Chapter 5 - Legal and regulatory issues Flashcards
What are the FCAs 2 main areas of regulatory responsibility IRO broking firms?
Authorisation aka Prudential regulation - ensure that firms are financially sound
Conduct of business aka Conduct regulation
Do insurance broking firms have to be regulated by the FCA if they intend to undertake any regulated activity for remuneration?
Yes
What is the FCA definition for mediation?
The activities of introducing, proposing or carrying out any other work preparatory to the conclusion of contracts of insurance or of concluding such contracts, or of assisting in the administration and performance of such
contracts, in particular in the event of a claim.
What are the 4 main activities that are regulated as per FCA insurance mediation?
Arranging the purchase of general insurance policies incl introducing as per ICOBS
Advising on insurance purchases.
Dealing as agent.
Assisting in the administration and performance of insurance policies
How does an insurance broker get authorised by the FCA?
Step 1 - Decide the scope of authorisation. What activities are your firm likely to undertake?
Step 2 - Understand the FCA’s Principles for Businesses and how they would apply to the firm.
Step 3 - Prepare an appropriate business plan that addresses the FCA’s requirements.
Step 4 - Calculate the minimum financial requirements for the business to operate.
Step 5 - Decide whether the processes, systems and controls within the firm will
meet the FCA’s requirements and are
adequate to manage the business.
Step 6 - Decide which people will be ‘authorised persons’ within the firm (i.e. take
responsibility for key regulated activities).
What will the FCA focus on when authorising firms?
Business model - how they make money
Governance - managed, directed and controlled
Culture - shared values, standards, beliefs
Systems and control - product governance, end-to-end sales process, prevention of financial crime
Why are firms subject to ongoing supervision by the FCA?
ensure they comply with the conduct of business regulation principles and rules
Does the FCA have a risk-based approach to supervision? What does this mean?
Yes
Directs its resources to firms it believes pose the greatest risk to customers in line with the FCA’s operational objectives
High risk = higher impact on customers
What is the FCAs primary objective?
Consumer protection through the fair
treatment of customers
How did the FCA categorise firms pre Sept 2015?
Categorised according to risk
C1 (large banking/insurance groups with lots of retail customers)
- C4 (smaller firms incl intermediaries)
How does the FCA categorise firms post Sept 2015?
Fixed portfolio - continue to be subject to a programme of firm or group-specific supervision
or flexible portfolio - subject to event-driven reactive supervision
Do fixed portfolio firms make up the majority of population regulated by the FCA? Why would a firm be marked as fixed portfolio?
No
factors such as size, market presence and customer footprint, require the highest level of supervisory attention.
Are fixed portfolio firms allocated a named individual supervisor?
Yes - continuous assessment approach
How are flexible portfolio firms supervised?
Combination of market-based thematic work and programmes of communication, engagement and education activity aligned with the key risks identified for the sector in which the firms operate.
Who do flexible portfolio firms use as their first point of contact with the FCA?
FCA Customer Contact Centre
How else can insurance brokers be subdivided into 3 groups?
Small firms – around 98% of the number of regulated firms;
Medium-sized firms with a higher risk profile; and
Significant businesses
Where is the FCA’s supervision model outlined?
Regulatory Handbook
What are the 3 pillars the FCAs supervision model is based on?
Frim systematic framework (FSF)
Event-driven work
Issues and products
What is Retail Mediation Activities Return (RMAR)?
The FCA monitors the regulatory position of firms who deal directly with clients (such
firms are known as ‘retail’ firms) by requiring them to report on certain activities.
Firms do this by completing a Retail Mediation Activities Return (RMAR)
How often do firms have to complete a Retail Mediation Activities Return (RMAR)? How do they submit?
<£5m - every 6 months
>£5m - every 3 months
GABRIEL (Gathering Better Regulatory Information Electronically)
What is the Senior Managers and Certification Regime (SM&CR)? When was it applied to insurance brokers?
Changing how people working in financial services are regulated.
Applied to insurance brokers in December 2019
What are the key aims of SM&CR?
Encourage greater clarity of responsibilities;
Improve corporate governance, demonstrating clearer accountability for decision making;
Ensure that responsibility is clear and that firms don’t rely on collective board responsibility;
Identify who really runs the firm (i.e. senior management) removing, or at least limiting, parent company involvement in a regulated firm;
Give the FCA a sound framework against which to take enforcement action against individuals when serious issues occur; and
Place the responsibility for ‘authorising’ those who undertake significant harm functions, such as an investment adviser, on the firm rather than the FCA (this is known as certification).
What are the key features of the SM&CR rules?
Senior Managers Regime - senior individuals who hold key roles or are responsible for whole areas of relevant firms
Certification Regime - ‘material risk-takers’ (i.e. staff who are subject to the
Remuneration Code) and other staff who pose a risk of significant harm to
the firm or any of its customers (e.g. staff who give investment or mortgage
advice or who administer benchmarks)
Conduct Rules - apply directly to nearly all staff (apart from ancillary staff, e.g. catering staff).
What happens if a firm fall short of the FCAs expectations?
Under the Financial Services Act 2012:
Withdraw that firm’s authorisation;
Discipline both individuals and firms;
Impose penalties;
Apply to the court for injunctions (a court order requiring certain action to be stopped);
and
Prosecute
Is the emphasis on prevention rather than cure?
Yes
What are the range of measures and sanctions available by the FCA that can be taken against
individuals within insurance broking firms and the firms themselves when there is a need
for enforcement and disciplinary action?
Public censure - damaging their reputation and potentially hindering future success
Financial penalties
Prosecution for criminal offences e.g., carrying on a regulated activity without authorisation or misleading the regulator
Civil and less formal remedies e.g., injunctions, restitution and withdrawal of permission and/or authorisation
What are the 11 Principles for Businesses which apply to the way brokers conduct their business?
- Integrity
- Skill, care and diligence
- Management and control
- Financial prudence
- Market conduct
- Customers’ interests
- Communications with clients
- Conflicts of interest
- Customers: relationships of trust
- Clients’ assets
- Relations with regulators
- Consumer Duty
What are the 6 FCA treating customers fairly (TCF) outcomes?
Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
Outcome 2: Products and services marketed and sold in the retail market are designed
to meet the needs of identified consumer groups and are targeted accordingly.
Outcome 3: Consumers are provided with clear information and are kept appropriately
informed before, during and after the point of sale.
Outcome 4: Where consumers receive advice, the advice is suitable and takes account
of their circumstances.
Outcome 5: Consumers are provided with products that perform as firms have led them
to expect, and the associated service is of an acceptable standard and as they have been
led to expect.
Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to
change product, switch provider, submit a claim or make a complaint.
What is the product life cycle in relation to treating customers fairly?
Firms are expected to embed the fair treatment of customers across the whole of its
operation from first contact with a potential client (and even before that when considering
what products to offer them) to ongoing client service.
What is the way that the fair treatment of customers interacts with the product life cycle?
Product design and governance
Identify target markets
Marketing and promoting the product
Sales and advice processes
After sales information
Complaints handling
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When did the FCA Consumer duty come into force?
July 2022 with full implementation expected by July 2024
What is the regulator’s intention in introducing the Consumer Duty?
A higher level of consumer protection in retail financial markets
Consumers find it harder to make informed decisions and could purchase products that are not appropriate for them
What are the 3 elements of Consumer Duty?
The Consumer Principle - act to deliver good outcomes for their clients
Cross-cutting rules - designed to amplify the Consumer Principle. Avoid harm, pursue financial objectives, act in good faith
Specific outcomes - more detailed set of rules and guidance setting out expectations for firm conduct. Communications, products and services, customer service, price and value
How does the FCA define a vulnerable customer?
Someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care
Does the FCA recognise that although consumers should take responsibility for their choices
and decisions, there are very real factors that might limit their ability to do so?
Yes - published guidance on how intermediaries should deal with customers they think are vulnerable
e.g., poor health, life events such as being recently bereaved, and poor literacy or numeracy skills
Should the fair treatment of vulnerable customers be embedded in policies and processes, not just on the front line?
Yes - areas such as product development, and should be part of a healthy culture throughout firms
How should firms achieve good outcomes for vulnerable customers?
Understand the needs of their target market/customer base.
Ensure their staff have the right skills to recognise and respond to the needs of vulnerable
customers.
Respond to customer needs throughout product design, customer service provision and
communications.
Monitor and assess whether they are meeting and responding to the needs of customers
with characteristics of vulnerability, and make improvements where this is not happening.
What is Insurance: Conduct of Business Sourcebook (ICOBS)?
The FCA moved from a principles-based approach to a risk-based approach and there are a
number of actual regulatory rules which are outlined in ICOBS
FCA can reinforce its principles through specific areas in the general insurance market
How many chapters are in Insurance: Conduct of Business Sourcebook (ICOBS)?
8
Does ICOBS deliver a blend of Guidance and Rules?
After each statement in the Handbook is a letter (G for guidance, R for rules)
What is in ICOBS 1: Application?
Defines the scope of the rules and the activities to which the rules apply - incl insurance mediation activity
What instances are ICOBS 1 rules exempt?
Broker not in contact with customer
Reinsurance
Contracts of large risks outs the European Economic Area (EEA)
Commercial customer located in EEA
What is in ICOBS 2: General matters?
Provides an explanation of the different categories of customer and communication to clients
Definitions of ‘consumer’ and ‘commercial customers’
In ICOBS 2, if it is unclear whose capacity the customer is acting in, are they treated as a consumer with higher set of protective measures?
Yes
If acting in private or commercial capacity then treated as commercial customer
What is in ICOBS 3: Distance communications?
Applies to contracts concluded via the internet or through a call centre
Information in a durable medium must be supplied before the conclusion of the contract
For insurers but brokers when distributes its products through a distance sale or service scheme and the client has not had the benefit of direct advice
What is in ICOBS 4: Information about the firm, its services and remuneration?
Insurance broker must disclose its status (e.g. address and authorisation status)
Using an initial disclosure document (IDD) - compulsory for consumer contracts
What is in ICOBS 5: Identifying client needs and advising?
Guidance on how brokers should explain the requirements to their customers
Rules concerning the assessment of a customer’s demands and needs and the suitability of a contract being recommended
Suitability statement - customer’s demands and needs and give reasons for any advice given in relation to a policy
What is in ICOBS 6: Product information?
Provision of information regarding the products being sold at each stage of the contractual process - client can make an informed decision
price, law, complaints handling, insurer EEA state and head office address, cancellation provision
What is in ICOBS 7: Cancellation?
Cancellation rights for consumers and the effects of cancellation
Subject to 14-day cancellation rights. Not strictly a cooling-off period as the rules allow for some insurers to charge for services provided. If the policy is cancelled, the consumer is entitled to a refund within 30 days
What is in ICOBS 8: Claims handling?
Way in which claims must be handled by insurers and intermediaries
General rule is that an insurer is responsible for the handling of claims, whether they carry out this work personally or it is delegated or outsourced to another organisation
Where the policyholder is a consumer, does ICOBS 8 set out certain circumstances in which the rejection of a claim is unreasonable?
Yes - unless evidence of fraud
Should any conflict of interest be resolved with the client’s approval of the proposed arrangement?
Yes
What does competence mean as per the FCA?
Having the skills, knowledge and expertise needed to discharge the responsibility of the employee’s role, including a good standard of ethical behaviour
What are the 3 key areas of training and competence that all firms need to consider as per the FCA?
Assessing competence;
Maintaining competence; and
Record-keeping
How does the FCA provide training and competence guidance?
Senior Management Arrangements, Systems and Controls (SYSC) sourcebook - describes the high level competence requirement; and
Training and Competence (TC) sourcebook - outlines more specific requirements for certain activities
What are the principles that a firm must do to satisfy themselves of the suitability of those acting on its behalf?
Employ personnel with skills, knowledge and expertise
Nature, scale and complexity of its business, and the
Nature and range of financial services and activities undertaken in the course of the business.
Does the Training and Competence (TC) sourcebook contain extra requirements for retail brokers? What about CPD?
Yes - requirement to supervise employees until they demonstrate the necessary competence to carry on the activity
Competency must be maintained through continuing professional development (CPD).
Does the FCA prescribe how competency is achieved?
No - each individual firm has responsibility for its own employees
What does the maintenance of competency must take account of?
Technical knowledge and its application;
Skills and expertise; and
Changes in the market and to products, legislation and regulation
How long do records of training be kept for?
Last three years
What are the 2 key financial crime issues with insurance brokers?
Money laundering; and
Bribery and corruption
What is money laundering?
Process by which criminals and terrorists convert money that has been obtained illegally into legitimate funds
What are the 3 stages of the money laundering process?
Placement - purchase of an insurance policy
Layering - conceal the origins of the money, additional transactions or transfers may be made
Integration - criminal accesses ‘clean’ money legitimately by RP or claim
What are the specific laws that relate to money laundering?
Criminal Justice Act 1993
Proceeds of Crime Act 2002 (POCA)
Serious Crime Act 2007
Money Laundering Regulations Act 2017
What does a money laundering reporting officer (MLRO) do?
Takes overall responsibility for maintaining effective anti-money laundering systems and
controls within the firm
What are the 4 criminal offences under the terms of the Bribery Act 2010?
Giving, promising or offering a bribe;
Requesting, agreeing to receive or accepting a bribe;
Bribing a foreign public official; and
Failure by a commercial organisation to prevent active bribery being committed on
its behalf
What offence causes the most conern?
Failure by a commercial organisation to prevent active bribery being committed on
its behalf
What are sanctions?
Governments may ban organisations or individuals from doing business, or even ban businesses and individuals from doing business with governments or countries where necessary.
Who is responsible for the implementation and administration of international financial sanctions in effect in the UK as well as licensing exemptions to financial sanctions,
domestic designations under the Terrorist Asset Freezing etc. Act 2010, and directions
given under Schedule 7 to the Counter-Terrorism Act 2008?
HM Treasury
What can working with sanctioned individuals/entities result in?
Large fine or up to seven years in prison
What is the Employers’ Liability Tracing Office (ELTO)?
Introduced by the insurance industry to
make it easier for employees to search for employers’ liability insurance policies using a
central database
How far back does the ELTO database go?
Contains all new and renewed employers liability (EL) insurance policies from April 2011,
policies from before April 2011 that have new claims made against them, and
policies that were identified through the previous tracing service
Are brokers required by the FCA to place certain information on the database?
Yes - ; there is now a section on the ELTO database specifically for brokers
What does The Data Protection Act 1998 (DPA) regulate?
Personal data
Protection from organisations who had lost, disclosed without
authorisation or retained inaccurate information about them
When did The Data Protection Act 2018 came into effect to replace the DPA?
in May 2018
What does The Data Protection Act 2018 aim to do?
Aims to modernise data protection laws to ensure they are effective in the years to come
When was The General Data Protection Regulation (GDPR) adopted?
May 2018
Does the GDPR have the force of law across all EU Member States?
Yes
Does the GDPR place specific legal obligations on data controllers and processors?
Yes
Does the GDPR apply to personal data?
Yes
How does the GDPR differ to the DPA?
Definition is more detailed
Reflecting changes in technology and in the way in which information is collected
