PROTECT

LEGAL AND REGULATORY UPDATE

MAY 2013

A lot to get through . . . .

The Legal and Regulatory Update (Dec ‘12 – May ‘13)

Some thoughts on “Culture”

Legal and Regulatory Update

New Legislation

Regulatory Initiatives

New Legislation

Equality Act 2010 (Amendment) Regulations 2012

Removed the exceptions relating to gender from the Equality Act as a result of an ECJ judgement

Taking gender of an insured into account as a risk factor constitutes discrimination – but . . . .

EU Guidance says the use of risk factors which might be correlated with gender remains OK, as long as they are true risk factors “in their own right”

So, the first big question for us to consider today is . . .

Are women drivers a risk factor – “in their own right”?

You are a bad man, Malcolm

The Consumer Insurance (Disclosure and Representations) Act 2012

In force from 6 April 2013

A big issue still causing difficulties for my clients

Seems straightforward – but needs to looked at in context

Starting with the straightforward . . . .

Replaces the duty of a consumer to volunteer material information to an insurer with a duty to take reasonable care not to make a misrepresentation

This means, if an insurer wants to know anything, it must ask for a “representation”

Whether a customer has taken reasonable care with any “representation” will be determined by reference to how clear are the insurer’s

questions; and

explanatory material?

The Consumer Insurance (Disclosure and Representations) Act 2012

Now, the less straightforward .. .

The Act only applies before a contract is entered into or varied

Clients ask whether they can require a customer to notify them of (material) changes in circumstances during the contract?

Under the Act, “yes”, but the Act was designed to bring elderly insurance law in line with current consumer focused legal/regulatory requirements - and those requirements include avoiding unfair terms

It usually will be unfair to require disclosure of changes in risk during a contract . . .

unless the requirement is exceedingly well illustrated and communicated

The Consumer Insurance (Disclosure and Representations) Act 2012

And one other complexity . . .

Many seem unaware of Section 6 of the Act

An “anti avoidance” provision . . .

makes it “ineffective” to convert:-

a representation made by a consumer (an answer to a question) into

a warranty (a term of the contract)

e.g. via an “entire agreement clause” – and . . .

a clause which is “legally ineffective” is an unfair term to include in a consumer contract – and therefore is unlawful

The Consumer Insurance (Disclosure and Representations) Act 2012

Any other new legislation?

Financial Services Act 2012

Bank of England H. M. Treasury (and Parl.)

Financial Conduct Authority

(FCA)

Prudential Regulation Authority (PRA)

“Dual Regulated Firms” (Insurers & Deposit

Takers)

All other Firms

Conduct of Business

For Conduct of Business . . .

Financial Conduct Authority

(FCA)

All Firms

An immensely powerful organisation

Financial Conduct Authority

(FCA)

Integrity Objective Competition Objective

Consumer Protection Objective

“Make regulated markets work well”

Totally consumer outcome focused

Never sell a consumer something they don’t

“need”

Consumers must be able to shop around

with no POS advantage

The Consumer Protection Objective - “to secure an

appropriate degree appropriate degree of protection for consumers”

And we will now see all of that within . . .

Regulatory Initiatives

A Deluge

Temporary Product Intervention

Consultation (CP12/35 December 2012) followed by Policy Statement (PS13/3) in March 2013

Deals with powers of FCA to make rules to ban (or otherwise intervene into) products that pose “unacceptable risks to consumers”

Usually an intervention will be preceded by consultation . . .

But where there is need for “prompt intervention” this can be made without consultation - but will last for no more than 12 months

“If an urgent product-related issue arises in the market, which is deemed likely to cause significant consumer detriment if left unaddressed for the time it would take to consult on product intervention rules”

“These are expected to be cases . . . where to delay action would jeopardise the FCA’s effectiveness in delivering on its consumer protection objective and/or produce a significant redress bill for the industry”

Which means?

FCA on the need for prompt intervention

Temporary Product Intervention will occur

. . . if anything remotely akin to PPI comes across FCA’s radar”

Which brings me neatly to . . . .

The “Add-on” Insurance Investigation

Announced on 19th December (for God’s sake)!

Already considered by PROTECT at a special meeting

Very important to note that the investigation is competition focused

. . . as was the investigation into PPI; and

Once you start on that road . . . . .

Armageddon ensues

Nature of the Study Focused on poor outcomes for consumers where:-

the consumer is focused on the primary sale, not on the cost and value of the add-on insurance; and

the terms of the add-on insurance mean that the products are of limited use to consumers; and

there are common features of the add-on markets that weaken competition and drive poor consumer outcomes . . aka the POS advantage!!

FCA aim to complete the assessment by the third quarter of 2013, and to publish the results shortly after that

Any subsequent proposals for intervention “would be subject to the FCA’s standard procedures, including statutory consultation for any new rules” (or maybe temporary product intervention)?

Malcolm’s thoughts. . . .

A massive threat

The threat is not restricted to the Armageddon outcome

(Indeed less rigid FCA approaches just may lead to more creative solutions)

But the threat is greater . . . .

Via the mere announcement of the Investigation

The add-on market for GI products may be destroyed before the investigation is completed . . .

Why did FSA announce the investigation?

Why not a discreet “thematic review” with a targeted “announcement” then made on the basis of knowledge?

Regulators . . .

Can distort and destroy markets (without redress) by a failure to understand their dynamics – and indirect outcomes . . .

Ask FOS what it thinks about the PPI Claims Management Industry . . .

Before FCA went public it should have understood (for example) the motor dealer guarantee product . . .

It could have asked the OFT just how exposed consumers of non-insured protection products are . . . ?

It could have simply switched the television on and . . . . .

Seen what happened to customers of . .

Which leads me to “Transparency”

DP 13/1 . . .

“to open a debate on how we (FCA) can become more transparent, about information we could disclose and information we could mandate firms to disclose”

A paper dressed to look like it is about the regulator’s transparency is actually mainly focused on the regulator using transparency as a tool

What is the tool for?

DP13/1 Transparency objectives . . .

“to increase consumer power in a rapidly changing and demanding economy”

“to put consumers in charge so that they are better able to get the best deals”

“firms may seek to prevent bad behaviour happening if they knew it will be exposed”

“mandating firms to release more, or different, data/information on “other aspects of their performance” so that this “could be used to compare firms”

FCA on how the Transparency tool could be used?

“Publishing information about which firms pay out on insurance products could help to address concerns that insurers seek to avoid paying out”

“Transparency may be an effective tool in certain insurance markets but not work well in others”. . . . .

So, where might “transparency” work well?

Guess where!!!!

“Our initial thinking suggests this could work particularly well for add-on and non-core products such as warranty, home emergency, identity theft and mobile phone insurance”

So I asked FCA . . . .

“Since you are so keen on Transparency

Can you please tell me, in connection with your add-on insurance investigation:-

the number of firms to whom questionnaires have been sent; and

the total number of separate questionnaires sent; and

the number of questionnaires sent in respect of each product type”?

The FCA’s answer?

Transparency!!!!!!!!

“Unfortunately, at this stage of the project we are not in a position to disclose more than we set out in the public announcement on 19 December 2012”

So I asked them if a Freedom of Information request might make them suddenly go all transparent . . . . ?

It did!

For PROTECT Members

If you value your market

If you value your business

You cannot let a regulator which has publically committed to working with the industry

Become, or operate, in an uninformed non-participatory, non-transparent manner

You HAVE to . . .

Really Shake them . .

Finalised Guidance on PPI Replacement Products

Again already considered by PROTECT at a special meeting with (then) FSA

So, just two points from me now, on:-

the extent to which the Guidance relates to existing as well as replacement products?

what happens next?

“Does the Guidance relate to other products”?

A surprisingly frequent question to me

“Although the focus of the guidance is on new forms of payment protection, firms . . . . may want to consider this document as part of any ongoing review of product design or distribution strategies”

I agree - the Guidance usefully collects together much existing guidance and good practice from the regulator into one place

So treat the Guidance as a reflection of FCA’s wider principles and approaches to the design, distribution and sale of all general insurance products to consumers

PPI Replacement Products – “What happens next”?

“We will continue to monitor developments in the market, and will consider taking action under our respective powers where we identify that firms’ products or practices risk causing detriment to consumers”

No surprises there then – but what follows is . . .

“We maymay also engage proactively with firms to mitigate emerging risks”.

This, from a Regulator . . . .

That promised participation with the industry . .

but which, if it sees a problem, only “may” engage proactively with firms?

One that needs a threat of freedom of information request before it will even communicate basic information to me . . .

Every firm here needs to be prepared to use its influence to change that mind set . . .

If not . . . . .

The “Modern Regulators” will think they know best!!!!

Other Regulatory Stuff (1)

CPP Enforcement – Use of Principle 7 (failure to communicate clearly) as basis for a major enforcement

Satellite Warranties – Supreme Court back FSA on an interpretation of “insurance” at odds with that in the PPI Guidance Consultation

Super Complaints and Mass Detriment – GC 13/1 anticipates a wider spectrum of consumer(?) organisations being able to make super-complaints

FOS publication of decisions – final decisions now being published

Sargent Review - no simple IRP, “not a straightforward purchase decision in the current regulatory environment”; weird hostage to fortune that ABI will take work forward with a view to “final conclusions and recommendations within 6 months”

Other Regulatory Stuff (2)

Unfair Terms:-

the regulatory tool of choice (in its widest sense). Law Commission proposing that “Core terms” become subject to UTCCR 1999

price variations (increases) - ECJ supports FSA’s approach that they can only be fair if the customer is adequately informed of the nature and justification for variations pre contract; that any variation which might leave the customer “high and dry” will not be fair and a right of cancellation will not help make it so

Regulatory Disclosure – 12 month transitional period, but this does not apply to disclosures required by EU law (e.g. distance marketing)

IMD 2 – has not gone away; could be made in 2014, for implementation in 2016 . . and it may ban tying and bundling even if the add-on investigation doesn’t!

Other Regulatory Stuff (3)

FCA Guidance Consultation on Interest Only Mortgages

This has clearly been waiting in the wings to demonstrate a fresh FCA approach to nipping matters in the bud

Although no mis-selling is implicated, the regulator still sees potential problems for consumers and will place heavy burdens on the industry to deal with consumer behaviour

Which brings me to . . .

“Culture”

Arising from a “Moral Duty”

“Firms are failing in their duties to Society”

Remember this?

The Consumer Protection Objective

“To secure an appropriate degree appropriate degree of protection for consumers”

My Role as a Lawyer 20 years ago

“Hello Malcolm”

“What’s the law on this”?

I had a little look up of the law . . . .

And I then told my client what the law was!

My client was either happy

or I got sued – because I had “got it wrong”

The Role of a Lawyer now

“Hello Malcolm

What’s the law on this”?

“That you must offer a fair product, in a fair manner which will deliver fair outcomes for your customer

What is fair, Malcolm?

Ah! That is for you to judge . . .

This is a serious point . . .

All the key regulatory outcomes are “soft” concepts:-

“fair”

“appropriate”

“unacceptable”

“value”

“ability to shop around”

But . . . . . .

Firms are still structured . . .

. . . as if key regulatory outcomes were hard, definable, concepts

Firms still approach product development and clearance on the basis of a “tension” between the:-

sales and marketing team; and

the “Business Prevention” team

That is no longer viable – because there is no longer any certainty!

Do we fire the lawyers and close down compliance?

No – but the expectation which management should have from them has changed

The regulator tells us that “culture” must:-

become key in driving “behaviours” in firms; and be set “from the top”

Then this culture must be translated into “easily understood business practices”, supporting “the right behaviours”

The “right behaviours” are those “appropriate behaviours” which define the FCA’s regulatory remit – and are now the measure of your behaviour

FCA has just described this required “culture” as . . .

“Treating customers like you would a member of

your own family”

The role of “compliance”

Is no longer that of a small team in a firm

It is the whole firm

A firm which understands what is expected by regulators from that firm; and understands

What customers expect from that firm; and

What the firm can expect from customers

Interest Only Mortgages tell us that . . .

Just because you meet all the rules

Just because you sold a product properly

Just because your customer fully understood what they were buying

Does not mean . . .

that customers are not . . . .

Stupid

Greedy

Short sighted

Careless; and ultimately . .

Untrustworthy

Are you st

upid ?

They are all those things . . .

But, notwithstanding the regulator will:-

still support them; and

will still expect you to spend time, effort and money sorting out the fact that they bought your products. . . .

more or less whatever happens

So, when you design product you must, of course, meet all FCA’s rules and principles, but remember . . . . .

The Principles . . .

The Principles are now supplemented by a regulatory view that

your firm has a “moral duty to society”

“A moral duty . . . .”

Every Firm, from top to bottom, must work out, then understand, and then communicate very clearly:-

what its risks from customers are; and

what its responsibilities to customers should be; and then

design and offer product which everyone knows will meet those risks and responsibilities whatever happens

And if you can’t do that . . . .

Your Firm will live to regret it

Thank You

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