Chapter 5: Legal and regulatory requirements Flashcards
Compulsory insurances for Private Individuals
- Third party motor
- Public liability in respect of wild animal ownership
Compulsory insurances for Professions and business
- Motor insurance
- Employer’s liability insurance
Why are insurances compulsory
- Provide funds for compensation
- In response to national concerns
Road traffic Act 1988
- Legal requirement to have motor third party
- Illegal to use a vehicle on public road unless insured
Employers liability (compulsory insurance) Act 1969
Updated 1998, 2004, 2008 and 2011.
- Employers are required to hold EL insurance
- Insurers against liability to pay compensation to employees who sustain injury during employment
Minimum Limit of Indemnity is £5 million
Riding Establishments Act 1970
- Public liability insurance is mandatory for riding schools
- indemnifies the insured against claims from using their horses (including injury to riders and public)
Compulsory PI/Professional negligence
Solicitors, Accountants, Doctors and Dentists are required to hold PI to have licence to practice
Why are compulsory insurances required
- Cover financial impacts of situations the insured is legally responsible or liable
- Protect innocent victims
- Longtail business means that losses can take a long time to be notified
- Insurers will defend claims against insureds removing legal fee financial burden
- sometimes required to purchase for period beyond when businesses cease to operate
Employers liability Assurance Corporation
- Set up 1880
- Dealt with new requirement for insurance created by EL act 1880
Warranty
Promise made by insured to insurer
Duties of good faith and fair representation exist between the two
Breach of Warranty
Suspends contract for period of the breach
Breach of good faith may see insurers ‘come off’ risk
EL Compulsory insurance regulation 1998 Section 2
Shall cease if
- Something specified is done or omitted to be done (warranty)
- Insured does not take care to protect employees to prevent risk of injury
- Insured fails to comply with legal requirements
- Insured does not keep records or fails
- Insurer has to deal with 3rd party claims but can challenge insured for payments
Treating third party claims
Insurer cannot refuse to deal with them but can proceed against the insured for repayment of sums
Compulsory insurance in USA
Workers comp (EL)
- Regulated state by state
- Compulsory motor insurance for commercial vehicle owners (not private)
Some states require employers to buy short-term disability insurance
Compulsory insurance in Turkey
- Property owners must have insurance against earthquakes
- some compulsory motor insurance
Compulsory insurance in Australia
- 3rd party motor insurance
in all but 2 states in Aus have one provider of basic motor insurance
Compulsory insurance in Germany
- 3rd party liability but broader in scope than motor insurance
- required for any event which German court might find you negligent
Consumer Rights Act 2015
- terms and notices have to be fair in consumer contracts
- unfair terms are not binding
- takes into account circumstances
- To avoid being measured as unfair, term should be transparent and prominent
Unfair contract term
- causes significant imbalance in parties’ rights and obligations under the contract
- detrimental to the consumer
- takes into account circumstances which existed when contract was agreed
Contracts (Rights of Third Parties) Act 1999
- Contract is an agreement between 2 or more parties
- 3rd party has no right to sue for breach of contract
- reformed privity rule and set out circumstances 3rd parties can enforce contract terms
- Contract must express provision for enforcement or 3rd party identified by name/description
Privity of contract
People who are actually a party in the contract and can enforce the terms
Injunction
Remedy awarded by the court to prevent a party from doing something
Specific performance order
- opposite of an injunction
- orders party to perform a particular act
E.g. could order party to comply with contract
Contracts Act 1999 Exclusion clause (cargo)
- do not apply to this insurance
- no benefits conferred to a third party
- No third party can enforce any term
- doesnt impact rights of the assured
IPT
12% in UK
- Tax levied by UK Gov on general insurance premiums
Standard and Higher IPT rates
Standard = 12%
Higher (Travel/other sold in conjuction with appliances) = 20%
IPT exempt insurances
Most long term insurances
- Reinsurance
- Insurance on ships
- Aircraft
- International GITs
Due to most risks located outside the UK but may be liable for similar taxes in other countries
Who collects IPT
Insurer collects from insured along with premium and pay to the UK Gov
typically paid to broker who pays both to insurer before they pay HMRC
Calculating IPT on a premium with brokerage
IPT only applies to the Premium not brokerage
£1000 premium and 20% brokerage
£1000 premium
£200 brokerage
£120 IPT
£920 net to insurer (£120 then paid to HMRC)
Senior Managers and Certification Regime (SM&CR)
- Applies to both insurers and brokers
- new regulatory framework of accountability to replace APER (Approved persons regime)
- focuses on senior individuals in firms
Firm requirements under SM&CR
- Senior managers have to have statements of responsibilities to set our personal accountability
- Produce firm responsibilities map
- Ensure senior manages are pre-approved by regulators
Regulator expectations of SM&CR
- Encourage staff to take personal responsibility
- Improve conduct at all levels
- Make sure staff understand and demonstrate who does what
Bank of England and Financial Services Act 2016
- Duty of responsibility
- Senior managers required to take steps to prevent regulatory breach
- SM&CR should result in greater disciplinary action
SM&CR parts
- Senior Managers Regime
- Certification Regime
- Rules of Conduct
Senior Managers Regime
- Applies to senior officials in firms (Known as senior management functions SMF)
- specified by rules made by PRA and FCA
- any new senior appointment need prior approval by regulators
New roles covered under SMFs
- Head of Key business area
- Group entity senior manager
- Significant responsibility function
Executive SMFs prescribed by PRA
Chief executive function
Chief finance function
Chief risk function
Head of internal audit
Head of key business area
Group entity senior manager
Non-Executive SMFs prescribed by PRA
Chairman
Chair of the risk committee
Chair of the audit committee
Chair of the remuneration committee
Senior independent director
Statement of responsibilties
- prepared for each senior manager
- set out responsibilities
Certification Regime
- apply to individuals not carrying out SMFs
- roles are still deemed capable of causing significant harm to the firm or customers
- Requires firms to assess the fitness and propriety of persons performing key roles
- Formally certify the assessment annually
- Significant harm function
Rules of conduct
- apply to senior managers, certified persons and other employees
First tier - individual conduct rules
- Integrity
- Due skill, care and diligence
- Open and cooperative with FCA, PRA and other regulators
- Pay due regard to interests of customers and treat them fairly
Observe proper standards of market conduct
Second tier - Senior manager conduct rules
SC1 - Take reasonable steps to ensure business is controlled effectively
SC2 - Take steps to make sure business complies with requirements and standards of regulatory system
SC3 - Take steps to ensure delegation of roles is to someone appropriate
SC4 - Must disclose information to FCA or PRA which would be reasonably expected
Ancillary roles in the FCA that fall out of scope
- Switchboard operators
- Receptionists
- Security staff
- HR
- Secretarial staff
Unacceptable behaviour - Acting with integrity
Deliberately
- misleading a customer/regulator
- recommending a product it cant justify
- Failing to inform customer./regulator misunderstanding material issue
- Prepare inaccurate records
- Misuse assets/confidential information of customer/firm
Unacceptable behaviour - Due skill
- recommending investment with no justification
- providing advice on transaction
- failure to provide control customer assets
- Fail to disclose conflict of interest
- fail to inform customer of information they werent aware of
Unacceptable behaviour - Observing proper standards
- Insider dealing
- Misusing market information
Unacceptable behaviour - Dealing with regulators openly
- Failure to answer questions
- not reporting information where it is of material interest
Unacceptable behaviour - business controlled effectively
- failure to apportion responsibilities under control
- failure to divvy up responsibilities clearly
- failure to share load appropriately
Unacceptable behaviour - Exercising due skill
- failure to ensure you are adequately informed
- Delegated authority without reasonable grounds for believing it will be handled
- Failure to maintain understanding on delegated area
Unacceptable behaviour - Compliance
- Failure to take reasonable steps to implement adequate system to control compliance
- failure to take steps to monitor
- Failure to inform on why significant breaches arose
- failure to take action after breaches are identified
Things to review to see if someone is fit and proper
- Honesty, integrity and reputation
- competence and capability
- financial soundness
Compliance officer
- carry out compliance oversight function
- report to governing body of the firm
- considered SMF and so is regulated by PRA and FCA
Main role of compliance officer
- Ensure that their firm abides by UK law and the rules and regulations set down by the regulator.
Vital to insurers/intermediaries as there are serious consequences for failing to abide
Functions of compliance officer
- Communicate company’s policies and associated training
- Completion of regulatory returns
- reviewing company procedures
- maintaining company’s compliance manual
- Checking that all stages of the business process are being conducted in line with compliance manual
May be hands on or hands off depending on size of organisation
Money Laundering Reporting Officer (MLRO)/Nominated officer
- All organisations have to ensure there are checks and procedures in place to prevent it
- SMF within UK regulatory framework so is regulated by both PRA and FCA
Whos not an SMF
Head of Claims
