Chapter 5 - Legal & Regulatory Requirements

Question 1

What 2 categories are required to purchase compulsory insurance?

Answer 1

1. Private individuals
2. Professions & businesses.

Question 2

What compulsory insurances must ‘private individuals’ purchase?

Answer 2

1. Third party motor.
2. Public liability (ownership of dangerous wild animals and/or dangerous dogs).

Question 3

What compulsory insurances must ‘professions & businesses’ purchase?

Answer 3

1. Motor insurance.
2. Employers liability.

Question 4

What are the 2 main reasons for compulsory insurances?

Answer 4

1. To provide funds for compensation.
2. In response to national concerns.

Question 5

Name 5 compulsory insurances.

Answer 5

1. Motor third party (Road traffic act 1998).
2. Employers liability (Employers liability act 1969).
3. Public liability (Riding establishments act 1970).
4. Liability for dangerous wild animal’s & dangerous dogs.
5. Professional indemnity insurance.

Question 6

What is the common link between all compulsory insurances?

Answer 6

They are all liability insurances and NOT property insurances.

They protect the insured should they be found legally liable for injury to a third party or loss or damage to a third party property.

Question 7

What happens if the insured breaches the warranty/good faith of their motor insurance, or employers liability insurance?

Answer 7

Insurers CANNOT refuse to pay third party claims.

After claims are settled, insurers can take action against the insured.

Question 8

What 2 compulsory insurances can insurers NOT refuse third party claims from?

Answer 8

1. Motor third party.
2. Employers liability.

Question 9

What is Employers Liability insurance called in the USA?

Answer 9

Workers Compensation.

It is regulated be each individual state, rather than being a federal system.

Question 10

What is the Consumer Rights Act 2015?

Answer 10

A piece of ‘unfair contract legislation’.

The act states that an ‘unfair term’ in a contract will not be binding on that consumer.

To avoid being considered an ‘unfair’ term, terms should be in plain language , and, if written, legible.

Question 11

How does the law define an unfair term in a consumer insurance contract?

Answer 11

Something that causes an imbalance between the parties, to the disadvantage of the insured.

Question 12

What is the Contracts (Rights of Third Parties) Act 1999?

Answer 12

‘Privity of contract’ means only those party to the contract can enforce the terms of the contract (even if the contract was made to benefit a third party).

This act reforms the ‘privity’ rule and enables the third party the right to enforce the terms of the contract.

i.e. this act allows certain parties, not privy to the contract, to claim on the contract.

Question 13

In the Contracts (Right of Third Parties) Act 1999, what provisions must be in place for a third party to enforce the terms?

Answer 13

The contract must make an express provision for the enforcement…

…or the third party must be expressly identified in the contract by name, class, or description.

Question 14

How can an insurer legally minimise its liability under the provisions of The Contracts (Rights of Third Parties) Act 1999?

Answer 14

Insurers do not generally want to extend their liability, so it it is permissible to opt OUT of the act.

Question 15

What is an ‘injunction’ order?

Answer 15

An Injunction is an order by the court that prevents a party from doing something.

Question 16

What is an order for ‘specific performance’?

Answer 16

(the opposite of an injunction)

An order for specific performance orders that the party performs a particular act.

i.e. court could order a party to
comply with a contract they’ve tried to breach.

Question 17

What is Insurance Premium Tax (IPT)?

Answer 17

This is a government tax on general insurance premiums in the UK.

There are 2 rates:
1. Standard
2. Higher

Question 18

How is IPT applied to premium?

Answer 18

The client pays the broker an additional amount of IPT (standard/higher rate) on top of the premium. This broker gives this amount to the insurer.

i.e. Client pays the broker £1,000 premium, plus an additional £120 if it has the standard rate of IPT (12%) (0.12 X 1000 = 120)

So, the insurer pays £1,000 + £120 = £1,120 to the insurer in total.

Question 19

What is the ‘Standard’ IPT?

Answer 19

The standard rate is 12%.

Question 20

What is the ‘Higher’ IPT?

Answer 20

The higher rate is 20% for travel insurance & some insurances (those sold in conjunction with the purchase of vehicles and electrical appliances, or sold as part of a wider deal such as extended warranty).

Question 21

What insurances are exempt from IPT?

Answer 21

• most long-term insurances.
• reinsurance.
• insurance on ships & aircraft.
• insurance on international goods in transit.

(these risks may be liable to similar taxes imposed by other countries).

Question 22

Who collects IPT from the insured?

Answer 22

The broker collects IPT, and the premium from the insured, and pays both to the insurer.

(The insurer is responsible for this but in practice the broker does it).

Question 23

Where does the insurer pay the IPT? And how often?

Answer 23

IPT is paid to HMRC by the insurer.

IPT is paid on a quarterly basis.

Question 24

In terms of premium and IPT, how is the brokerage calculated?

Answer 24

The brokerage (usually a %) is calculated from the standalone premium (without the IPT added).

i.e. Client pays broker £1,000 premium. 20% brokerage means broker retains £200 (0.20 X 1,000).

Question 25

What does SM&CR stand for?

Answer 25

The Senior Managers and Certification Regime (SM&CR).

Question 26

What does the The Senior Managers and Certification Regime (SM&CR) do?

Answer 26

Aims to make individuals more accountable for their conduct & competence.

Focuses on the responsibilities of senior managers within an organisation.

(encourages greater individual accountability).

Question 27

What are the 3 parts of (SM&CR)?

Answer 27

• Senior Managers Regime.
• Certification Regime.
• Rules of Conduct.

Question 28

What does the ‘Senior Managers Regime’ part of (SM&CR) entail?

Answer 28

Applies to those performing senior roles in a firm, known as senior management functions (SMF’s).

Requires seniors managers are approved by regulators before carrying out their role.

Question 29

What does the ‘Certification Regime’ part of (SM&CR) entail?

Answer 29

Applies to individuals not carrying out SMF’s, but those whose roles could cause significant harm to the firm.

Requires firms to assess the fitness & propriety of people performing other key roles, and certify this at least annually.

Question 30

What does the ‘Rules of Conduct’ part of (SM&CR) entail?

Answer 30

Rules of conduct apply to senior managers, certified persons & other employees.

Include:
- acting with integrity
- acting with due care, skill & diligence
- cooperating with the FCA & PRA
- treating customers fairly
- observing standards of market conduct

Question 31

What is the role of the Compliance Officer?

Answer 31

Ensuring that their firm abides by UK law & the rules and regulations of the regulators.

The compliance officer holds a senior management function.

Compliance officer is regulated by & PRA.

Question 32

What is the role of the Money Laundering Reporting Officer (MLRO)?

Answer 32

Is an appointed senior management function, and is regulated by both the PRA & FCA.

Question 33

How is a ‘Consumer’ defined under the FCA rules?

Answer 33

Someone who is buying insurance wholly or mainly for purposes unrelated to their business, trade or profession.

Question 34

How is someone who is ‘not a consumer’ defined under the FCA rules?

Answer 34

= the policyholder is either not an individual, or is buying insurance related to their trade, business or profession.