Compliance News - 14 January 2011
As foreshadowed in our Industry News Flash of two weeks ago, the Financial Services Authority has fined a major banking group £2.8m for multiple failings in the way they handled customers’ complaints, responding inadequately to more than half the complaints reviewed by the FSA. The group agreed to settle at an early stage in the investigation and therefore qualified for a 30% reduction in penalty. Were it not for this discount the FSA would have sought to impose a financial penalty of £4m.
The FSA’s investigation found that there was an unacceptably high risk that customers may not have been treated fairly due to a number of failings within the banks’ approach to routine complaint handling, including:
- Delays in responding to customers;
- Poor quality investigations into complaints, with complaint handlers failing to obtain and consider all the appropriate information when making their decision;
- Issuing correspondence that failed to fully address all of the concerns raised by customers and failed to explain why complaints had been upheld or rejected; and
- Customers not receiving their Financial Ombudsman Service referral rights within the appropriate time period.
Of the complaint files reviewed by the FSA, 53% showed deficient complaint handling; 62% showed a failure to comply with FSA requirements on timeliness and disclosure of Ombudsman referral rights; and 31% failed to demonstrate fair outcomes for consumers.
The FSA’s investigation also found that:
- The banks did not give complaint handling staff adequate training and guidance on how to properly investigate a complaint;
- The monitoring of complaint handling in branches and the management information produced was ineffective in assessing whether customers were being treated fairly; and
- The banks failed to ensure that complaint handlers properly reviewed complaints taking account of all relevant factors.
Margaret Cole, the FSA’s managing director of enforcement and financial crime said:
“We expect firms to treat customers fairly and that consumers can be confident that their complaints will be dealt with properly. The failure of these two high street banks to deal adequately with complaints put consumers at unacceptable risk and the fine of £2.8m reflects this.“
Source: Financial Services Authority
The FSA has decided to consolidate previous messages to fund managers and others about what is fair, clear and not misleading in advertising and how past performance can be dealt with. This draft guidance is open for comment for the next six weeks, and responses must be received by FSA by 25 February 2011.
This guidance is likely to be of most relevance to fund managers and other persons approving financial promotions, particularly those that may be ‘image’ advertising, or deal with past performance.
The guidance being consulted on is aimed primarily at fund managers and comments on the importance of financial promotions both for consumers and as an indication of how firms treat their customers (promotions are the firm’s ‘shop window). It discusses compliance with the fair, clear and not misleading rule, and issues of balance. There is specific comment on ‘image’ advertising and on the past performance rules.
Source: Financial Services Authority
The fourth edition of this newsletter has been published and covers the following topics: Adequacy of firms’ financial resources, Risk Mitigation Programme trends, Financial crime – sanctions against Iran, Keeping contact details up to date, Client Money self-assessment and Recent Speeches. The Risk Mitigation Trends and item on sanctions are of particular interest and more widely applicable than to smaller wholesale insurance intermediaries, and thus are summarised below.
Risk Mitigation Programme (RMP) trends
The following are areas where FSA found firms to be performing below acceptable levels, and required them to take action to address these failings.
Adequacy of resources
· Regulated entity boards are failing to assess Threshold Condition 4 (TC4) on a regular and ongoing basis.
· Regulated entity boards pay little attention to the recoverability of intercompany balances and charges over their assets.
· The adequacy of non-financial resources is not considered and documented.
Strategic planning
· Firms are not adequately documenting their strategies.
· Strategies are often not aligned with capital and business planning.
· Strategies are not stress and scenario tested to any degree.
Client money
· Breaches are not being immediately addressed.
· Firms have inadequate client money controls.
· Firms are failing to review client money calculations.
Governance
· Regulated Entity Boards are failing to provide adequate oversight.
· Control Functions (compliance, risk management, internal audit) are ineffective due to inadequate resourcing.
· It is not clear that controls are properly integrated into firms’ governance frameworks.
Risk management
· Stress testing frequently takes the form of a change in the interest or exchange rate and ignores other factors.
· Firms lack adequate resources to implement proper risk management.
· The Risk Register is only being reviewed annually.
Treating Customers Fairly (TCF)
· Regulated entity boards do not receive adequate management information to demonstrate the fair treatment of customers.
· Complaints are often the sole way of demonstrating fair treatment of customers against TCF outcomes 5 and 6 (i.e. consumers are provided with products that perform as firms have led them to expect and consumers do not face unreasonable post-sale barriers).
· Statements of demands and needs do not always make the basis of product selection clear.
Control Functions
· The internal audit function is not always independent of compliance.
· Firms often lack sufficient resource to properly enforce compliance and conduct effective audits.
· Committees meet too infrequently to exercise proper oversight.
Iranian sanctions
New EU sanctions were recently introduced against Iran. These place restrictions on insurers, reinsurers and intermediaries and their dealings with Iranian public or private bodies. We have summarised some key aspects here.
What is not allowed?
· Providing insurance and reinsurance to:
i. Iran and its government, public bodies, corporations and agencies;
ii. an Iranian person, entity or body other than a natural person; or
iii. a person acting on behalf or at the direction of a person referred to under (i) and (ii), which includes company subsidiaries located outside of Iran.
· Making funds available to specific individuals and organisations, subject to the freezing of funds and economic resources listed in Annex VII of the regulation (e.g. the Islamic Republic of Iran Shipping Line, Persia International Bank plc, etc) without approval from the UK government.
· Transferring funds to and from an Iranian person, entity or body, unless the transfer is notified to the Treasury (if €10,000 or above) and (if not for foodstuffs, healthcare, medical equipment or for humanitarian purposes) submitted for prior authorisation (if €40,000 or above).
· Opening subsidiaries, branches, joint ventures or representative offices in Iran.
· Providing access to the EU bond market to:
i) Iran, its government and its public bodies;
ii) Iranian credit and financial institutions and their branches and subsidiaries wherever located;
iii) any person acting on behalf of Iran or an Iranian credit or financial institution; and iv) any legal person owned or controlled by anyone falling within the previous categories.
· Knowingly or intentionally circumventing the prohibitions.
What is still allowed?
· Continuing with contracts entered into before 27 October 2010, including paying claims (although contracts may not be renewed after expiry).
· Providing insurance/reinsurance to Iranian private individuals located in Iran or elsewhere (unless they are acting on behalf of an Iranian organisation, e.g. an employee of an Iranian company acting in his official capacity).
· Providing third party or compulsory cover (e.g. employers’ liability cover, motor cover) to Iranians based in the EU.
· Providing insurance/reinsurance to the non-Iranian owners of a ship/plane/ vehicle chartered by Iranians.
· Providing insurance/reinsurance to non-Iranian owners of ships and planes when they are in Iranian waters or airspace.
What firms should do
Firms should take note of these changes and review your business to ensure you are complying with the new requirements.
Firms that place business via insurance and reinsurance pools should also make a particular effort to ensure that they are aware of who is participating in these pools, and that the participants are not subject to financial sanctions.
The Treasury’s guidance on the new Iranian sanctions is available on their website.
Source: Financial Services Authority
Lynda Blackwell, Manager of Mortgage Policy, FSA, addressed the ‘Mortgage Masters’ conference at Stapleford Park, Leicester on the following point ‘How will the MMR create a sustainable market for lenders, brokers and borrowers?’
She stated her reaction to the question is that:
“The MMR will achieve this if we all work constructively together to achieve it. We read comments about the FSA ‘steam rolling’ through the MMR and criticism that we appear determined to implement a particular set of regulatory measures irrespective of their impact on the economy and the market, and irrespective of the views of others. Well – that’s wrong. We are in the middle of a process which involves engaging stakeholders through consultation papers to assess what changes should be made to improve the effectiveness of the mortgage market.”
After examning the history to the MMR Ms Blackwell concluded:
“We will be publishing and finalising our proposals – and I should add here that we have set no firm timetable for implementation of the final rules. We have always been clear that this will depend on market conditions.
On top of this, it is now clear that there will be a new European initiative. We're waiting for details of the measure to be confirmed. However, it follows a great deal of discussion and debate around the case for intervention, especially to promote more responsible lending and borrowing, a debate with which we been closely involved.
On top of this, it is now clear that there will be a new European initiative. We're waiting for details of the measure to be confirmed. However, it follows a great deal of discussion and debate around the case for intervention, especially to promote more responsible lending and borrowing, a debate with which we been closely involved.
The Commission is interested in many of the same topics that we’ve been considering and we seem to have a shared view of the principles underlying responsible lending. We are both interested in seeing a robust assessment of affordability and aim to build on this understanding over the coming months, and of course we will reflect on any European proposals as we refine our MMR thinking.
I really hope we can all work together on this and have a clear and shared view about how to achieve a healthy and sustainable UKhousing market that works well for customers.”
Source: Financial Services Authority
November was a stable month with very few changes to the volume and value of mortgage activity, according to new data from the Council of Mortgage Lenders. 44,000 loans for house purchase, worth £6.3 billion, were advanced in the month. This was unchanged from October and down 15% by volume and 13% by value from November 2009.
This month sees the launch of a new database for the CML monthly Regulated Mortgage Survey lending figures, and all historic RMS data back to 2005 are now based on this. There have been revisions to all historic data, reflecting improvements in data coverage and quality. Although most revisions are modest and within expected statistical error margins, care should be taken in comparing these new figures with any published by the CML previously.
Source: Council of Mortgage Lenders
Legal costs have rocketed in the past decade and now account for a huge proportion of the value of a claim in dispute. However, the UK’s Coalition Government is showing a willingness to tackle the issue, proposing reform of both legal aid and civil litigation costs.
Since “no win no fee” litigation (known as conditional fee arrangements) was introduced in 2000, the cost of taking a dispute to court has risen to new highs. For insurers this means more expensive claims handling, making some uneconomic to defend even if they are perceived to have little merit. Typically, legal costs now account for 40% of a disputed claim and can easily exceed the total value of smaller claims, according to industry statistics. For every pound paid in compensation in a motor accident, 87p was paid in legal costs, rising to 93p for employers’ and public liability claims under £5,000.
“With conditional fee arrangements and ‘after the event’ insurance premiums being recoverable from defendant insurers, it was inevitable that claims costs would increase and, in turn, premiums,” says Kees van der Klugt, Head of Legal and Compliance at the Lloyd’s Market Association (LMA). “We are seeing this now, particularly in motor personal lines, where premium rises have been widely publicised.”
Source: Lloyd’s of London
Risk managers say they will be on the look out for changes to insurance regulation in 2011 in case it affects them. Jorge Luzzi, vice president of the Federation of European Risk Management Associations (Ferma), says the implementation of the Solvency 2 regime, which lays down stringent capital management rules, could shake-up the European insurance market.
“We are concerned that Solvency 2 could lead to a reduction in the available capacity of medium-sized, monoline or specialist insurers. Furthermore, Solvency 2 could lead to a concentration in the market with the loss of local insurers,” says Luzzi, who is also risk manager of Italian tyre company Pirelli. “This would be regrettable as local insurers play an important role in diversifying the insurance offering and also often have valuable local knowledge.”
Airmic’s John Hurrell says his members are concerned about the UK Government’s recently announced plans to break-up the Financial Services Authority and reallocate its responsibilities within the Bank of England.
“They are concerned that supervision could become unwieldy to the extent that it makes insurers and brokers less responsive and adds cost to the end product,” he warns. “So although regulation is primarily an insurance market issue, every time there’s been a change in market regulation it has added bureaucracy and slowed the market down.”
Source: Lloyd’s of London
The Financial Ombudsman Service has published for public consultation its proposed budget for the next financial year (2011/2012) – together with an update on the numbers and workload for the current financial year (2010/2011).
The budget sets out how the ombudsman service plans to deal with a potentially volatile caseload of between 152,000 and 208,000 cases in 2011/2012. This compares with the 180,000 consumer complaints that the ombudsman expects to resolve in the current financial year. The volatility in complaint numbers is largely driven by cases involving payment protection insurance (PPI). So far this year the volume of PPI complaints is significantly higher than originally anticipated – with 68,000 PPI complaints now forecast for 2010/11, substantially in excess of the 46,000 cases budgeted for.
Complaints about certain other financial products (for example, investments) continue in a downward trend. But there has been a general shift towards more complex and harder-fought cases – with higher proportions requiring a formal decision by an ombudsman. Taking into account the rise in PPI complaints, the total number of cases referred to the ombudsman service in the current financial year (2010/2011) looks likely to be 7% higher overall than in the previous year.
To deal with the volatile levels of demand being forecast for its service in 2011/2012, the ombudsman is likely to need a budget of between £90 million and £116 million – compared to a forecast of £101 million in 2010/2011. As part of its plans for funding the service in 2011/2012, the ombudsman proposes freezing case fees and the total levy paid by the financial services industry – for the second year running. This means that the case fee – paid only by the small minority of businesses that have four or more complaints referred to the ombudsman service during the year – will again be frozen at £500.
These proposed budget arrangements are dependent on the ombudsman receiving the types and numbers of cases set out in this consultation. They do not take into account any additional costs that could arise in connection with the British Bankers Association’s upcoming judicial review of PPI-related matters.
The consultation also sets out the ombudsman’s plans for continuing to develop its levels of service in line with the expectations of users and stakeholders – including increased transparency and helping the financial services industry improve the way it handles and learns from complaints. This work will be funded through further cost-reduction drives, resulting in efficiency savings of 10% in 2011/2012.
Source: Financial Ombudsman Service
