Chapter 5 - Legal And Regulatory Requirements

Question 1

Compulsory insurance - what are the two types of people who are required to purchase?

Answer 1

Private individuals - 3rd party Motor, public liability (dogs)

Professions and businesses - Motor, employers liability

Question 2

Why some insurance is compulsory

Answer 2

• To provide funds for compensation

- In response to national concerns

Question 3

What does Motor 3rd party cover?

Answer 3

3rd party property damage

3rd party bodily injury or death

Question 4

What does Employers Liability cover

Answer 4

Covers employers against liability to pay compensation to employees who sustain bodily injury or disease arising out of employment

Minimum limit of indemnity £5m but insurance market provides £10m as standard

Question 5

What does Public Liability cover under the arising Establishments Act 1970

Answer 5

Indemnifies against claims made arising from using the insureds horses

Injuries sustained by those riding the horses or the public

Indemnifies horse riders against liability for injury to public arising out of hiring the horses

Question 6

Liability for dangerous wild animals and dogs

Answer 6

Not a free standing insurance - likely to be an extension to home insurance under PL

Question 7

Professional negligence/indemnity

Answer 7

Required by solicitors, accountants, doctors, dentists, as condition of having a licence to practice

Question 8

Why compulsory insurance exists

Answer 8

Covers financial impact of situations where the insured is found to be legally responsible or liable for injury to people or loss or damage to their property.

Question 9

What insurance is known as ‘long-tail’ business?

Answer 9

Liability.
Losses can take time to be notified and claims can take time to develop and be resolved.

Most insurances provide that insurer will defend claims against you.

Question 10

Why do most compulsory insurances require insured to purchase for a period of time after business ceases to operate?

Answer 10

To protect the consumer should expert have ceased trading between time the advice given and point when client realised it was bad and incurred financial loss.

Question 11

All compulsory insurances in the UK are…

Answer 11

Of a liability nature

Question 12

What is a warranty?

Answer 12

A promise made by insured to the insurer.

Duty of good faith, fair presentation, disclosure of material information.

A breach of warranty suspends the insurance contract. Can come off cover, however cannot if:
Motor 3rd party
Employers liability

Due to desire to protect innocent 3rd party in an accident. Insurer can’t refuse to deal with 3rd party claims. However insurer can take action against insured to recover sums

Question 13

What compulsory insurances does USA have?

Answer 13

Workers compensation- employers liability: medical, death, lost wages, rehabilitation
Each state regulates its own workers comp

Motor insurance for commercial vehicles (not for individuals)

Short term disability insurance for employees (only some states)

Question 14

Consumer Rights Act 2015

Answer 14

Terms and notices in consumer contracts have to be fair.

• Unfair terms are not binding

Unfair if:
Causes imbalance in parties rights and obligations under the contract to detriment of consumer

Should be:
Transparent, prominent, expressed in plain intelligible language and be legible

Question 15

What will be considered when judging if a term is unfair?

Answer 15

• subject matter of contract
• circumstances when contract agreed
• terms of contract
• any other contracts it depends on

Question 16

Contracts (Rights of Third Parties) Act 1998

Answer 16

Only those party to a contract can enforce terms. (Privity of Contract)

This act reformed the privity rule to allow a third party to enforce terms

Contract must make express provision for this

Usually remedies are damages, injunction, specific, performance

Question 17

What is an injunction?

Answer 17

An order to prevent someone from doing something

Question 18

What is an order for specific performance?

Answer 18

Orders a party to perform a particular act

Question 19

Contracts (Right of Third Parties) Act 1999 Exclusion Clause (Cargo)

Answer 19

Cargo insurers receive claims from those who are not original buyers of the contract (insurance sold on with goods). Cargo insurance is freely assignable.

Insurers would deal with parties not privy to the original insurance contract so exclusion was created to prevent 3rd parties enforcing terms.

Question 20

IPT

Answer 20

Standard rate 12%
Higher rate 20% (travel)

Long-term insurances and non UK risks exempt

Insurer collects with premium and pays to HMRC on quarterly basis

Brokerage is not applied to the IPT amount, so their commission is percentage of the premium only

Question 21

Senior Managers and Certification Regime (SMCR)

Answer 21

• New regulatory framework. required by Solvency 2 and new banking supervision rules

Firms required to:

• ensure each senior manager has a statement of responsibilities
• produce a ‘firm responsibilities map’
• ensure all senior managers pre-approved by regulators

Senior managers expected to prevent a regulatory breach (Bank of England and Financial Services Act 2016)

Question 22

Senior Managers Regime

Answer 22

Senior management functions (SMFs) specified in rules made by PRA and FCA.

Firms must submit applications to regulators for approval of new senior manager appointment.

Roles covered by regulators:

• Head of key business area
• Group entity senior manager
• Significant responsibility function

Statement of responsibilities should be prepared for each senior manager including the firm’s responsibilities map.

Question 23

Certification Regime

Answer 23

Individuals not carrying out SMFs but capable of causing significant harm to firm or customers.

Firms should formally certify this annually

Question 24

Rules of conduct

Which apply to senior managers, certified persons and other employees

Answer 24

FIRST TIER RULES

• Act with integrity
• Act with due skill care and diligence
• Be open and cooperative with FCA, PRA and regulators
• Pay due regard to interests of customers and treat them fairly
• Observe proper standards of market conduct

SECOND TIER RULES

• ensure the business of the firm is controlled effectively
• ensure business of the firm complies with requirements of regulatory system
• ensure any delegation is to appropriate person and oversee discharge of delegated responsibility effectively
• disclose any information PRA or FCA would want to know

Question 25

Controlled Functions: Unacceptable behaviour

Answer 25

• Misleading customer, firm or regulator
• Misusing assets of a customer or firm
• Failing to disclose conflict of interest
• recommending an unsuitable investment
• insider dealing
• misusing market info
• failing to answer regulators questions
• not reporting info of material interest
• failing to apportion responsibilities clearly
• failing to insure you’re adequately informed about affairs of the business
• failing to take steps to implement control

Question 26

What qualities should a firm consider when reviewing if an individual is fit and proper?

Answer 26

• Honesty, integrity and reputation
• Competence and capability
• Financial soundness

Question 27

Under SMCR What additional evidence must be collected when assessing candidates for senior management positions?

Answer 27

Senior Managers:
Criminal record checks

Senior managers, certified persons and non approved non exec directors:
Regulatory references past 6 yrs

SMCR came into effect for brokers 9th Dec 2019

Question 28

Compliance officer

Answer 28

Reports to governing body
Senior management function
Regulated by PRA and FCA
Ensures firm abides by law and follows regulatory rules

FUNCTIONS:

• communication of regulatory returns
• completion of regulatory returns
• review procedures to ensure compliant
• maintain compliance manual
• checking business processes conducted in accordance with compliance manual

Tasks of the role may be carried out by an external compliance consultant