IF1.9 Legal and Regulatory Flashcards
Compulsory Insurance for Private Individuals
-Third Party motor insurance
- public liability in respect to the ownership of dangerous wild animals and/or dangerous dogs
Compulsory Insurance for Professions and businesses
- Motor Insurance
- Employers Liability
- Public Liability (specific trades and professions)
- Professional Indemnity Insurance (for specific professions)
- Marine pollution liability & liability for operators of nuclear reactors
Why are some insurances compulsory
- To provide funds for compensation
- In response to national concerns
Road Traffic Act 1988
It is illegal to use a vehicle on a public road unless an insurance policy is in force, covering third-party property damage and third-party bodily injury or death.
Dangerous Dogs Act1991
Dangerous Wild Animals Act 1976
Makes it compulsory to have liability insurance if you own one of the listed animals (nature and scope is not detailed)
How does a dangerous dog owner know the scope of the insurance they must purchase?
The local authority which issues the appropriate license will state the adequacy of the insurance.
Employers Liability Act 1969
Compulsory for the employers in great Britain to have employers liability insurance. With minimum limit of indemnity £5m.
What does employers liability insurance cover?
compensation for employees who sustain bodily injury or disease, arising out of and in the course of their employment.
Riding Establishments act 1970
Made is compulsory for such establishments to have public liability insurance. (covers anyone riding the horse or any member of the public effected by the horse)
Professional Indemnity (PI) Insurance
Insurance that provides indemnity for financial loss suffered by a third party due to professional negligence.
Solicitors Act 1974
States that solicitors must hold PI insurance which will indemnify the solicitor against claims for financial loss suffered by clients as a result of the solicitors professional negligence.
Do insurance intermediaries need PI?
Yes. Any Insurance intermediary authorised by the FCA must have PI to cover financial loss suffered by a third party caused by their professional negligence. Must have a minimum level.
Minimum level of PI cover for insurance intermediaries
1.3 million euros according to the Insurance Distribution Directive (IDD)
Do (introducer) appointed representatives need PI covers?
No
Reasons for needed Professional Indemnity Insurance in the UK
- the rising cost of legal services
- retrospective legislation may cause people to claim against you
- decisions maybe made against you
- it’s the law
privity of contract
a person can only enforce a contract if they are a party to it
Contracts Rights of Third Parties Act 1999
focusses on the privity of contract concept and sets out the circumstances in which a third party will have a right to enforce a term of the contract.
doesn’t apply to insurance contracts.
Third Parties Rights against insurers act 2010
protects insurance proceeds from the effects on insolvency.
Insolvent
When a company is unable to pay their debts
Prudential Regulation Authority (PRA)
An authority in the bank of england that regulates systemically important firms.
Supervises and where necessary intervenes to prevent firms failures effecting the entire financial system.
Financial Conduct Authority (FCA)
A separate independent regulator responsible for
- conduct of business and market issues for all firms
- prudential regulation of small firms, like insurance brokerages and financial advisory firms.
Proactively reviews and analyses potential problems and products.
Financial Policy Commitee (FPC)
A committee within the bank of england responsible for monitoring emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime.
Bank of England and financial Services Act 2016
Puts the bank of england at the heart of the UK financial stability by strengthening the Banks governance.
Who does the FCA monitor
All financial services companies
Who doe the PRA monitor
Financial service companies which are so large they w2ill effect the whole of the UK if they fail
systemically important firm
firms that pose a risk to the financial system if they fail.
Objectives of the Prudential Regulation Authority (PRA)
- to promote the safety and soundness of the firms it regulates
- ensure policyholders are appropriately protected
(3. facilitate effective competition)
Threshold conditions
minimum requirements that firms have to meet in order to be permitted to carry on regulated actitivies
High level Threshold Conditions of the PRA
- firms head office must be in the UK
- firm must have appropriate financial and non-financial resources (conduct business in a prudent manner)
- firm has to be fit and properly staffed
- capable of being properly supervised.
What is the PRAs approach to supervision focussed on?
judgement based
forward looking
key risks
PRAs framework approach to risk assessments
Impact
- consider the potential impact on policyholders
- how does the firm affect the wider financial system if it fails.
Mitigation
- risk mitigation by the firm
- financial strength (reserves, capital and liquidity)
- resolvability of the firm
What are the numbers for the PRAs risk assessment categories
1 - greatest risk
5 - least risk
How does the PRA monitor firms
the intensity if dependent on the risk assessment category.
Also smaller firms will require less monitoring.
All firms face a base line monitoring
Basline of monitoring for the PRA
- ensuring compliance with standard
- liquidity, asset valuation, provisioning and reserving
- annual (at least) review of risks posed by the firm
- examining individual firms when a risk appears
- assess the firms planned recovery actions
Proactive Intervention Framework (PIF)
Judgements about the firms proximity to failure comes from the impact assessments. The PIF has 5 stages which reflect this proximity to failure.
If a firm moves up a stage supervisors will review their actions accordingly.
Objectives of the FCA
- Protect consumers from bad conduct
- protect and enhance the integrity of the UK financial system
- promote effective competition in the interest of consumers
Overarching strategic objective of the FCA
make sure the relevant markets function well
definiton of Integrity
Doing the right thing
How does the FCA differ from the PRA in its actions?
It is more proactive and intervenes at an earlier stage to pre-empt and prevent widespread harm to consumers.
Super-Complaint
Detailed submissions by groups of consumers
What is the FCAs competition objective?
promote effective competition in the interests of consumers i.e. allow consumers to get fair priced products which reflects their needs
What is the FCAs approach to regulation?
- Proactive product governance
- Reviewing super complaints
- Promoting Competition
FCA supervisor teams
large organisations will have supervisor teams
small organisations will be supervised as part of a portfolio
8 core principles which guide the FCAs supervisory work
- forward-looking
- focus on firm strategy & business models
- focus on culture and governance
- focus on individual & firm accountability
- proportionate and risk-based
- T-way communication
- Coordinated
- putting right systemic harm that has occurred and stop it happening again
Three types of work in the FCAs supervision model
- Proactive
- Reactive
- Thematic
proactive supervision
pre-emptive identification of harm through review and assessment of firms and portfolios
Reactive supervision
dealing with issues that are emerging or have happened, to prevent harm from growing
Thematic supervision
wider diagnostic or remedy work where there is actual or potential harm across a number of firms
Powers of the FCA
- they can stop misleading promotions
- ban retail products
- vary the permissions granted to firms
- disclose that enforcement against a firm has commenced
What is publication of enforcement action FCA intervention
The FCA can pursue cases against individuals (inc senior management) and can publish the fact that a warning notice has been issued
When can the FCA withdraw authorisation?
If they are not complying with guidelines
How often does the FCA report to Government and Parliment?
Annually
Principles for Business (PRIN) Integrity
A firm must conduct its business wholly and honestly
Principles for Business (PRIN) Skill, care and diligence
A firm must make sure its employees are training and careful in their actions
Principles for Business (PRIN) Management and Control
A firm must take reasonable care to organise and control its actions responsibly and effectively and with adequate risk management.
Principles for Business (PRIN) Financial Prudence
A firm must maintain financial resources (make sure the pool is big enough)
Principles for Business (PRIN) Market conduct
Observe proper standards of market conduct (price products fairly)
Principles for Business (PRIN) Customers Interest
can’t hide anything and must be accessible to all customers
Principles for Business (PRIN) Conflicts of interest
Mange conflicts of interest fairly
example of a conflict of interest in insurance
when insurance companies insure both parties
Principles for Business (PRIN) relationships of trust
give suitable advice
Principles for Business (PRIN) clients assets
protect clients assets
Principles for Business (PRIN) relations with regulators
be open and cooperative and disclose anything appropriately
Fair treatment of customers principle in the FCA
The FCA expects all firms to embed the fair treatment of customers principle in their corporate strategy and build it into their firms culture and day to day operations.
What is in the fair treatment of customers lifecyle
product design and governance -> identifying target markets -> marketing and promoting -> sales and advice processes -> after-sales information -> complaints handling ->
What are the 6 positive consumer outcomes that the FCA expects companies to obtain
- consumers can be confident they are dealing with firms where their fair treatment is important
- products and services are designed to meet the needs of individual groups
- consumers are provided with clear information before, during and after sales
- advice to consumers is suitable
- products provided perform as they should
- consumers do not face post sales barriers
define vulnerable customers
someone who is susceptible to detriment e.g. someone who’s had a family member die, or someone who has a disability.
Why is ethical behaviour important for customer service
Customers should have confidence that they are dealing with people who are putting their interests first, not because they have to but because they believe its the right thing to do.
It is important not to discriminate agaisnt:
age, disability, gender reassignment, marriage, pregnancy, race, religion, sex & sexual orientation.
Overarching Cross-cutting rules of consumer duty
firms should:
- avoid causing foreseeable harm
- enable customers to pursue their financial objectives
- act in good faith towards customers
Four outcomes for the key elements of the firm-consumer relationship in the Consumer principle
- communications
- products and services
- Customer Service
- Price and Value
What is the Senior Management arrangements, systems and controls (SYSC)?
its a section in the FCA handbook
What do the threshold conditions that must be met to become and maintain being authorised by the FCA relate to?
- legal status
- location of offices
- close links of the company
- adequacy of resources
- suitability to be authorised.
What is the Senior Mangers and Certification Regime (SM&CR)
A new regime as a result of solvency II that gives a new framework for individual accountability
- Statement of responsibilities
- senior managers must be approved by the regulators
Senior Manger Regime (SMR)
Roles which are senior have specific rules made by the PRA and FCA, anybody applying for a senior role must have approval.
head of key business area
Appointing separate senior managers for large sections of firms
If an individual is not a senior manager but is in a role that could cause significant damage to the firm then…
A certification regime must be carried out on them.
The fit and porper test (FIT) for employees and senior managers
employees must be tested with regard
- honesty, integrity and reputation
- competence and capability
- financial soundness
Public Interest Disclosure Act 1998 (PIDA)
protects whistle-blowers from their employers (provide it was in good faith)
Whistle Blowing (making a qualifies disclosure)
the public allegation of a firms concealed misconduct usually by someone within the organisation
key themes the FCA promotes for ESG
- promotion of global standards for sustainability reporting
- improved transparency of performance on diversity and inclusion matters
capital adequacy
The adequate amount of capital a firm needs to hold
Public censure (Disciplinary action)
if a firm has failed to meet a requirement imposed on it under the financial services act 2012, it may issue a public statement of misconduct on the approved person
Financial Penalities (Disciplinary action)
A fine will be issued depending on the seriousness of the offence and the extent that the misconduct was deliberate.
(e.g. profit/loss, resource level of person, disciplinary record, conduct of the firm following the event, compliance history)
Which misconducts may result in prosecution for criminal offences
- carrying out regulated activity without authorisation
- failing to comply, deliberately giving false information or misleading to investigators/auditors/authorised persons
what civil and less formal remedies are there (Disciplinary action)
- withdrawal of approval and authorisation
- cancellation of permission
- restricting certain individuals
- restitution
Injunction meaning
restraining a person from beginning or continuing a task
Restitution meaning
restoring something
What does capital provide?
A buffer to absorb unexpected loss
Define solvency Margin
The amount by which assets must exceed liabilities
Solvency II
requires capital adequacy and risk management for insurers with the aim of increasing protection for policy holders.
1. financial requirements (make sure there enough funds)
2. governance and supervision
3. reporting and disclosure
Pillar 1 of Solvency II
Financial requirements
Solvency Capital requirement/Minimal capital requirement: assets will cover liabilities for the next year
Pillar 2 of Solvency II
Governance and supervision
own Risk and Solvency Assessment - a set of processes and procedures that are used to identify, assess, monitor, manage and report the short and long term risks a insurance company may face.
Pillar 3 of Solvency II
Reporting and Disclosure
Solvency and Financial Condition Report (SFCR) PUBLIC
Regulator Supervisory Report (RSR) PRIVATE
Quantative Reports for solvency II
Balance Sheets
Premium, claims & expenses
Own fund
Variation Analysis
SCR and MCR
assets
technical provisions
reinsurance
group recording
Qualitative Reports for solvency II
Business and performance
system of governance
risk profile
valuation for solvency purposes
capital management
When can the FCA and PRA intervene?
if companies are failing to comply with requirements OR a company has drifting significantly from their business plan
Powers of the PRA
- restrict income
- more frequent account submitting
- require more information
- no new business
- restore its capital position
- wind up the company
Retail Mediation Activities return (RMAR)
FCA monitoring of firms online
(inc detail on, accounting info, capital, PI insurance, Threshold conditions met?, training and competence, conduct of business data, product sales data, income to calculate fees for the FCA)
Which complaints do the FCA collect information on?
all ocmplaints
Conduct of Business Sourcebook (ICOBS)
rulebook for sales and admin processes.
- promotions must be clear fair and not misleading
- records must be kept to demonstrate compliance with the rules
What type of customer provides more detailed protection?
Consumers
Distance Marketing Directive
consumers who have entered through a distance sale e.g. over the internet are protected information is clear.
What information should be clearly disclosed to customers about an insurance contract.
- price
- law applicable
- complaints handling procedures
- head office address of insurer
- cancellation provisions
Guaranteed Asset Protection (GAP) Insurance
covers the difference in price of new to old if you’ve just bought a ew item (the value will drop considerably)
when do cancellation polices not apply?
for insurance less than a month or if the contract has fufilled
Enterprise act 2016
Insurers must pay insureds claims within reasonable time
Insurance Distribution Directive
Consumer protection provisions
- distributors must act with integrity
- distributors must communicate clearly
- Remuneration must not conflict with the duty to act in the customers best interests
Define Money Laundering
The process by which criminals and terrorists convert money that has been obtained illegally into legitimate fund
What are the 3 stands to the legal rules that apply to money landering
- specific laws
- Money laundering regulations
- regulatory rules
define placement
The process of putting cash into the financial system and coverting it into other financial assets
define Layering
concealing the origins of money by creating a series of complex transactions.
define integration
When the criminal finally gets access to the money.
criminal Justice Act 1993
Makes it a criminal offence to launder gains from other crimes. Also its a criminal offence to conceal, collude, not report and tip off money launderers.
Proceeds of crime act 2002 (POCA)
it is an offence to
-conceal money laundering
- possess illegal money
- fail to disclose someone else money laundering.
It also set up an Assets recovery Agency to recover the proceeds of criminal acitivity.
Serious crime Act
Builds on POCA to strengthen asset recovery.
Money Laundering Regulations 1993
requires firms to create and maintain systems to prevent and control money laundering and for there to be effective training in place.
Money Laundering Regulations 2017
Covers the following areas:
Customer due diligence - verifying the customer
Polices and procedures - monitoring & risk assessing
registration with the FCA
Enforcement - gives the FCA the right to enter and inspect premises and take copies of relevant documents.
Financial crime
Fraud, dishonesty, misconduct or misuse of information relating to a financial market or handling the proceeds of crime.
Money Laundering Reporting Officer (MLRO)
A director or sernior manager to establish and maintain effective anti-money laundering systems and controls.
What is the Money Laundering Reporting Officer (MLRO) expected?
- to be based in the UK
- have level of authority within the firm
- sufficient resources and information to complete responsibilities
- decide whether a suspicious transaction should be reported to the NCA
Who does the Money Laundering Reporting Officer (MLRO) report to is Money laundering is suspected?
The national crime authority NCA
If someone reports money laundering…
the name is concealed and they will not be called upon to provide evidence (but the NCA knows who they are)
Client verification
firms must check the identity of new clients and check their addresses are genuine. They need a valid passport or driving license.
alternatively home visits, verification from a bank are sufficient.
How are commercial clients verified?
name, registered number, registered office & business address.
Bribery Act 2010
4 criminal offences:
- giving promising or offering a bribe
- requesting, agreeing to or receiving a bribe
- bribing a public official
- failure of firm to prevent bribery being committed on its behalf
high level standards applying to ICOBS
advertising accuracy, data protection & regulatory compliance
How often do insurance companies submit IPT
quarterly
Contracts (Rights of Third Parties) Act 1999
Allows for a third party, who is a named beneficiary under an insurance policy, to enforce the policy against the insurer
what area of the business is addressed by ICOBS?
Sales and administration process
If an approved person in Lloyds fails to comply with the relevant regulatory guidelines, who can enforcement action be taken against?
The broker & the approved person
What is a Lloyds coverholder?
company authorised by a managing agent to issue contracts of insurance
Within Lloyds which body is responsible for setting guidelines for all syndicates to safeguard standards of underwriting and risk management?
lloyds franchise board
Authorised insurance intermediaries conduct business within terms set by the
Insurance: Conduct of Business Sourcebook (ICOBS)
What acts allows an insurer, having indemnified a policyholder for loss or damage by riot to seek recovery of its costs from the police
Contracts (Rights of Third Parties) Act 1999
Within Lloyds which body is specifically responsible for setting guidelines for all syndicates to safeguard standards of underwriting and risk management?
Lloyds franchise board
What is a coverholder at Lloyds
company authorised by a managing agent to issue contracts of insurance
What organisation provides information and techincal services to underwriting businesses in the Lloyds market?
Lloyds market association
What is it called when a person seemingly acts on his own behalf and make a binding contract. But later on its discovered he is acting on behalf of another.
undisclosed principal
What activities of ARs for firms in the UK does ICOBs apply to
- insurance distrubution
- effecting & carrying out contracts
- lloyds (managing underwriting capacity)
- advertising
Insurance Distribution Directive
Consumer protection, distrubuters must:
- act honestly, fairly & professionally
- communicate clearly & not mislead
- remuneration must not conflict with customers best interests
General rules in ICOBS
- advertising must be clear, fair and not misleading
- must keep records of sales
- contracting out DOES NOT remove your accountability
When does a cooling off period not apply (from ICOBS)
short-term policies e.g. less than a month
ICOBS rules on claims handling
- insurer is responsible
- insurer must keep client up to date
- must be fair and prompt (can’t reject without valid reason)
- can’t refuse a claim where a breach of warranty did not effect result
Guaranteed asset protection Insurance (GAP) from ICOBS
FCA put rules based on concerns about competition for the add-on insurance:
- firms must provide info to encourage customers to shop around
- introduce a deferral period (so cannot be introduced and sold on the same day)
(basically want to empower customers to make their own decisions)
What is the purpose of the GABRIEL system when a firm uses it to submit a completed retail regulated medium return to the FCA?
It is a framework which provides the FCA with supervision of an insurers activities
Under which act does the regulator have powers to supervise insurers?
Financial Services Act 2012
Third Parties (rights agaisnt insurers) Act 2010
Third party can bring a claim directly against the insurer if the company or individual becomes insolvent.
Examples of senior management functions set by the PRA
- Chiefs, heads, group entity senior managers
- chairs & senior independent directors
Examples of senior management functions set by the FCA
Executive director, MLRO, compliance, directors & significantly responsible senior managers.
qualifying disclosure
- criminal offence, failure to comply with legislation, miscarriage of justice, breaching health and safety, damage to environment & deliberate concealing of any of the above.
