company, where the services enhance the UK intangible assets.  If the non-UK company is awarded a percentage of the profit arising from the UK intangible assets, this is not caught by the rules. The payment is correctly, in HMRC's view, characterised as an expense incurred in arriving at the UK taxable profits.

Despite the new guidance, and the reassurance it may provide in certain cases, taxpayers are still advised to review their intra-group tax planning arrangements so as to be certain that payments under such arrangements are genuinely incurred on commercial terms, and do not amount to a tax-motivated diversion of profit.

As a general comment, although the revised guidance is welcome, it is far from ideal to see widely-drafted legislation limited by guidance in this way.

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{45197356-2E75-4669-8B98-DDE926B9A9F9}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/abi-proposals-on-home-and-motor-insurance-renewal-pricing/ABI proposals on home and motor insurance renewal pricingWed, 16 Jul 2014 08:05:00 +0100Corporate insurance and financial servicesThese proposals follow up on the FCA's current work in this area and can be seen as proactive steps by the insurance industry as a whole to underline its commitment to ensuring that appropriate pricing information is given to customers prior to policy renewal in order to enable customers to make an informed decision about the proposed arrangements.

In connection with insurers' obligations under ICOBS 6 to provide all information about a policy (including pricing) in good time which applies both prior to customers purchasing a policy and at policy renewal, the proposals will require insurers to state in renewal documents:

  • the premium that the customer paid at the start of the year alongside the renewal quote for easy comparison; and
  • any introductory discounts which may have applied to new customers but will not apply when the policy is renewed.

In our view, if implemented, these proposals will not only benefit customers but will go some way to addressing the FCA's concerns as highlighted in Charley Taggart's summary of the FCA's Business Plan 2014/15, that insurers may be taking advantage of consumer inertia on large renewal books.

We are tracking the developments in this area and will provide you with any relevant update on the implementation of the ABI's proposals in due course.

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{1E66E888-BBB7-4E97-AC00-001A3AA2AE6A}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/hong-kong-broker-commission-proposed-rules-of-conduct/Hong Kong: broker commission – proposed rules of conductThu, 10 Jul 2014 08:12:00 +0100Corporate insurance and financial servicesDavid SmythTucked away in clause 84 of the Bill is a proposed new section 92 to the Insurance Companies Ordinance (Cap. 41). This provides that the IA may make "Rules on conduct requirements for licensed insurance intermediaries" (including, licensed insurance agents and brokers).

One such rule (section 92(2) of the Bill) would allow the IA to make rules requiring insurance intermediaries to take steps to ensure that they (among other things) disclose to their clients any commission or advantage received in relation to policies recommended to insureds.

This provision is not, of itself, controversial.  More important will be the wording of the proposed rules providing for such disclosure and how they are enforced.

Following the case of Hobbins v Royal Skandia Life Assurance Ltd & Anor [2012] 1 HKLRD 977, the issue of such commissions with respect to (for example) ILAS products (Investment Linked Assurance Schemes) attracted quite a bit of press coverage; possibly, in part, instigated by disgruntled investors.

In that case, the High Court of Hong Kong held (among other things) that, in a civil context, commission paid by an insurer to a broker with respect to business placed did not contravene section 9 (Corrupt transactions with agents) of the Prevention of Bribery Ordinance (Cap. 201).

At paragraph 89 of the judgment, the judge stated:

"The practice of insurers paying commission to insurance brokers may or may not be unsound. It ought possibly to be strictly regulated or even prohibited altogether. I express no view on the matter. That is a question of policy best left to the legislature, not the Court, to tackle."

The provision in the Bill for proposed rules of conduct should be seen against this background.

The Bill was gazetted in April 2014 and is currently before the relevant Legislative Council Bills Committee. The latest timetable is for the Bill to be passed in 2015. However, given Hong Kong Legco's current backlog of Bills, some slippage would not be unexpected.

In the meantime, best practice is for brokers to give clients written confirmation of: (i) the brokerage services to be provided and (ii) the usual percentage range of commission (depending on the type and nature of the policy in question) payable out of the premium charged by insurers with respect to new or renewed policies.

Insurance Companies (Amendment) Bill 2014

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{27AF2B9D-11D2-42A9-8BFA-593D2E93FCE4}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/know-your-regulator/Know your regulatorFri, 27 Jun 2014 08:24:00 +0100Corporate insurance and financial servicesRegulation is fast becoming the key concern of compliance teams throughout the insurance sector meaning that understanding the approach and motivating themes behind each regulator is paramount. This can be difficult, there is no one-size-fits-all model of a regulator. Even an analysis of the recently created Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) shows a distinct difference in regulatory approach and priority. The task of understanding a regulator's central concerns becomes even more fraught when comparing regulators across multiple jurisdictions. On this assessment it becomes apparent that the key to successfully navigating a regulator is an understanding of the economic, political and cultural landscape in which it is operating. In this article Charley Taggart and I explore and expand on these themes to offer an insight into how to maintain good relations with insurance regulators across the globe.

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{1E30271E-EE27-44D4-B997-81A9F0C7A54E}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/new-anti-avoidance-rule-targeting-transfers-of-corporate-profits/New anti-avoidance rule targeting transfers of corporate profitsTue, 10 Jun 2014 08:26:00 +0100Corporate insurance and financial servicesBen RobertsThe measure, potentially of wide application, may impact on what have (up to now) been seen as commercial arrangements in the insurance and reinsurance industry.

The new tax rule will apply where:

  • two companies (A and B) are part of the same "group"; and
  • A and B are party to "arrangements" which result in substance in A (directly or indirectly making a payment to B of "all or a significant part" of A's profits (or the profits of another group company); and
  • one of the main purposes of the arrangements is to secure a "tax advantage" (and not necessarily for A or B).

"Group", "arrangements" and "tax advantage" are each given a wide meaning.  Although the securing of a tax advantage (which includes a "reduction" in tax paid or payable) must be a main purpose of the arrangements, in the current climate this may not be a high hurdle for HMRC to overcome.

If the new rule applies, A's profits for corporation tax purposes must be recalculated as though the arrangements leading to the profit transfer had not occurred.

Unlike some anti-avoidance provisions, the new rule does not contain a "commercial" let out.  If the arrangements produce a transfer of profits, which in turn causes a reduction in tax take, the arrangements may be ignored for tax purposes.

It is worth noting that although the stated "primary aim" of the new rule to prevent the use of certain marketed schemes to circumvent the operation of another anti-avoidance rule (the obtaining of a UK tax advantage through the use of a "total return swap"), it is explicitly stated that the new rule is not limited to such cases.

HMRC have indicated that they will not normally challenge arrangements if:

  • they are ordinary commercial arrangements; and
  • they are also arrangements of a kind that are usually entered into by companies operating in the same type of business.

For example, HMRC states that intra-group reinsurance, affected as part of "ordinary commercial arrangements", would "not normally" fall within the scope of the new rule.  An example given by HMRC of "ordinary commercial" reinsurance is where the profitability of the ceding company is taken into account in determining the premium payable.

What have (up to now) been seen as commercial arrangements that might be under threat include:

  • the aggressive use of reinsurance;
  • the use of offshore (normally tax haven or low tax jurisdiction) group companies;
  • aggressive finance and group treasury arrangements;
  • the placing of profitable business in low tax or tax exempt group companies;
  • profit related royalties and transfer payments.

It remains to be seen whether the new rule is enacted in its current form.  We would also expect further revised guidance from HMRC on its intended scope.

Once enacted, the new rule will have retrospective effect from 19 March 2014.

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{1FA9F685-23B6-41C3-B9A8-BAF928E4B654}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-pras-stance-on-solvent-schemes-of-arrangement-and-omnibus-ii/The PRA's Stance on Solvent Schemes of Arrangement & Omnibus IITue, 03 Jun 2014 08:32:00 +0100Corporate insurance and financial servicesAmongst the numerous administrative and other amendments there are a large number of transitional arrangements. These effectively operate as a grace period in certain areas that delay the full force of the new regime taking effect from the implementation date of 1 January 2016.

Amongst these are transitional periods that are available to insurers that are by 1 January 2016 in run-off and in the process of seeking finality.  The detail can be found at article 308b on pages 164 to 167 of the directive. These provide for a grace period of (i) three years where the insurer has satisfied its regulator that that it will have "terminated its activity" by 1 January 2019; or (ii) five years if the insurer is subject to a formal re-organisation process and an "administrator" has been appointed. The first period would seem to apply to a run-off insurer that is able to satisfy its regulator that its outstanding insurance liabilities will by then have naturally expired. The second period would seem to apply to a run-off insurer that has initiated a formal process – such as a portfolio transfer or scheme of arrangement – to accelerate legal finality. These provisions do not disturb article 12 of the original Solvency II text which remains available to a reinsurer that has gone into run-off by 10 December 2007.

Whilst these new transitional provisions are of course helpful, there are some important caveats. The first is that the insurer in question must not form part of a group that contains live carriers. The rationale for this appears to that the live operations can support the run-off operations. However, this will in practice severely limit the benefit of this provision, since pure run-off insurers/ groups are relatively few in number.

A further caveat is that the regulator must remain "satisfied with the progress that has been made towards terminating the undertaking's activity". This may be a grey area. How quickly must an insurer move? What active steps are required? And what happens if it encounters bona fide obstacles along the way? What happens if these obstacles take the form of resistance from the regulator to the finality proposals themselves? The following example, concerning schemes of arrangement, illustrates the point.

The UK's Prudential Regulation Authority (PRA) has made clear in a recent supervisory statement that it will take some considerable persuasion to support a scheme of arrangement for a run-off book that is solvent. It has however left the door open in that it has said that it will consider proposals on a case by case basis. This means that there will need to be careful analysis of what a company is seeking to achieve in the scheme and a convincing case must be made that a scheme is right in the circumstances. There is then the possibility of the PRA effectively blocking a proposal for a scheme, which may derail an insurer's plans for finality. You can see where this might lead.

If this in turn lifts that insurer out of the criteria for the transitional period, it will find itself subject to the full force of Solvency II. If the effect of this were to force a run-off insurer into an insolvent situation, could this open the PRA to charges of unwarranted damage to shareholder value? Would this be enough to persuade the PRA not to object to the scheme in the first place? Also, could the PRA's implementation of this recent supervisory statement lead itself unwittingly into a conflict with Solvency II by depriving a run-off insurer of the benefit of the transitional period in a manner not envisaged by the Solvency II law-makers? In particular, Solvency II is designed to be largely "maximum harmonisation" in nature, and so create an even playing field. In other words, each EU member state must not over-implement (or "gold-plate") with its own additional requirements. The transitional provisions at article 308b are no exception to this. Might the PRA's stance on solvent schemes in practice constitute an additional hurdle or criteria to the availability of this transitional period, and could it find itself subject to challenge?

These questions will require careful consideration on the facts, and are likely to colour an insurer's discussions with the PRA as to the availability of a solvent scheme.

Omnibus II directive

Level 1 Solvency II directive

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{9C93F50E-7F2D-4E1C-A547-B92C81F818BD}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-findings-on-conflicts-management-in-the-commercial-sme-sector-encouraging/FCA findings on conflicts management in the commercial SME sector: encouraging, but only the start?Tue, 27 May 2014 08:35:00 +0100Corporate insurance and financial servicesAccording to its report, nearly 3.97m SMEs rely on a broker. The rest of the report will come as no surprise to the industry in that, whilst there are pockets of best practice and good conflict management, there are still intermediaries whose conflicts of interest controls have not caught up with their evolved business models. The generally reassuring conclusions may conceal more interventionism to come. The FCA notes at the beginning of the report that, given the level of understanding of SME buyers, it expects them to have similar levels of protection to retail consumers. With that in mind, the FCA intends to educate SMEs on its findings and, in particular, their right to request commission information from their broker. Given that apparently 72% of SMEs believe their broker will be earning commission of 15% or less, there may be some interesting conversations to come.

The report highlights the following key findings:

1. There is a lack of consumer understanding about the services that are being provided

In some firms that describe themselves as independent brokers, as little as 30% of their business was actually derived from acting as an agent of the customer, suggesting that their business model is closer to an insurer agency. This is in contrast to 82% of SMEs who expect their broker to go to at least two markets to obtain a quote, with 27% expecting them to go to at least seven markets. This is, of course, inconsistent with the economics of doing SME business.

It is therefore important that a customer is accurately informed of the basis on which a broker acts. The report reflects on an example of disclosures on the various ways a broker may act, made in a single section of a terms of business agreement, making it impossible for the customer to decipher which model applies to them. Particular concern is raised in relation to add-ons and premium finance arrangements (both of which have been the subject of previous FCA papers) because of the inconsistency between the advisory service provided on the main product and more of an insurer-agency arrangement on these additional products. Seventy-nine per cent of SMEs expected intermediaries to act on their behalf in securing the best or cheapest payment option, despite the majority of intermediaries considering themselves to be only offering, and not advising on, finance options.

Good practice involves:

  • Ensuring that the customer receives sufficiently clear information that enables them to understand the basis on which a broker is acting for them in relation to each product they purchase.
  • This information should include add-on products and premium finance arrangements as well as the main product.

2.  There is a lack of effective control frameworks to identify, mitigate and manage conflicts

The report notes that many firms have conflict of interest policies, but that there is a lack of control framework and management information to support the implementation and audit of those policies.

Good practice involves:

  • Ensuring that where a firm acts for the customer and the insurer, that there is a separation between the broking (customer facing) role and the placement (market facing) role. Where a firm operates an MGA, there should be an ethical barrier in place between the broking and placement functions.
  • Where insurers are being selected for a panel or a scheme, that the basis of selection is dominated by product features and value for the customer and not remuneration for the broker. A full audit trail of the basis of selection should be maintained to be able to demonstrate this rigour around the selection process.
  • Robust controls should be in place where a firm has made its staff aware of enhanced remuneration arrangements. Firms should not allow staff remuneration, for example, to increase the risk of conflicts not being managed effectively.
  • Management information must be made available to senior management to allow them to see that conflicts are being effectively managed. For example, file review findings, conflicts of interest registers and information on key insurer relationship and gross written premium to those markets

3.  Firms rely too heavily on the disclosure of conflicts

The report emphasises that disclosure is not a "get out of jail free" card as it does not exempt intermediaries from the obligation to maintain and operate the effective organisational and administrative arrangements required by SYSC 10. SYSC 10.1.9G specifically states that "over reliance on disclosure without adequate consideration as to how conflicts may be appropriately managed is not permitted".

Good practice includes firms:

  • considering how their exposure to the risk of conflicts of interest may have changed as they introduce new products, schemes and markets into their business
  • ensuring that where they operate a scheme or panel arrangement, that this is frequently reviewed to ensure on-going suitability, for example to ensure on-going value for money and benchmarking of the insurers' performance against metrics such as claims paid and complaints management
  • monitoring the impact of different commission arrangements with insurers on their placement activities through audit
  • ensuring that there are appropriate controls in relation to add-on and premium finance arrangements

4.  More to come

The FCA notes its concern in relation to claims handling authority arrangements with a profit commission and highlights that it will report further on these concerns in the forthcoming commercial claims review. It also raises concerns about residential property management services and conflicts, which is the subject of an on-going Competition and Markets Authority case. We will provide an update on these issues when further information is released.

As the FCA concludes the report by summarising how it plans to engage with firms in relation to specific issues to better educate the industry generally as well as the buyers of insurance, intermediaries must take action now to reflect on how they manage conflicts and to make any necessary changes to ensure they comply with FCA expectations.

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{7B001710-85B7-4466-A9DF-275E36493B85}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/broker-conflicts-thematic-review-what-can-we-expect/Broker conflicts: thematic review– what can we expect?Thu, 22 May 2014 09:03:00 +0100Corporate insurance and financial servicesIn the meantime, what can we expect? As discussed at our recent Corporate Insurance half day seminar, it is worthwhile comparing and contrasting the regulator's approach to conflicts of interest and inducements in the retail investment sector as there are parallels with the activities of brokers and insurers in the general insurance market. In January 2014, the FCA published its Finalised Guidance in relation to retail investment inducements and conflicts of interest. The guidance is aimed specifically at retail investment firms and product providers and includes substantial detail on the application of specific COBS rules and guidance on conflicts of interest and inducements, which don't directly apply to general insurance brokers and providers (contrast the detailed inducements rules in COBS with the guidance in ICOBS, which does little more than restate Principle 8 on conflicts of interests).  However, there are clear parallels between the relationship between providers and distributors of investment products to which the retail investment Guidance relates and the relationship between providers and distributors in the general insurance market.

Of particular relevance to general insurers and brokers is the FCA's guidance on panel selection; exclusive distribution arrangements; multi-year and variable service and distribution arrangements; and their reiteration of good practice on entertainment and training, which reinforces guidance given after the asset management sector conflicts of interest review findings (which were published in November 2012).

Panel selection and exclusive distribution

In its retail investment Guidance, the FCA states that the selection of product providers for a firm's panel should not be influenced by the providers' willingness and ability to purchase significant services from or to provide other benefits to the firm. This is in contrast to the FCA's current guidance on panel selection in ICOBS 4.1.8G, which appears to permit benefits offered to the firm to be a factor in the selection of panel providers, so long as it is not the sole factor. If, as appears to be the case, the FCA now views such firm
benefits as giving rise to unmanageable conflicts of interest, then it is difficult to see how the ICOBS guidance on panel selection can continue in its current form.

Similarly, where a firm distributes a product exclusively for a single provider, in the FCA's view, the selection of that provider being influenced by sizeable payments or other benefits offered by the provider to the firm could also lead to a breach of Principle 8.

Multi-year and variable services and distribution arrangements

In relation to services and distribution agreements between product providers and intermediaries, the FCA identified "poor practices" that could create conflicts that it thinks firms would not be able to manage fairly. These included:

  • longer term multi-year agreements where the revenue stream is significant for the advisory firm, which relies on the on-going revenue generated from such agreements to sustain its business;
  • clauses in services and distribution agreements that allow the provider to negotiate a reduced level of payments for a reduced level of services if the provider loses its place on the advisory firm's panel, or where there is a material reduction in sales of the provider's products.

Training and hospitality

The provision of training by product providers to advisory firms is unlikely to conflict with the best interests of the adviser's clients where the training relates to features and benefits of the provider's products or services, or subject areas in relation to the adviser's professional development, and the following conditions are met:

  • such training is made reasonably available to all firms that could recommend the provider's products or services (e.g. on a first come first served basis);
  • it is provided in the UK, where it is provided to UK based advisers; and
  • any hospitality given in connection with the training complies with the FCA's guidance on hospitality and gifts.

In relation to hospitality and gifts, the retail investment Guidance reiterates that these must be of a "reasonable value" and sets out examples of characteristics of hospitality and gifts that, in the FCA's view, meet this requirement, including:

  • the event at which the hospitality is provided is in the UK;
  • adviser attendance at the event, and any gifts or prizes given or awarded, is not based on criteria incentivising poor behaviours e.g. it is not based on the volume of business generated by the adviser for the provider's product;
  • the event at which the hospitality is provided is designed for business purposes e.g. product training; and
  • any overnight accommodation provided to advisers is only paid for by the provider where necessary e.g. where the event is run over two days.

There is much more of interest in the retail investment Guidance, including in relation to the provision by product providers to advisory firms of IT development and maintenance, contributions to seminars and conferences and promotional activity. It remains to be seen to what extent the FCA will apply the same standards to general insurance product providers and advisors. In any event, brokers should already be reviewing their panel arrangements and distribution and services agreements with insurers for potential and actual conflicts and the steps they should be taking to prevent them giving rise to customer detriment.

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{EC6F463A-D8EB-40BA-85BC-4061BEB7CF41}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/product-trade-mark-registrations-on-the-up-as-firms-fight-back/Product trade mark registrations on the up as firms fight back from the bottom of the financial crisisFri, 09 May 2014 09:12:00 +0100Corporate insurance and financial servicesAccording to my colleague Jeremy Drew, trade mark registrations by financial services firms in the UK have increased by 100% since the bottom of the crisis. There were apparently 3,396 trade mark registrations made by financial services businesses last year compared to just 1,698 made in 2009.

New market entrants and firms launching new products should beware the FCA's product intervention powers (for example, as set out in a Policy Statement in March 2013). The FCA will consider making temporary product intervention rules with immediate effect which are, in its view, necessary and expedient to meet its consumer protection objective or competition objective, because of the risks posed by a particular product or product type.

The FCA has promised generally to be a 'shoot first, ask questions later' regulator. That judgement-based, interventionist approach has come under attack (most recently for the widely reported zombie funds debacle surrounding its announcement that it would investigate 30 million life insurance policies dating as far back as the 1970s).

On reading the news about welcome product launches, I wondered whether firms may be taking the understandable but risky view that "if an interventionist FCA hasn't banned it, it must be ok".  The FCA has, of course, always been at pains to say it does not 'approve' products; one cannot get an FCA product 'kite-mark'.

Firms now looking to grow their retail financial products offering could, instead, take comfort from the introduction of the new Regulator's Code. This enforces the Coalition Government's current primary focus on compliant business growth. No further than a few lines into the Code, it sets out clearly in principle 1 that "Regulators should avoid imposing unnecessary regulatory burdens through their regulatory activities ... [and] should consider how they might support or enable economic growth for compliant businesses and other regulated entities". (Click here for our latest blogs on the Code).

Perhaps most significantly, article 5.5 of the Code requires regulators to provide advice and guidance to assist those they regulate and "to ensure that the advice can be relied on".   It follows that, if firms ask the FCA for advice on their new business plans or products, and are entitled to rely on that advice under the Code, this will increase the likelihood of firms treating their products as 'approved' or, perhaps, asking the FCA to offer a mechanism by which they can seek 'approval' of such products.

In any event, the increase in trade mark registrations is a welcome sign of returning growth. Although firms will inevitably have to deal with the regulatory risk of innovation, they should take comfort in the fact that the Government is on the side of economic growth, a key part of which is a flourishing financial services sector.

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{F28D3B3A-0165-4432-97CD-683262308743}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/new-regulators-code/New Regulators' CodeFri, 02 May 2014 09:16:00 +0100Corporate insurance and financial servicesWhilst FSMA already requires both bodies to "have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium to long term", the Regulators' Code pushes this issue right to the fore. Certainly the FCA has really pushed its consumer agenda in particular in a series of recent speeches, market studies, and thematic reviews, e.g. concerning Motor Legal Expenses Insurance and Mobile Phone Insurance. At times it has effectively criticised insurers for exceptional loss ratios and too much profit. Similarly, the PRA is consulting on a new regulatory principle requiring all firms to 'act in a prudent manner'.

Although we applaud the FCA for its rigorous approach to certain areas of undoubted excess, we also believe that the industry must have room to breathe. We would welcome a balanced approach that, by allowing a little more entrepreneurial risk, will grow profits in a manner beneficial for customers, employees, investors and the wider economy alike. We at RPC would be delighted to talk to any client that wishes to review any FCA or PRA rules or guidance (draft, new or old) against this Code, and to consider any representations that may be made.

Sam Bishop’s comment

Regulators' Code

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{5B1CBF44-070D-4FED-8383-6E1D13308B00}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-game-changer-set-to-discipline-add-on-markets/FCA 'game changer' set to discipline add-on marketsTue, 08 Apr 2014 09:23:00 +0100Corporate insurance and financial servicesIndeed, as Martin Wheatley, the FCA's Chief Executive, pointed out in a recent speech, "... for the FCA ... behavioural economics is quickly becoming a game changer.  Not just for consumers, but potentially for the shape of regulation for many years to come ... And firms in the UK at least, should be under no illusions as to how serious we are about breaking [the] link between poor products and high financial reward."

The experiment

The FCA first used an experiment to examine customer behaviour in its add-ons market study.  A principal objective of this study was to investigate whether transactions where insurance is offered as an add-on to another primary insurance product intrinsically have effects on consumer behaviour that translate across different insurance markets and whether these effects are anti-competitive.

Alongside economists and academics, the FCA designed a controlled experiment that made it possible to test directly for common patterns of customer behaviour arising from the structure of the add-on insurance purchase and to identify which of these aspects were the most crucial in driving these effects.

Participants were asked to shop around for a main product (for example, a holiday, car hire, a boiler, a laptop or an iPad) and they were then given the opportunity to buy related add-on insurance products.

The add-on insurance was offered both at different points in the purchase of the main product and on different terms, with some priced annually, others monthly.  One group was instructed to purchase insurance alone; the other to purchase both the main product and the optional add-on insurance.

The results

The results of the experiment are surprising.  Where standalone insurance was being purchased and a single price given, there were virtually no mistakes in choosing the best deal.

However, when participants had to choose between prices for the main product and then separate prices for the add-on insurance, one in five failed to identify the cheapest option.  In addition, when monthly prices were presented to the participants instead of the annual cost, there was even more confusion, with consumers paying higher prices and shopping around less.

The FCA also found that keeping track of multiple prices without a total was a major barrier to consumers being able to compare insurance firms' offers effectively.  This suggests that consumers could need help in comparing options even when add-on prices are given up-front.

Comment

The results of the FCA's behavioural experiment show that simple changes to the presentation of material can have drastic effects on the ability of consumers to identify the best priced packages for their needs, with the add-on mechanism being seen to "weaken consumers' ability to discipline firms by shopping around and comparing products effectively".

In light of these results, the FCA has proposed a number of remedies to the harms identified in its add-ons market study, including banning pre-ticked boxes in an attempt to combat customer inertia, as well as an overhaul of the way add-ons are sold through price
comparison websites.  As I explained in a previous blog, the FCA is currently consulting on these proposed remedies, with comments due in by 8 April 2014.

Martin Wheatley has described these proposals as "a quantum leap forward in the competition debate. For the first time, [the FCA is] seriously considering how [it] can
support consumers to discipline markets more effectively...  If consumers are consistently harmed by a product, firm or market, it makes sense that a ban or enforcement may be the best option."

The FCA's proposals will not be finalised until consultation with the industry is complete, but clearly the FCA is serious about changing the add-ons market and expects insurers to be proactive in bringing about that change.

Furthermore, according to Martin Wheatley, "it is clear that behavioural economics – as part of the regulatory toolkit - could become profoundly important...  Competition will be king as [the FCA] move[s] forward."

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{81A68E72-2DC9-43E1-8FA4-C5E2DA8AAADA}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fca-business-plan-2014-15-and-what-it-means-for-the-general-insurance-market/FCA Business Plan 2014/15 and what it means for the general insurance marketTue, 01 Apr 2014 09:36:00 +0100Corporate insurance and financial servicesThis year's plan is punchy, particularly well laid out in comparison to prior years and sends a very clear message. Accountability of responsible persons in firms needs to be improved, wrong doing will be responded to promptly and effectively and rebuilding consumer trust is paramount.

Below we set out a high level summary of what the business plan means for the insurance industry.

PPI

Payment protection complaints and how proactive and fair firms are in addressing complaints continues to be a focus. This resulted in several large fines being levied in 2013 and the pressure to contact consumers, even where they may not have complained, continues.

Advised and non-advised sales

The FCA is keen to manage a perceived expectation gap in consumer understanding on when a sale is advised or non-advised and plans to look at whether disclosures around the basis of the sale can work better for consumers. Firms should ensure that they provide consumers with sufficiently clear information on the basis of the advice prior to the sale.

Consumer Credit

The FCA will be more intensive in its supervisory approach than the OFT was previously, something it can achieve as it has more powers than its predecessor. Brokers who are involved in the introducing and broking of premium credit, as well as the collection of premium credit debt from consumers, need to apply the same principles of fairness for consumers and transparency to the credit distribution arrangements as they do to the insurance sale itself.

Contract terms

Unfair terms continue to be a big focus and the theme of the customer being at the heart of how the firm does business remains key. Continued emphasis on products and services being appropriate for consumers will require insurers and brokers to continue to monitor whether a product is suitable for a customer segment, meets their needs and responds when an appropriate claim is made. This monitoring should occur at the product development phase as well as on an on-going basis as the FCA plans to draw information from consumer bodies as well as complaints data, even unsuccessful FOS complaints could fall to be analysed if they have been escalated to the right body.

Culture and governance

The FCA will continue its work to ensure integrity and fairness for consumers is embedded in firms through the right culture, governance and risk management controls, including monitoring risks such as poor sales practices. Firms that have previously struggled to fully embed sound governance and risk management controls throughout their business need to ensure this is a priority for the coming year.

Wholesale and coverholders

The FCA is committed to considering the impact on consumers and SME customers buying products via wholesale firms. This review is possibly linked to findings from the conflicts of interest review, where the FCA has looked at the potential consumer detriment arising from retail brokers placing business into wholesale managed delegated authority arrangements, although the findings from this review are yet to be published.

The FCA's work on distribution chains also continues with the addition of risks relating to product design in complex distribution arrangements being up for review as well as sales and post sales activities. There is a stated commitment to improve the way intermediaries identify and manage conflicts of interest, which signals found failings from the recent conflicts review.

Firms should ensure that they provide clear information to their customers on the basis on which they are acting as well as ensuring that they have appropriate controls in place to mitigate the risks of conflicts being improperly managed. Firms should also ensure that in any delegated authority arrangement, there is complete clarity on who is responsible for the product, the sale, managing claims and dealing with complaints.

Of particular note is the concern from the FCA that firms may be taking advantage of consumer inertia on large renewal books and that because of the cost of acquiring a customer, consumers may then subsequently not be offered the best rates. The FCA has been reviewing the automatic renewal of home and motor insurance and the pricing of renewals is likely to have formed part of this review, but again we cannot be sure as the results are yet to be published. Although the concern in relation to inability to switch is focussed on the life sector, the cost of inertia is relevant to life and general insurance.

The FCA also states its intention to assess competition issues in the wholesale market, identifying potential candidates for market studies. It does not state whether this will or will not involve the insurance sector.

Premium finance

A new theme as a result of its new responsibilities in relation to consumer credit, the FCA intends to look at sales practices and disclosures in relation to premium finance. All firms involved in intermediating premium finance will need to ensure they have the appropriate licences to do so, as well as appropriate client disclosure and conflict management processes. Premium finance contracts are separate to the main insurance contract and are often sold on a non-advised basis. The difference between the basis of the advice for the insurance, versus the basis of the advice for the premium finance therefore needs to be clear.

Motor legal expenses and mobile phone insurance

Firms will be reviewed to ensure recommendations from last year have been embedded. For details on the recommendations please see our previous blogs on Motor legal expenses insurance and mobile phone insurance.

Client money

The FCA refers to the publication of the new client money rules for intermediaries, although it does not fix a date. But the FCA does refer to pending guidance on how to use and operate non statutory trusts. We will update you when this is released.

Commercial Claims

This work will build on the work undertaken in the consumer context, looking at whether customers' expectations are met in the claims process and whether the management of claims could lead to poor client outcomes as well as a lack of trust in the market. The review does not refer to the proposed Business Insurance Law Reform, the impact of which the FCA should consider when looking at whether remedial action is required.

 

Other cross sector themes

  • Inducements - firms must ensure that sales staff are not remunerated in a way which may encourage poor sales practices
  • Cyber-attack and IT resilience- firms will need to be able to demonstrate resilience including how these risks are managed and monitored at board level
  • Financial crime - after last year's focus on third party payments, anti-money laundering is a big theme this year.

 

Summary of review work for GI sector

Q1 - GI add-ons (continues to end Q3)

Q2 - Coverholders (through to Q4)

Q3 - premium finance, motor legal expenses, commercial claims, client money (latter 2 continue through to next year)

Q4 - mobile phone insurance (continuing to next year)

 

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{55C9B3B8-2F94-46EA-821A-CD8316BBE105}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/a-continuation-on-a-thematic-review-insurance-broker-fined-for-abc-systems-failings/A continuation on a thematic review: insurance broker fined for ABC systems failingsTue, 25 Mar 2014 09:44:00 ZCorporate insurance and financial servicesHowever, the Final Notice that accompanied the fine, whilst not containing anything ground-breaking, does highlight some important themes that ought to make those in the insurance sector take note.

The failings

The failings identified by the FCA with respect to Besso centred on the firm's inadequate systems and controls concerning payments made to various third parties. Typically these were parties who entered into commission sharing arrangements with Besso and/or assisted Besso in winning and retaining business.

The failings were systemic: the company had limited policies and procedures between January 2005 and October 2009; risk assessments and adequate customer due diligence was not performed; adequate records were not maintained; and arrangements were not subject to monitoring and review. To illustrate the effect of this, the FCA cited an example of a relationship that Besso had with a third party based in the US that had not been subject to review since the arrangements began in 2002 and was not subject to a written agreement between the parties documenting what arrangements were in place and why.

The breaches were compounded by the fact that the regulator had previously flagged ABC failures to the industry by way of "Dear CEO" letters, a 2009 thematic review and high-profile enforcement action against Aon Limited and Willis Limited. Besso was itself the subject of two visits by the regulator in 2009 and 2011 which brought to light deficiencies with relevant systems and controls.

Regulator continues to target systemic failings

The enforcement action is a reminder that the FCA has its sights firmly trained on eradicating the risks that control  failings pose to the integrity of the UK financial system and that smaller brokers, despite the volume of business they process and compliance resource being lower, are held to the same standards as those posing a much larger risk overall. As with previous cases brought, the FCA identified no actual instances of bribery or corrupt payments. Besso's conduct was neither deliberate nor reckless and the majority of third parties to whom Besso made payments were not based in high-risk territories.

Nevertheless, the absence of systems and controls in line with FCA expectations presented an unacceptable risk that bribery and corrupt payments could have taken place.

Risk management tools alone are not enough

Despite the firm having made improvements with respect to its risk assessments, the FCA felt that these did not go far enough. As has been seen on a number occasions, the form itself was fit for purpose. The manner in which it was used was not. The FCA found that in the majority of third party files the risk assessment form was not completed either fully or accurately, that the employee had noted a number of high-risk indicators present but the overall risk rating remained low and there was no adequate justification for the assessment reached.

The expectation from the regulator is clear. ABC policies and procedures cannot simply be a one-size-fits-all set of documents or operating tools. Instead systems and controls must be detailed, tailored specifically to the firm's business operations, be effectively implemented and subject to meaningful review.

Remediation and openness continues to be valued

On a more positive note, the Final Decision is a reminder of how the FCA recognises and rewards openness, co-operation and a commitment amongst firms to remediate where breaches have been identified. Besso's conduct following the breach was explicitly commented upon by the regulator. It had been collaborative both with respect to its dealings with the regulator and its dealings with the Skilled Person that was appointed by the FCA to analyse its affairs. This constructive approach extended to commissioning a firm of solicitors in 2011 to review systems and controls and sharing the findings of that review with the FCA. As well as helping the firm to demonstrate good corporate citizenship such openness is, of course, reflected in the level of fine imposed.

Conclusion

This latest fine by the FCA will come as a shock to some smaller brokers who may have previously considered themselves to be below the radar of the regulator. It demonstrates the FCA's commitment to eradicating the risk of financial crime in the UK wholesale market, regardless of the size of the risk or the cost to the regulated entity.

With the FCA in the midst of its thematic review of smaller general insurance brokers' anti-bribery and corruption systems and controls only the foolhardy would ignore this Final Notice.

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{10396D07-EE1C-4A15-9A40-CFA60D08CD00}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/fcas-first-market-study-finds-little-value-add-in-uncompetitive-insurance-add-ons-market/FCA's first market study finds little value-add in uncompetitive insurance add-ons marketWed, 12 Mar 2014 09:55:00 ZCorporate insurance and financial servicesThe FCA has found poor competition, low levels of claims and a potential overcharge of customers by up to £200 million each year for products that they may not necessarily need or use. 

Christopher Woolard, Director of Policy, Risk and Research at the FCA, said: "There's a clear case for us to intervene.  Competition in this market is not working well and many consumers are simply not getting value for money.  Firms must start putting consumers first and stop seeing them as pound signs".

As I previously explained, the FCA's market study was launched in July 2013 and is the first of its kind since the FCA became responsible for the promotion of competition in the financial services industry.  

Provisional Findings

The FCA's market study concludes that, in many cases, competition is not currently delivering value for money on add-on products.  The FCA's key provisional findings include the following:

  • A lack of competition and information at the point of sale, preventing customers from making comparisons and informed decisions about products;
  • 25% of consumers who bought insurance as an add-on were not aware that they could buy the product elsewhere;
  • Add-on buyers are less likely to compare add-on products, and if they do, are likely to be less effective and less sensitive to price.  Indeed, 58% of add-on buyers did not make comparisons with other policies in the market, compared to 22% of buyers of 'stand-alone' products;
  • Depending on how add-on information was presented to consumers, they could be up to four times less likely to shop around than they would for 'stand-alone' purchases;
  • Customers are not often engaging when purchasing add-ons and are buying products without clear intent.  Indeed, 38% of add-on buyers said they had not planned to buy add-on insurance before the day of purchase;
  • Customers who bought insurance as an add-on were much less likely to correctly recall how much they paid.  Indeed, 69% of add-on purchasers could not accurately remember how much they paid for the product three to four months later, and 19% could not remember buying it!  There were particular concerns about GAP (guaranteed asset protection) insurance, where the sales process in car showrooms often leaves individuals believing that the only source of the product is the showroom where they are buying the car; and
  • The proportion of the retail price that was paid to settle claims (the claims ratio) was lower than average across the markets, and very low in some, indicating that many consumers may be paying for poor value products.  For example, the GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10%, and the claims ratio of add-on personal accident insurance was less than 9%.  This compares with 64% for personal insurance sold to consumers, including motor and household insurance.

The report will draw comparisons with the Competition Commission's analysis of add-ons in its Private Motor Insurance market investigation.  There, the CC has provisionally found that insufficient information is provided to consumers in the sale of add-ons in private motor insurance, and has criticised the point of sale advantage enjoyed currently by insurers.  It is to be hoped that, following the FCA's provisional conclusions in this area, the CC will now find the FCA better-placed to deal with any issues around insurance add-ons.

Proposed remedies

The FCA is proposing a number of remedies to address the issues found, including banning pre-ticked boxes, making it compulsory for firms to publish claims ratios (to highlight low value products) and "breaking" the point of sale advantage for GAP insurance by proposing that customers confirm in writing that they want GAP insurance in the days after the initial sale of the motor vehicle.  This remedy will be particularly onerous for insurers.  The FCA may be surprised at how a busy consumer may overlook the need to reconfirm their add-on cover to make it effective and as a result may be left without cover.

The FCA has also indicated that it may act to improve the way that price comparison websites offer the provision of add-ons, including what information customers can access and when this information is introduced.

The FCA's focus may now be on distributors rather than insurers as the market study did not find that either add-on or stand-alone insurance policies provided insurers with high profits (which the FCA clearly regards as a good thing) whereas distributors did earn much higher profits from add-on rather than stand-alone products.

What next?

The FCA's proposed remedies will be subject to further refinement, a cost-benefit analysis and a formal consultation process.  Prior to this, the FCA invites comments on its report and proposals by 8 April 2014.  It will publish its final findings "in due course" and has committed to publishing its consultation on remedies before the end of 2014.

According to the FCA's press release, this market study paves the way for future market studies which will become the principal way in which the FCA will gather evidence to assess competition problems.

As Christopher Woolard, in his Foreward to the market study report, explains, the FCA's approach will evolve over time and it will continue to learn lessons.  However, the questions it poses in the add-ons market study about customer behaviour and outcomes are clearly the kinds of questions the FCA will ask in future market studies.

Market study report

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{25F17821-B4C7-4B06-AF04-9ED80AD1AF8B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/scottish-integration/Scottish integration?Fri, 07 Mar 2014 10:02:00 ZCorporate insurance and financial servicesThese insurers should also be thinking about their legal and operational structures, and any changes that may be required as a result. The point stems from an arcane EU Directive which provides that an insurer must have its head office in the same member state as its registered office and that it must actually operate there.

If independence were to happen, these provisions will be thrown into play. This is regardless of whether Scotland is itself admitted to the EU or not – since either way it will have left a member state, the UK.

Is this an issue in practice? In most cases, the head and registered offices of a Scottish insurer are in the same place – Edinburgh, but if (as the SNP wishes) the Bank of England is to continue to be the prudential regulator post-independence, what stance will it take? The directive strongly implies that an insurer's head office should be located in the member state where it conducts the bulk of its activities. In particular it requires that authorisation should not be granted (or withdrawn) where the "geographical distribution of the activities actually carried on indicate clearly that [it] has opted for the legal system of one Member State for the purpose of evading the stricter standards in force in another Member State within whose territory it carries on or intends to carry on the greater part of its activities". Whilst there would be no suggestion of intentional regulatory arbitrage in this case, could the Bank of England nonetheless require a Scottish insurer to move its registered/head office to the UK on the basis that this is where the bulk of its policyholders lie?

This may appear to be a technicality, and indeed there are bigger commercial issues driving a Scottish insurer's decision about its place of domicile, but it does illustrate nicely the complexities involved in the implementation of the SNP's project and, at the same time, the extent to which Scotland and the rest of the UK are bound together.

Our comment

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{6C969CFA-BED4-4E87-97F8-549DC74BAA35}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/ttip-of-the-iceberg--eu-us-trade-negotiations/TTIP of the iceberg - EU/US trade negotiationsThu, 06 Mar 2014 10:08:00 ZCorporate insurance and financial servicesThe aim of the talks is to remove trade barriers (tariffs, unnecessary regulations, restrictions on investment etc.) across a wide range of sectors to facilitate the purchase and sale of goods and services between the two, and to make it easier to invest from one to the other. As you would expect, financial services is on the agenda. The negotiations began in July 2013 and the aim is that they conclude by the end of 2014.

Whilst the European Commission maintains an impressive website dedicated to the negotiations, precious little detail is provided (although this is understandable at this stage).

However, it would be fair to assume that the insurance sub-group discussions will be focussing on the question of convergence of the US and EU regulatory regimes and, in particular, the extent to which the covenant of a reinsurer on one side of the pond is recognised in the books of a cedant on the other. On the EU side, this is a question of establishing the relevant US regime as "equivalent" to that of the EU for the purposes of Solvency II. On the US side, this is a question of presenting a unified position that is broadly reflective of state-based regimes and quelling internal pressure for protectionist measures in favour of domestic reinsurers.

Some progress has already been made with the creation of the US Federal Insurance Office and the launch of an EU-US dialogue earlier last year. Achievements to date include the reversal of heavy collateral requirements for EEA (and other alien reinsurers) in certain key states, but there is some way to go. There is also pride at stake with US hackles rising at any suggestion that they should conform to EU standards. One must hope that the negotiators can reach a pragmatic position in a manner that will look beyond technicalities to an enhanced flow of premium both across the Atlantic and, of course, that these issues do not get horse-traded into the side-lines in favour of other issues.

The next (fourth) round of talks is due to be held in Brussels next month. We will keep you posted.

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{3FF79789-4E79-4B6E-855E-40C3A1C41EA3}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/top-tips-internal-investigations/Top tips - internal investigationsMon, 03 Mar 2014 10:11:00 ZCorporate insurance and financial servicesThe ability to conduct and manage an internal investigation in a way which is proportionate to the issue which has arisen as well as timely and cost effective is a skill not to be under-estimated. Whilst each investigation needs to be tailored to the specific circumstances, there are some considerations which apply across the board. Click here for our top tips!

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{004D2177-730B-4710-9462-9F2F77E5F7E4}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-principle-of-fundamental-rule/The Principle of Fundamental RuleFri, 21 Feb 2014 10:17:00 ZCorporate insurance and financial servicesBuried deep in a PRA consultation paper issued last month was a proposal to replace the PRA's Principles for Business with nine new so-called "Fundamental Rules" (FRs).

Six of these are re-workings of the current PRA Principles (albeit with tweaks). Three however are brand new.

The new name itself is noteworthy. "Fundamental Rule" certainly sounds more important than a mere "Principle". We can only assume the PRA will be pushing ahead with "Fundamental Rule-based" regulation, relying on these to fill in gaps and overrule the interpretation of specific rules as it sees fit.

What's the significance of the new FRs?

  • The first (FR 3) states: "A firm must act in a prudent manner"
  • The second (FR 8) states "A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with the minimum disruption of critical services"
  • The third (FR 9) states: "A firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular"

The first in particular is eye-catching. In the accompanying text, the PRA acknowledges this FR has a greater potential to direct firm behaviour and so could possibly limit competition, for example "where a firm wishes to engage in operative but risky financial products or where a firm wishes to compete where aggressively to gain market share". In such instances it is the PRA's view that compliance with FR 3 will discourage irresponsible behaviour rather than prevent sensible competitive conduct.  This is a moot point.  To cynical eyes, this could be read as (and used as a weapon to enforce) a requirement for a firm to act in a risk averse fashion. It is certainly the nearest that we have seen to this from the PRA and seems to work hand in hand with the FCA's new product intervention powers.

The second new FR is also going to raise some interesting arguments as to the manner in which a firm may go about resolution proceedings. What are these critical services, and to what extent will a firm's options be reduced by the requirement to ensure a "minimum disruption" thereto? How will this interplay with insolvency law and a director's duties to shareholders.

The third new FR is effectively copied across from the requirement at s.398 of FSMA. However it has a slightly wider effect given that it does not necessarily relate to compliance with a regulatory requirement.

It is also noteworthy that the draft handbook text supplied with the CP does not include any of the more descriptive material around the purpose of the FRs, or the consequences of breach. Will this allow the PRA a greater flexibility to apply them as they wish?

All of these questions and more may be put to the PRA before the window for consultation closes on 14 March 2014.

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{1D5EB4BD-DB3D-438F-B9B3-88E1859D595B}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/basel-iii-insurance-as-a-risk-mitigant/Basel III – insurance as a risk mitigant?Mon, 17 Feb 2014 10:33:00 ZCorporate insurance and financial servicesOliver KnoxBasel III

Basel III is the third version of the set of minimum standards applicable to banks and came into effect in the UK on 1 January 2014.  One of the main requirements of Basel III is that a bank must hold a proportion of its capital to reflect its inherent business risks. The level of that capital depends on the nature of the business and the presence of permissible risk mitigation devices (e.g. guarantees, credit derivatives and ... insurance).

Banks are naturally keen to keep the capital figure as low as possible to free up their assets for profitable purposes.  With this in mind, companies may either follow the Standardised Approach or adopt their own Internal Ratings Based Approach ("IRB Approach") if approved by their respective regulator.  The IRB Approach may provide the company with greater flexibility and result in them having to hold less capital in reserve.

The Basel Committee confirmed in December 2002 that insurance could be used as a qualifying risk mitigant provided that it meets the criteria applicable to guarantees.  (These criteria will be familiar to anyone with a passing knowledge of the Solvency II rules applicable to insurers and their use of reinsurance and other risk mitigation techniques).

Credit Insurance

In particular, this is relevant to credit insurance, of which there are two distinct types:  (i) "whole turnover", which protects the insured from customer payment default for all eligible business within an agreed period; and (ii) "single risk" (a.k.a. structured credit insurance), which protects the insured from counterparty payment default on a specific transaction/deal.  The latter is more widely written (including by Lloyd's).

Unconditionality

The main issue around whether credit insurance can be used as a risk mitigant in this way is the Basel III requirement for unconditionality. This means that the instrument must be irrevocable and within the direct control of the protection purchaser (i.e. the bank/insured).  A typical insurance policy will of course have inherently conditional features, such as the duty of disclosure and the operation of warranties, conditions precedent and exclusions.  Non–disclosure, for example, may entitle the insurer to avoid the contract.

Credit insurance policies have had to evolve so as to be Basel compliant.  Hence "warranties" have been re-classified as "terms" breach of which will give rise only to damages rather than avoidance.  Likewise, the inclusion of wording such as "to the best of the insured's knowledge" limits the duty of disclosure. The control of the insurance contract has therefore swung more into the favour of the insured.

Other Issues

Despite this, certain issues remain As above these relate to the absence or loss of control by the bank/insured, but tend to be fact-specific or trickier to deal with. These include:

  • Situations where a third party is named as insured on behalf  of a group or syndicate of banks/ lenders. Similar issues arise where a bank is involved on a transaction as a sub-participant.
  • Provisions that require insurer consent, before the bank/ insured can take certain actions.
  • Provisions that require the bank/ insured to pursue remedies against third parties before the insurance cover is triggered.
  • Exclusions (particularly where they are mandatory for the insurer, for example nuclear exclusions).

These issues are all surmountable with careful drafting, but this will turn on the particular facts of the case, as well as normal negotiation dynamics. It will also be interesting to see how the Law Commission's proposed amendments to the duty of good faith and duty of disclosure for business insureds will feed into this. On the basis that these reforms are designed to limit the circumstances in which an insurer may avoid a contract, this may serve as a boost to this particular line of business.

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{8A5E5454-C64D-495B-9DD7-92CD07819C36}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/consumer-credit-reform-impact-for-insurers-and-brokers/Consumer credit reform – impact for insurers and brokersMon, 10 Feb 2014 10:39:00 ZCorporate insurance and financial servicesThis means that all firms carrying on consumer credit-related regulated activities will need to be authorised by the FCA unless they are exempt (ie an appointed representative).  Failure to seek such authorisation is a criminal offence and could also result in enforcement action and any credit agreement being unenforceable against the consumer.

The FCA published a consultation paper in October of last year which sets out detailed proposals for the new regime. Below is a summary of how this may impact on insurers and brokers.

The rules will distinguish between lower and higher-risk consumer credit activities. As defined, higher risk activities will pick up firms whose main business is financial services and which includes not just consumer credit lending but also credit brokerage (ie the introduction of consumers to lenders). Whilst the political spotlight is currently on pay-day and other retail lenders, insurers and brokers are likely to be performing such high risk activities if they introduce customers to premium finance providers or credit arrangements are put in place by the insurer for the payment of annual insurance premiums.

These activities will require full authorisation. The FCA has explained that FCA authorised firms who currently hold a consumer credit licence from the OFT will need to submit an interim variation of permissions application to the appropriate regulator before 1 April 2014.  All OFT consumer credit licences will expire on 31 March 2014.  So firms should be getting their application forms together now. That done, there is a little time before the regime enters into full force, and so firms may wish to consider the following in advance:

  • Disclosure:  in light of the FCA's current thematic review of brokers' conflicts of interest (see Financial Services Blog), brokers should consider whether it should disclose the basis upon which it selects a premium finance provider (ie whether it is based on a fair analysis of the market in the same manner as for selection of an insurer);
  • Oversight: firms should consider appointing an individual with sufficient, knowledge and expertise of the new regime to oversee compliance in this area; and
  • Training:  firms should ensure its employees are provided with training on the new regime and how it will impact on the business.

We will update on this when the FCA publishes its Policy Statement and final rules – expected this month or next.

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{68B6EE5E-74D7-4464-91E3-1661BF309C07}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/welcome-to-the-corporate-insurance-hub/Welcome to the Corporate Insurance HubWed, 29 Jan 2014 10:48:00 ZCorporate insurance and financial servicesJames MeeOur writers come from across RPC's Corporate Insurance practice to bring insight into the market from a variety of perspectives, with a view to informing you of recent changes and updates.

Our Corporate Insurance team is a little different: every member has a thorough understanding of the Insurance Market. Our team is made up of lawyers who have worked on the largest and most complicated mandates and those who advise on the "day to day" matters and problems encountered by our clients. It is a core part of our service offering, and brings together our undoubted market expertise with the highest quality transactional and advisory services.

The Corporate Insurance team brings together market leading practitioners in all relevant specialist legal disciplines, including competition/antitrust, M&A, IP and Technology, dispute resolution, real estate, finance, restructuring & insolvency, and regulation.

Through the hub, we'll aim to keep you up to speed with the market, making it easy for you to access information on a wide spectrum of matters from one easily digestible place.

We hope you enjoy the content, and find it useful.  Any suggestions you might have will be gratefully received – please send them to rpc@rpc.co.uk.

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{7A80D9FD-19EA-409A-97A3-E0CED4D7FD13}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/complaints-led-regulation-of-general-insurance-fos-increasing-role/Complaints-led regulation of general insurance – FOS' increasing roleMon, 06 Jan 2014 10:53:00 ZCorporate insurance and financial servicesInvestment mis-selling is revealed by market losses.  Insurance mis-selling tends to come to light through complaints about claims handling.  The FOS will therefore play an increasingly important role.

The FOS was first to identify the emerging PPI scandal and has recently boasted about its role in the FCA's thematic review into mobile phone insurance (MPI).  As insurers start seeing their FOS decisions published and prepare for the findings of the thematic review into complaints handling next year, they need to prepare for increasingly complaints-led conduct regulation.

The FOS constantly reiterates that it is not the regulator; it states that its role is to resolve individual disputes as a quicker and more informal alternative to the courts. It does, however, state that its role is aligned with the FCA's objectives and that, because it considers such a vast number of complaints, it can identify widespread issues.

Since January 2013, the FOS has had a duty under s. 232A of FSMA to disclose information to the FCA that it considers would or might be of assistance to the FCA in advancing one or more of its brief but far-reaching operational objectives.

Under s. 234D of FSMA, the FOS may make a reference to the FCA – a 'super complaint' – where there appears to be a regular failure by one or more regulated persons to comply with the regulatory requirements applicable to carrying on a particular activity.

The FOS said in April that it looked forward to working closely with the FCA as it implements its new approach to regulation. However, cooperation under the terms of MoUs has been a constant. In September 2013 issue of 'Ombudsman News' the ex-Chief Executive, Natalie Ceeney, stated that FOS had already been in contact with 'Martin Wheatley and people in his team' for the last 18 months – dating back to March 2012.   Of course, the FOS reporting to regulators is nothing new; it notified the FSA about rising numbers of PPI complaints. But the FSA's failure to react quickly enough to the unfolding PPI scandal has spurred FOS to try harder next time.  In the latest 'Ombudsman News' the lead Ombudsman, Caroline Mitchell, says that FOS intervention has brought about wider change "quite a few times". The specific example cited concerns complaints involving MPI. She states that, in spring 2012, the FOS' uphold rate on MPI complaints was running at approximately 90%. The FOS dedicated a team of adjudicators to MPI complaints. Lead decisions "involving big players in the market" were issued along with batches of decisions involving similar issues. The FOS got in touch with the FCA and the ABI to voice its concerns.

Given that the FOS deals with a large number of consumer complaints, and its resultant ability to identify industry trends, it seems sensible for it to bring certain issues to the FCA's attention. But how far will this collaboration go? Will future regulation be increasingly complaints-led?

On the one hand, the FOS states it is not the regulator and its role is to assess individual disputes, quickly and informally. (We await the Court of Appeal's commentary on the public policy drivers behind FOS' role). On the other, the FOS puts dedicated teams of adjudicators together to assess complaints on particular issues, issues 'lead decisions' (which inevitably have precedent value within the FOS and would explicitly form precedents once published) and closely collaborates with relevant regulators. Now that provisions in FSMA explicitly allow (and indeed encourage) the FOS to share information with the FCA, we can expect more complaints-led regulation.

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{CFF3D252-F34A-4C92-B2B3-9D08D2BDDFF2}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/scottish-independence/Scottish Independence?Tue, 10 Dec 2013 11:04:00 ZCorporate insurance and financial servicesAmongst the 670 pages were its plans for the regulation of Scotland's substantial financial services industry.

Most of us are familiar with RBS, HBOS and other famous Scottish banking brands. There are some big insurers too, including Standard Life, Scottish Widows, Aegon UK and Bright Grey (part of the Royal London Group). How would these large entities be overseen and regulated in a post-independence world?

The SNP's position is simple – keep the PRA (along with the Bank of England) as prudential regulator, but give Scotland its own conduct regulator.

But how would this work in practice? How in particular would this regime deal with the fact that most of their customers would be English?

If Scotland is to become a member of the EU in its own right, then presumably such cross-border business will require a single-market passport.

But who would be doing what? The general rule is that it is for the "home-state" to oversee prudential matters and for the host state to oversee conduct matters .So if the PRA will be handling the former and (given that the bulk of their customers will be English) the FCA will be leading on the latter, then we would in fact see very little change indeed –no doubt just how SNP would like it …

Proposals

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{506E64CB-176A-41A3-A9C0-0AF89C7C3286}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/financial-transaction-tax-still-a-cause-for-concern/Financial Transaction Tax – still a cause for concern?Tue, 10 Dec 2013 10:59:00 ZCorporate insurance and financial servicesBen RobertsAs we approach the end of the year there must be real doubt as to whether an FTT, in a form bearing any resemblance to that proposed so far, will ever be introduced. As seen from my earlier post insurers and reinsurers would be affected by such an FTT.

The status of the FTT is uncertain, to say the least.

In September, the EU's own lawyers published a legal opinion stating that the FTT in its proposed form would be illegal. Although the legal opinion is non-binding, meaning that the 11 participating Member States could still press ahead with the FTT, this was seen by many observers as the beginning of the end for the FTT.

However, the new German coalition government has reaffirmed Germany's commitment to the FTT, and a recent leaked report suggests that the European Commission's lawyers are challenging the findings of the September legal opinion. The UK governments own legal challenge, before the ECJ, remains in place.

As a result, it remains a case of watch this space …

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{B2B866D9-F8B6-4DC4-991F-A0C7F7BD42D1}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/solvency-ii-the-phoney-war/Solvency II – the Phoney WarMon, 11 Nov 2013 11:07:00 ZCorporate insurance and financial servicesIt is fortunate that the PRA has saved us the task of reviewing this mighty 411 page tome by promptly producing its own paper (CP9/13) on 21 October 2013.

The PRA does identify a few areas where the guidelines are more "granular" than its own current rules. So for example, the guidelines that deal with "own fund" requirements provide that a firm must ensure that the terms and conditions of any own fund item are "clear and unambiguous" in relation to the criteria of the applicable capital regime. This goes beyond the requirements of GENPRU 1.2 and may create a little difficulty in the case of more exotic instruments.  But ultimately the PRA concludes - in just 13 pages - that the impact of the guidelines is relatively limited. Given that the window for comments is just three weeks (ending on 15 November), I don't think the PRA is expecting anyone to disagree...

Is this evidence that the stars in the Solvency II firmament are coming into alignment? Or is it simply a reflection of the fact that no further substantive detail on the level 2, 3 or other measures surrounding the final shape of Solvency II was then (or is now) available? I fear it is the latter. The phony war continues, and if Solvency II is to come into force on 1 January 2016, there is an awful lot more detail to be had.

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{D952FCA7-366F-4E8E-95EF-70529484D814}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/handbook-suffers-from-cidra-hangover/Handbook suffers from CIDRA hangoverThu, 10 Oct 2013 11:13:00 +0100Corporate insurance and financial servicesIn this month's FCA Handbook update the provisions of the new Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) have been transposed into ICOBS.

The FOS' guidance on mis-representation and non-disclosure published in August boasted that "The Act has not changed the way we look into cases about misrepresentation and non-disclosure because the law now reflects the approach we were already taking". We have previously discussed the potential impact of CIDRA when the Act first came into force on 6 April. At the time we noted that although CIDRA merely clarifies the law to reflect market and FOS practice the new Act conflicted with existing provisions in ICOBS.

With the update to the Handbook, effective as of 1 October 2013, the categorisation of a 'mixed' customer in ICOBS has been brought into line with CIDRA but only for the purposes of applying CIDRA. The old definition at ICOBS 2.1.3(1) G will continue to apply, such that a 'mixed' customer acting as a both 'consumer' and a 'commercial customer' will be a 'commercial customer', except in relation to the new provisions on disclosure and 'qualifying misrepresentations' at ICOBS 5.1.4 G and ICOBS 8.1.2 R respectively. For these provisions, a customer who enters into a contract of insurance "mainly" for purposes unrelated to his trade or profession is still a 'consumer' who can benefit from the 'qualifying misrepresentations' provisions. Lest you think this clarifies matters, there remains a distinction between mixed use customers and 'status uncertain' customers; under ICOBS 2.1.2, "if it is not clear in a particular case whether a customer is a consumer or a commercial customer, a firm must treat the customer as a consumer"!

The new ICOBS 5.1.4(3) and (4) G reflect s.3(1) and s.3(2) CIDRA and require insurers to "explain… to the customer the responsibility of consumers to take reasonable care not to make a misrepresentation and the possible consequences if a consumer is careless in answering the insurer’s questions, or if a consumer recklessly or deliberately makes a misrepresentation; and [to] ask… the customer clear and specific questions about the information relevant to the policy being arranged or varied."

The new ICOBS 8.1.2(2) makes it unreasonable for insurers, in relation to contracts or variations agreed on or after 6 April, to reject a claim for "misrepresentation by a customer [if] the misrepresentation is not a qualifying misrepresentation". The definition of a qualifying misrepresentation derives from s.2(2) CIDRA which is set out in the new ICOBS 8.1.3 R: (1) the consumer must take reasonable care not to make a misrepresentation and (2) the insurer must show that without the misrepresentation they would not have entered into the contract or would have done so only on different terms.

Now the new Handbook rules are in force it is essential that insurers ensure that all their consumer documentation has been amended to remove any references to the old duty of disclosure. Not only will attempts to avoid a policy based on the old duty of disclosure be ineffective, an insurer's failure to ensure that consumers (in the new, wider sense) are familiar with the new, limited, duty of disclosure will be a failure to follow ICOBS 5.1.4 G, and an attempt to rely on the old rules will likely be a breach of ICOBS 8.1.2 R.

Following Imogen's blog, any insurer looking for a case to run to the High Court by way of Judicial Review of the FOS' approach to directions should find a 'commercial customer' to which CIDRA does not apply but which (at the time of the complaint rather than placement of the policy) was eligible to complain to FOS as a micro-enterprise.

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{6E8EE5AC-195E-4F4F-97E6-C98AB8001589}https://www.rpc.co.uk/perspectives/corporate-insurance-and-financial-services/the-fca-a-very-different-animal-that-bites-harder/The FCA – a "very different animal", that bites harderTue, 23 Jul 2013 11:17:00 +0100Corporate insurance and financial servicesThe firms were not just required to conduct a root cause analysis and put matters right but were required to pay redress to customers adversely affected by the issues in the past, whether or not they had complained.

In Swinton's case, the sale of personal accident, home emergency and motor breakdown policies over a two year period resulted in an estimated repayment of £11.2m being required, as well as the fine.

The failing here was an aggressive sales strategy aimed at boosting sales, with the customer not being given adequate information about the products.  The fine was heavily discounted however, to reflect Swinton's cooperation in badgering customers to respond to the offer of compensation, raising the customer response from a uninterested 1.5% of customers asking for their money back to 12%.

The FCA's reviews, in its short life, have been prolific.  In his speech to the ABI Biennial Conference on the FCA's first 100 days, Martin Wheatley, Chief Executive of the FCA, described the FCA as a "very different animal" to the FSA.  The FCA has been making extensive information requests from the London Market, citing its interest in conduct risk, suggesting the pace of reviews will not slow.

Since April, firms would have been worrying in the boardroom about reviewing all their sales practices and literature on motor legal expenses insurance, undertaking an extensive review into fairness in claims handling, reviewing all add-on products sold through third parties with consumer products (such as gadgets, mobile phone and holidays), and reviewing the basis on which they remunerate and delegate authority to brokers.  Good job they are distracted from making money, since the FCA doesn't particularly want them to.  One of the FCA's objections in the Swinton final notice was the fact that they raised £92.9m (with a 30% profit margin), in two years of selling add-ons.

What will be the impact of the reviews?  Do consumers really care if the product they purchased had some additional protection they did not avail themselves of, provided the product was cheaper than the next?

Consumers care about the price of the product.  Which is why, despite endless campaigns to retain customers and create loyalty, despite pockets of excellence in claims handling (the only real measure for a consumer of the worth of an insurance company) consumers still move to a new insurer to save fifty pence.  The extent of the cover is not typically the driver.  So if a home policy with legal expenses cover, boiler care and accidental damage is £20 more than the same product without these features, they'll consider moving.

There are however, learnings to be taken on board from the Swinton case where there was some sharp behaviour.  Firms selling add-on products should ensure:

  • Compliance monitoring should be in relation to the core products and the add-on products.
  • The customer should be made aware that the cover is separate and not compulsory (so ask "you also have an option to take PA cover" not inform "you've got 3 months' free PA cover").
  • The key terms and exclusions of the product should be explained prior to purchase.
  • Sales staff remuneration should not be structured in a way which motivates inappropriate sales practices.
  • If different levels of cover are available, the customer should be informed of them all.
  • If any free period is offered, customers must be reminded of its pending expiry.
  • Cancellation rights must be explained.
  • Board management information on all of the products must be sufficient to enable those responsible to identify customer detriment and regulatory risks.
  • Ignore internal adviser concerns about mis-selling at your peril!

The problem is of course that all reviews come at a cost.  And with the risk of fines, that cost is considered to be an evil necessity.  Who then pays for the cost of reviewing thousands of cases, pulling endless files out of archive and trawling through telephone recordings?  The consumer of course.  It is naïve to suggest that this additional cost burden is one which can be borne by shareholders, or employee redundancy programmes.  And so premiums increase and the consumer pays.  Martin Wheatley, Chief Executive of the FCA recently commented "We want consumers to be in a position to drive healthy competitive markets so that they become the new normal." I couldn't agree more.  But healthy competitive markets require stability and for firms to be able to "put the consumer first … [or] exit" requires proportionality and measure.

Wouldn't it be more proportionate to educate consumers on potential product failings and ask the consumer whether the product represents good value for money and whether consumers understand what they are getting with their policy?  It would then be for the consumer to determine if the outcome was fair to them.  Or alternatively focus reviews on the firms where complaints have been received or internal compliance or audit reports suggest failures in sales practices?

With FCA reviews costing vast amounts of time and money, regulatory intrusion on intermediaries and insurance increasing more than any other regulated sector and the internal costs of compliance having an impact on profitability, for the organisations that demonstrate best practice as well as those that fall short, the outcome is simple. It is becoming increasingly unaffordable and uncomfortable doing insurance business in the UK.

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