Chapter 5 - Legal & regulatory issues (15 Qs) Flashcards
What are the two main areas of regulatory responsibility for the FCA in respect of insurance broking firms?
- Authorization - called prudential regulation, which is to ensure the firms are financially sound
- Conduct of Business - treating customers fairly
FCA responsible for all aspects of insurance sales & advice
Do insurance broking firms need to be authorised by the FCA if they intend to undertake regulated activity by way of business for remuneration?
Yes - they must. FCA calls it ‘insurance mediation’
What is meant by insurance mediation in the FCA’s view?
Any firm wishing to offer independent advice
In terms of insurance mediation, what are the 4 main categories identified by the FCA which are regulated?
- Arranging - purchasing insurance policies e..g introduction of a client to a broker or assisting in the completion of a prop form
- Advising - on purchases e.g. advising how a policy meets client’s needs and having an opinion on it
- Dealing - as an agent e.g. entering into a contract with a client on behalf of an insurer (DA)
- Assisting - admin and performance of the policies e.g. all client service
What are the 6 steps to authorisation that insurance brokers need to follow?
- Decide scope of authorisation e.g. what activities will the firm undertake
- Understand the FCAs principles of business and how they apply
- Prepare a business plan that addresses FCA’s requirements
- Calculate minimum requirements for business to operate
- Decide whether processes, systems and controls within the firm meets FCAs requirements and are adequate to manage business
- Decide which people with be ‘authorised persons’ within the firm (responsible for key activities)
When authorising firms, what does the FCA focus on
Business model (how it earns), Governance (management, directed & controlled), Culture (shared values & standards) and Systems & controls the firm intends to place over:
- Product governance - control it has over insurance products & services
- End-to-end sales processes - procedures it follows when selling
- Prevention of financial crime - identification and prevention of criminal activity
When the FCA is assessing applicants understanding of how it ensures to treat customers fairly, what does it consider?
- Corporate culture - how firm identifies, manages and reduces risk
- Sales procedures
- Product design - if customers needs are being targeted accordingly
What is the FCAs approach to the suprervison of firms?
Risk-based -> directs resources to firms it believes pose the greatest risk to customers.
What is the primary objective of the FCAs supervision?
Consumer protection & Treating customers fairly
What does a ‘high risk’ firm mean to the FCA?
Can be high risk of failure, but also could be referring to a firm that if failed, would have a large impact on customers.
What are the main outcomes of the FCA’s ‘New Strategy’ in 2015?
- Classification - Changed from C1-4 (C1 being a bank and C4 being small intermediary) to ‘fixed portfolio’ (programme of supervision from FCA) to ‘flexible portfolio’ (event-driven supervision). Changes depending on risk identified so firms will move over time.
How are fixed portfolio firms and flexible portfolio firms supervised different?
Fixed portfolio - allocated named individual supervisor and continuously assessed
Flexible portfolio - supervised through combination of market-based thematic work and programmes of communication and education aligned with risks identified in the sector. These firms use FCA Customer Contract Centre for contract with FCA.
What are the 3 pillars the FCA’s supervision model is based on?
- Firm Systematic Framework (FSF) - assess firms conduct risks (are customer interests at heart) e.g. by assessing business model and strategy to ensure businesses are embedding fair treatment of customers.
- Event-driven work - supervisory activity in response to emerging issues or events.
- Issues & products - thematic work on sectors or products putting customers at risk
How does the FCA monitor the position of firms who detail directly with clients (called retail firms)
Require them to report on certain activities by:
- Completing a Retail Mediation Activities Return (RMAR) -> onto a system called GABRIEL
What is SM&CR & What are the key aims of it?
Senior Managers & Certification Regime = individuals who conducted controlled functions need to be approved by the FCA within an authorised firm. Applied in December 2019
Key aims:
- Encourage greater clarity of responsibility
- Improve corporate governance by demonstrating accountability for decisions
- Ensure responsibility is clear
- Identify who really runs the firm
- Give the FCA a framework to take enforcement action if issues occur
- Place responsibility for ‘authorising’ those who undertake significant harm functions on the firm rather than FCA
What do the following key features relate to?
= Focuses on senior individuals who hold key roles & responsibilities:
- Ensure each senior manager has a ‘statement of responsibilities’
- Introduce a ‘responsibilities map’
- ensure that all senior managers are pre-approved by the regulators before
carrying out their roles; and
- ensure those who hold a senior management function are assessed for
fitness and propriety at least annually
Senior managers regime
What does the following describe:
= Applies to all ‘material risk takers’ & staff who pose harm to firm or customers
Firms identify the individuals and then:
- assess them as fit and proper;
- issue a certificate to each affected employee to this effect; and
- have procedures in place to re-assess the fitness and propriety of certified
staff on an annual basis including the requirement to issue an annual
certificate to confirm this.
Certification Regime - onus is on the firm to assess individuals are fit and proper for the role
What does the following paragraph relate to?
These are high-level rules that apply directly to nearly all staff (apart from
ancillary staff, e.g. catering staff). Firms must ensure that staff who are subject
to the rules are aware of them and how they apply to their jobs.
Conduct Rules of the SM&CR regime
Should firms fall short of the regulators expectations under the Financial Services Act 2012, what does the FCA have the power to do?
Can intervene, discipline and enforce, how:
- Withdraw firms authorisation
- Discipline individuals and firms
- Impose penalties
- Apply to the court for injunction ( stop certain actions)
- Prosecute
THE EMPHASIS IS ON PREVENTION RATHER THAN CURE - KEY
What are the legal impacts of the FCAs regulation on insurance brokers?
- Criminal offence to carry on regulated activities without authorization
- Regulated firms must establish that insurers, brokers or intermediaries are properly authorised or exempt
- Regulated firms supervised by the FCA must adhere to rules and principles
How many FCA principles of business are there? What are their purpose and what are they?
11 principles providing foundation for regulation. Guide for authorised firms to achieve strategic and operational objectives.
1. Integrity
2. Skill, care and diligence
3. Management and Control - organise affairs responsibly
4. Financial prudence - maintain adequate financial resources
5. Market conduct - observe standards of the market
6. Customers’ interests - treat fairly
7. Communications with clients - cannot mislead
8. Conflicts of interest - manage them fairly
9. Customers: relationships of trust - ensure suitable advice
10. Client’s assets - arrange adequate protection
11. Relations with regulators - open and cooperative.
What is TCF?
How does it relate to the FCA PRIN?
What are 6 TCF outcomes?
= Treat customers fairly - initiated by the FSA (previous regulator) and is now fundamental aspect of regulatory compliance. All UNDER THE UMBRELLA OF PRIN NO. 6
Outcomes:
1. Consumers are confident dealing with firms who TCF
2. Products and services marketed and sold are designed to meet needs of consumers
3. Consumers are provided with clear information and kept informed through sales
4. Customers receive suitable advice
5. Consumers are provided with products which firms have led them to expect
6. Consumers do not face unreasonable post sale barriers.
TCF should be in the whole product life-cycle from first contact with potential client to ongoing service
What are the 6 stages of the product life-cycle? How does it relate to TCF?
Product design and governance -> identify target market -> marketing and promotion of product -> sales and advice processes -> after sales information -> complaints handling -> to the beginning
At all stages of the product life cycle customers should be treated fairly
What is the FCA’s consumer duty?
When did it come into force?
What are its implications?
Why has it been brought in?
What are the 3 distinct elements?
Brought into force july 2022, expected full implementation july 2024 and has implications for product development, marketing, sales, customer support and compliance.
FCA considered too many financial firms not adequately considering customers’ needs (e.g. misleading information and services not fit for purpose
What are the 3 distinct elements of the FCA’s Consumer Duty?
- The consumer principle - firms must deliver good outcomes for clients
- Cross-cutting rules - rules spread across FCA Handbook to amplify consumer principle
- Specific outcomes - More detailed set of rules and guidance of expectations of firms conduct
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” e.g. poor health, poor literacy and numeracy
How does the FCA expect firms to achieve good outcomes for vulnerable customers?
- Understand the needs of the market/customer base
- Ensure staff have right skills to recognise and respond to needs to vulnerable customers
- Respond to customers needs throughout product design, customer service & communications
- Monitor and assess whether they are meeting and responding to the needs of customers with characteristics of vulnerability
What is ICOBS?
What is its purpose?
Insurance: Conduct of Business Sourcebook from the FCA, divided into 8 chapters and provides a blend of regulatory rules and guidance to apply to insurance brokers
Purpose: provides a means by which the FCA can reinforce its principles in the general insurance market. Intended to provide as much flexibility as possible, while addressing key issues of potential consumer detriment.
IS A BLEND OF GUIDANCE AND RULES
What are the 8 chapters of ICOBS?
- Application - scope & who it applies to (only brokers who are in contact w/ client)
- General matters
- Distance communications
- Information about the firm, services and remuneration
- Identifying client needs and advising
- Product information
- Cancellation
- Claims handling
What does ICOBS Chapter 2 relate to?
General Matters - defines different categories of customer e.g. consumer and commercial customer. If it is unclear what capacity consumer is acting in, must be treated as a consumer.
Also covers: inducements, record-keeping, financial promotion
