LM2 - Chapter 5 Flashcards
Private individuals
Third party motor insurance and public liability insurance in respect
of the ownership of dangerous wild animals and/or dangerous dogs are compulsory for
private individuals.
Professions and businesses
Motor insurance and employers’ liability insurance are
both compulsory for every business which uses motor vehicles on a road and has
employees respectively.
Why are some insurances compulsory
- to provide funds for national compensation
- in response to national concerns
Motor third paarty
the most basic level of motor insurance is a legal requirement under the Road Traffic Act 1988
The Act provides that it is illegal to cause or permit the use of a vehicle on a public road
(extended now to include ‘any other public place’) unless an insurance policy is in force,
covering third party property damage and third party bodily injury or death.
Employers’ Liability
Under the Employers’ Liability (Compulsory Insurance) Act 1969
as updated by regulations issued in 1998, 2004, 2008 and 2011, employers are required to
hold employers’ liability insurance.
This insures them against their liability to pay compensation to employees who sustain bodily
injury or disease, arising out of and in the course of their employment.
There is a list of exemptions from this requirement, mainly relating to employees who are
also family members, employees not ordinarily resident in Great Britain and Government
agencies. In practical terms, however, most employers have to insure this risk.
The minimum required limit of indemnity has been increased over the years and now
stands at £5m, though the insurance market provides £10m as standard. There is also a
requirement for employers to display their insurance certificates (provided by insurers) at
each place of work.
Employers Liability Tracing Office
the organisations records of historic EL coverage must be maintained. the ELTO can identify insurers that provide cover to employees
Public liability
Certain operations such as riding schools are required to hold public liability
insurance under the provisions of the Riding Establishments Act 1970.
This type of insurance indemnifies the insured against claims arising from the use the
insured’s horses. This includes injuries sustained both by persons riding the horses and
members of the public. The insurance must also indemnify the horse riders themselves
against any liability they may incur for injury to members of the public, arising out of the hire
or use of the riding school proprietor’s horses.
Liability for dangerous wild animals and dangerous dogs
Apart from motor insurance,
the other forms of liability insurance which are compulsory for private individuals are in
respect of the ownership of dangerous wild animals or dangerous dogs.
This is not generally a free-standing insurance but likely to take the form of an extension
to another insurance such as home insurance, where it usually falls under the public
liability section
Professional negligence/professional indemnity
Certain professionals such as solicitors,
accountants, doctors and dentists are required to hold professional indemnity insurance as a
condition of having a licence to practice
When does employers liability insurance date back to
Employers’ Liability Act 1880
What type of insurance is liability
liability insurance is known as ‘long-tail’ business which means that
the losses can take time to be notified and the claims can take some time to develop and
be resolved. Defending a claim made against you as a driver, or as an accountant or doctor,
even if the claims are spurious, costs money; the costs of defending yourself in court can
bankrupt you even before any final judgment is made against you.
Most of the insurances also provide that the insurers will defend claims made against the
insureds. This removes the financial burden of the legal fees at least in part (as most policies
have a deductible or excess which often applies to fees)
Warranty
A warranty is a promise made by the insured to the insurer. A breach of warranty suspends the insurance contract for the period of the breach
what normal insurance policies do not apply to liability
warranty and good faith/fair presentation
Employers’ Liability (Compulsory Insurance) Regulations 1998
There is prohibited in any contract of insurance any condition which provides that no
liability…shall arise under the policy or that any such liability so arising shall cease, if:
* some specified thing is done or omitted to be done (i.e. a warranty);
* the insured does not take care to protect employees against the risk of injury or
disease in the workplace (another area where a warranty might be applied);
* the insured fails to comply with any legal requirements for the protection of employees
against risk of injury or disease in the course of their employment; or
* the insured does not keep records or fails to provide information to the insurers
Compulsory insurance - USA
workers’ compensation (also called employers’ liability insurance) provides
coverage for employees who are injured or become ill at work. This insurance provides
coverage for medical expenses, death benefits, lost wages and rehabilitation. In exchange
for coverage, employees relinquish the right to sue the employer for damages unless the
employer intentionally harmed the employee or failed to carry the required coverage for the
relevant state. Each state regulates its own workers’ compensation programme rather than it
being a countrywide (or federal) system.
Every state in the USA also has compulsory motor insurance for commercial vehicle owners– but interestingly not for private vehicle owners.
Some US states have a requirement that employers buy short-term disability insurance for
their employees. This insurance covers illnesses and disabilities not directly related to the
employment and pays out a weekly benefit related to earnings for a set period of time.
Compulsory insurance - Turkey
a requirement for property-owners to purchase insurance against earthquake
risks, and some compulsory motor insurance.
Compulsory Insurance - Australia
a similar level of compulsory third party motor insurance to the UK.
Interestingly, in all but two of the states in Australia there is only one provider of this basic
insurance.
Compulsory insurance - Germany
the requirement for third party liability insurance is broader in scope than just
motor insurance. It is compulsory to have third party liability insurance in relation to any
event for which a German court might consider you negligent.
Consumer Rights Act 2015
Under this piece of English law, terms and notices in consumer contracts have to be fair.
This concept is not new, as unfair contracts legislation has been in force for many years.
The Act states that an ‘unfair term’ in a consumer contract will not be binding on that
consumer. However, if the consumer chooses to rely on that term then they may do so.
Unfair term
contrary to the requirement of good faith, it causes a significant imbalance in the
parties’ rights and obligations under the contract to the detriment of the consumer.
How does a term avoid being unfair
a term should be transparent and prominent, expressed
in plain and intelligible language, and, if written, be legible.
A practical example of a potentially unfair term listed in the schedule to the Act is one
which ‘makes the traders’ commitments subject to compliance with a particular formality’. An
example of this might be the claims notification provisions.
Contracts (Rights of Third Parties) Act 1999
a contract is an agreement between two or more parties. Only those persons who are actually a party to the contract can enforce the terms of the contract. The legal term used for this is ‘privity of contract’.
Consequently, even if a contract is made with the purpose of benefiting someone who is not
a party to it, that person (the ‘third party’) has no right to sue for breach of contract.
Privity rule
The Contracts (Rights of Third Parties) Act 1999 reformed the privity rule and set out the
circumstances in which a third party will have a right to enforce a term of the contract.
Broadly speaking, either the contract must make express provision for the enforcement, or
the third party must be expressly identified in the contract by name, class or description. The
remedies allowed are those usually permitted (damages, injunction or specific performance).
Injunction
An injunction is a remedy that the court can award which is an order to prevent a party
from doing something
Specific Performance
An order for specific performance is the opposite of an injunction, whereby the court
orders that the party performs a particular act; for example, it could order a party to
comply with a contract that they have tried to breach
Contracts (Rights of Third Parties) Act 1999 Exclusion Clause (Cargo)
The Provisions of the Contracts (Rights of Third Parties) Act 1999 do not apply to this
insurance or to any certificate(s) of insurance issued hereunder. Neither this insurance nor
any certificates issued hereunder confer any benefits on any third parties. No third party
may enforce any term of this insurance or of any certificate issued hereunder. This clause
shall not affect the rights of the assured (as assignee or otherwise) or the rights of any
loss payee.
Insurance Premium Tax
Insurance premium tax (IPT) is a tax levied by the UK Government on
general insurance premiums in the UK. There are two rates: standard and higher.
The standard rate is 12%. The higher rate is 20% for travel insurance and some insurances,
such as those sold in conjunction with the purchase of vehicles and electrical appliances
(and are sold as part of the wider deal, such as extended warranty).
Most long-term insurances, together with reinsurance and insurance on ships, aircraft and
international goods in transit are exempt from IPT, as are most risks located outside the UK.
These risks, however, may be liable for similar taxes imposed by other countries.
Who is responsible for collecting IPT
The insurer is responsible for collecting the premium tax from the insured together with
the premium and paying it onto the tax authorities in the UK. In practice, this means that
the broker collects this sum from the insured together with the premium and pays both to
the insurer.
It must be shown on all the documentation (separately from the premium amount) when
the risk is processed through the central market databases by Xchanging. The IPT amount
having been paid via the broker to the insurer is held by the insurer in an account from which
they can pay the funds onwards to Her Majesty’s Revenue and Customs (HMRC) generally
on a quarterly basis.
Senior Managers and Certification Regime (SM&CR)
The Senior Managers and Certification Regime (SM&CR) now applies to both insurers and
brokers/intermediaries.
The SM&CR introduced a new regulatory framework for individual accountability to replace
the previous Approved Persons regime (APER). It focuses on the most senior individuals
in firms who hold key roles or have overall responsibility for whole areas of relevant firms
What is required of firms under sm&cr
Firms are required to:
* ensure each senior manager has a statement of responsibilities, setting out the areas
for which they are personally accountable;
* produce a ‘firm responsibilities map’ that knits these together; and
* ensure that all senior managers are pre-approved by the regulators before carrying out
their roles
What are the objectives of SM&CR
- encourage staff to take personal responsibility for their actions;
- improve conduct at all levels; and
- make sure firms and staff clearly understand and can demonstrate who does what within
the firm
Bank of England and Financial
Services Act 2016.
The Government also introduced a ‘duty of responsibility’, which means senior managers are
required to take the steps that it is reasonable for a person in that position to take, to prevent
a regulatory breach from occurring.
What are the 3 parts of SM&CR
- Senior Managers Regime.
- Certification Regime.
- Rules of Conduct
Senior Managers Regime
The Senior Managers Regime applies to persons performing the senior roles in a firm. These
roles, known as senior management functions (SMFs), have been specified in rules made
by the PRA and FCA. Any firms planning a new senior manager appointment, or a material
change in role for currently approved individuals, must prepare and submit an application to
the regulators for approval
Head of key business area
this relates to individuals managing a business area so
large (relative to the size of the firm) that it could jeopardise the safety and soundness
of the firm, and so substantial in absolute terms that it would warrant a separate SMF
even though the individual performing it may report to the CEO or another SMF.
Group entity senior manager
individuals employed in another group entity or parent
company who can exercise significant influence over the firm’s affairs.
Significant responsibility function
senior executives responsible for certain functions
or business areas where key risks exist, but not currently categorised under a significant
management function.
statement of responsibilities
prepared for each senior manager, setting
out their responsibilities in managing the firm’s affairs. It should be complemented by the
individual’s CV, personal development plan, job description, organisation chart showing
reporting lines and the firm’s responsibilities map.
A responsibilities map sets out the firm’s management and governance arrangements,
including reporting lines and responsibilities. Extending the principle of proportionality, the
FCA distinguishes between large and small firms, and acknowledges that in the latter the
map will be a simple document
Certification Regime
The Certification Regime will apply to individuals who are not carrying out SMFs, but
whose roles have been deemed capable of causing significant harm to the firm or its
customers by the regulators. The Regime requires firms themselves to assess the fitness
and propriety of persons performing other key roles, and to formally certify this at least
annually. These ‘significant harm function’ roles are also specified by the regulators in rules
but the appointments are not subject to prior regulatory approval.
First tier – individual conduct rules
You must act with integrity
You must act with due skill, care and diligence
You must be open and cooperative with the FCA, the PRA and other regulators
You must pay due regard to the interests of customers and treat them fairly
You must observe proper standards of market conduct
Second tier – Senior manager conduct rules
SC1
SC2
SC3
You must take reasonable steps to ensure that the business of the firm for which you
are responsible is controlled effectively
You must take responsible steps to ensure that the business of the firm for which
you are responsible complies with the relevant requirements and standards of the
regulatory system
You must take reasonable steps to ensure that any delegation of your responsibilities
is to an appropriate person and that you oversee the discharge of the delegated
responsibility effectively
SC4
You must disclose appropriately any information of which the FCA or PRA would
reasonably expect notice
Acting with integrity
Deliberately:
* Misleading or attempting to mislead a customer, firm or the regulator.
* Recommending a product for a customer where the AP knows they cannot justify
its suitability for the customer.
* Failing to inform a customer, firm or the regulator that their understanding of a
material issue is incorrect.
* Preparing inaccurate or inappropriate records or returns.
* Misusing the assets or confidential information of a customer or firm
Acting with due skill, care
and diligence
- Recommending an investment for a customer without reasonable grounds to
believe it is suitable. - Providing advice on transactions without a reasonable understanding of the risk
exposure of the transaction to the customer. - Failure to provide control over a customer’s assets – this includes failure to make
timely payments!
Failing to: - Disclose a conflict of interest.
- Inform a customer or the firm of material information when the AP was aware or
ought to have been aware of the information and the need to provide it.
Fit and Proper individual
- honesty, integrity and reputation;
- competence and capability, including whether the person satisfies any relevant FCA
training and competence requirements. - financial soundness
Compliance officer
One such
role is carrying out the compliance oversight function. The person performing this job is
known as a compliance officer and must report to the governing body (usually the board of
directors) of the firm. A compliance officer is still considered to have a central role under the
new regulatory framework and holds a senior management function so is regulated by both
the PRA and FCA
Compliance Officer role
- communication of the company’s policies including the organisation of any
associated training; - completion of regulatory returns such as governance, finance and complaints;
- reviewing company procedures to ensure they are appropriate and compliant;
- maintaining the company’s compliance manual; and
- checking that all stages of the business process are being conducted in accordance with
the compliance manual.
