Compliance News - 15 April 2011
INDUSTRY NEWS FLASH WEEK ENDED 15 APRIL 2011
David Lawton, Head of Markets Infrastructure and Policy has made a speech entitled “Outlining the current and future strategy for securities markets regulation” at the TradeTech Liquidity Conference in London. This is a key speech for anyone involved in this sector.
Topics covered included:
- how the trading landscape might be redefined through the introduction of new types of trading venue;
- the steps that are needed to get better consolidation of equity trading data;
- how greater transparency should be introduced into non-equity markets, while not damaging liquidity;
- how MiFID should respond to the challenges being posed by new types of market practice, such as high frequency trading;
- the importance of transaction reporting as a tool to protect market integrity;
- how financial regulation can best contribute to the broader agenda on commodities; and;
- the overarching importance of European markets remaining open to non-EU firms.
The Financial Services Authority (FSA) has fined an IFA firm £35,000 for failing to assess adequately whether customers were eligible to receive promotions for Unregulated Collective Investment Schemes (UCIS) and failing to ensure that customers were given suitable advice to invest in them. The FSA uncovered the issues with recommendations as part of its thematic review into the promotion of UCIS in 2010.
In October 2010 the FSA required the IFA to appoint a skilled person to review promotions of and advice given to customers to invest in UCIS during 2008 and 2009. During that period, the IFA recommended UCIS to 101 customers who invested a total of over £11 million in one or more of the three UCIS funds promoted by the firm.
The firm did not comply with legislation governing the promotion of UCIS and in nearly 50% of the 20 files reviewed to date for suitability, the advice given to customers was found to be unsuitable. The FSA expects the IFA to contact customers for whom it may have been unsuitable to invest in UCIS with a view to providing redress to any who have suffered detriment.
The FSA has also publicly censured another IFA for failings in relation to sales of a geared traded endowment policy (“GTEP”) product. This second IFA did not take reasonable care to ensure the suitability of its advice in recommending the GTEP product; the firm failed to match customers’ attitudes to risk to the product profile and did not communicate the risks involved with the GTEP product to customers.
The issues with this IFA’s advice on GTEPs came to the FSA’s attention during a thematic review of GTEPs in 2007. The firm has since contacted all of its GTEP customers to complete new customer fact find documents and will subsequently contact those customers who may have received unsuitable advice.
Tom Spender, head of retail enforcement at the FSA, commented:
'Our thematic work on both UCIS and GTEPs has uncovered a number of cases where there have been serious failings in the quality and suitability of advice given to customers. Failure to give suitable advice around the sales of complex investment products is unacceptable as it puts consumers at real risk of financial detriment - we expect firms to be able to demonstrate that they give their customers appropriate, well considered advice.'
The FSA originally sought to impose a fine of £45,000 on the second IFA, however they provided verifiable evidence that this would cause serious financial hardship. The FSA would have imposed a financial penalty of £50,000 on the first IFA, but the firm agreed to settle at an early stage of the investigation and therefore qualified for a 30% discount.
Source: The Financial Services Authority
A new ABI survey has revealed that over half of people may not be prepared to pay for financial advice, and a third thought such advice would be worth less than £300. The research, commissioned by the ABI, asked over 2,500 people about their attitudes to financial advice.
While the ABI is supportive of the overall aims of the Retail Distribution Review (RDR) for delivering good outcomes for consumers and building trust in financial advice, it is also important that all consumers can access financial advice, some of whom may not need or cannot afford full advice.
Helen White, the ABI’s acting Director of Life and Savings, said:
“The results of our research send us a strong message about what consumers need: to fill the gap between paying for full financial advice and having none. Our research revealed that many consumers would only pay up to £300 for full financial advice, whereas this service currently costs on average £670.”
“For the RDR reforms to deliver good outcomes for consumers and the industry we need to both convince sceptical consumers that full advice is worth paying for and also come up with a model of simplified advice for those consumers who cannot afford or do not need full financial advice. Our customers are telling us what they want and we are looking at how we can provide it. We hope that the FSA and other regulators will help us deliver on this.”
Source: Association of British Insurers
The ABI has called for better co-ordination between the new financial regulatory authorities, with the emphasis on transparency and accountability and a focus on positive consumer outcomes.
Responding to H M Treasury’s consultation: “A New Approach to Financial Regulation”, Otto Thoresen, the ABI’s Director General, said:
“It is vital that the new Prudential Regulation Authority and Financial Conduct Authority do not duplicate each other’s activities. Without clear co-ordination and sharing of information, firms could suffer the unnecessary cost of having two overlapping regulators. To achieve the best outcomes for firms and consumers both the FCA and PRA must work in a co-ordinated, joined-up and transparent manner. If there is clarity about who is responsible for what, and everyone is aware of the rules and decision making processes across the board, then understanding should increase and consumer detriment decrease.”
The key points in the ABI’s response include:
- There is particular concern about the cost of dual regulation for members. It is not yet clear how costs will be apportioned and what safeguards will be in place to ensure that dual regulated firms are not levied twice for the same activity. Dual regulated firms will also incur additional costs to ensure ongoing compliance with the requirements of two regulators, for example supervisory visits, requests for information, rulebooks, documentation etc.
- As the Government recognises, close co-ordination between the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) will be necessary to ensure that the new regulatory structure operates in an efficient and effective manner.
- The Government’s proposal to limit the framework legislation by introducing a statutory duty of co-ordination, a requirement for there to be Memorandum of Understanding between PRA and FCA and cross-membership of the Boards of the two authorities was welcomed. This would provide a framework to enable co-operation without imposing bureaucratic restraints on how this is done.
- Consumers, financial companies and the regulatory system itself will benefit if the regulators’ operational approach is made transparent. Better understanding of the rules and regulations will mean that the authorities will have to be more accountable for their actions and decision making. This should create a more efficient and trusted regulatory system.
- In line with the FCA’s statutory objectives to promote consumer choice and competition, the FCA should encourage and promote access to financial services to help make it easier for consumers to access services and products that meet their financial needs.
- The role of the Financial Ombudsman Service (FOS) is to resolve individual disputes between consumers and financial services firms. When the FOS deals with cases that have wider implications, raising regulatory or legal issues which may affect how businesses operate, it is essential that these cases are dealt with by the FCA or a court.
- The FCA should oversee and conduct regular reviews of the FOS to ensure it is accountable and operates effectively and consistently. The role of the FOS within the new regulatory regime should be clearly defined in statute, including its relationship with the FCA.
- Regulation of complaints management companies should be enhanced, perhaps by bringing them within the FCA’s regulatory remit. As they are now involved in a growing number of FOS complaints they need to be suitably regulated and supervised to ensure they are acting in the best interests of consumers.
Source: Association of British Insurers
BBA -REPORT OF THE INDEPENDENT COMMISSION ON BANKING
The BBA have commented on the interim Independent Commission on Banking’s report and stated that it contains a number of very significant options and it will take time to carefully consider the costs involved and the economic impact on the wider economy.
The Commission's proposed options will have to be considered alongside other reforms underway at a national and international level. Banks in the UK have already undergone significant change since the global crisis, including significantly increasing their capital and liquidity and establishing resolution plans, to protect depositors and to keep finance flowing, should a bank get into difficulty.
The UK's regulatory framework is also being dramatically changed with new and welcome focus on financial stability. Banks like any other company must be able to fail and not assume the tax-payer will step in. As such, due consideration must be given to where the the ICB's interim recommendations fit within this ongoing programme, some of which remains work in progress, with further changes due before the final report is due.
The banking community remains committed to supporting the twin aims of ensuring financial stability and supporting economic recovery, and is committed to ensuring the taxpayer is repaid for support of the banking system.
Source: British Bankers’ Association
The ABI has warned that proposals from the Solicitors Regulation Authority (SRA) to reform the market for solicitors’ professional indemnity insurance are inadequate and will only worsen already fragile fears for the future of this market. The ABI claims that the SRA has failed to understand that there must be a move away from the current ‘one size fits all’ minimum policy terms and conditions set by the SRA to a more flexible approach, with policies tailored to the risks and requirements of individual firms of solicitors.
Nick Starling, ABI’s Director of General Insurance and Health, said:
“These disappointing proposals are a missed opportunity for the long overdue reform which is so badly needed. Insurers warned the SRA that a failure to make radical change would not only damage the interests of solicitors, but also reduce consumer choice. Persisting with the current situation will make insurance ever harder to find for those smaller firms who most need a policy to cover what they do, not what they don’t.
“The proposal to close the Assigned Risks Pool from October 2013 is much too late, and little else has been put forward. It is hugely disappointing that they have behaved so timidly considering the advice they received from their advisors, Charles River Associates, last autumn - that immediate and far-reaching change was needed. They have failed to heed the warning.
The regulator has failed in the past to control both entry to the profession and the behaviour of many of those in it. Insurers have done their best to deliver competitively-priced insurance, but with stricter capital requirements approaching, we needed more from this review. This is a completely missed opportunity by the SRA.”
The minimum terms and conditions, imposed on the market by the regulator, allow solicitors to maintain their insurance even when they have failed to pay premiums or when they are found to have lied on proposal forms. They also fail to distinguish between different types of solicitors firm, so every firm, no matter how small, must buy the same policy as a big City law firm. Insurers believe the ability to vary the policy terms is crucial to maintaining a stable and sustainable market.
The minimum terms and conditions, imposed on the market by the regulator, allow solicitors to maintain their insurance even when they have failed to pay premiums or when they are found to have lied on proposal forms. They also fail to distinguish between different types of solicitors firm, so every firm, no matter how small, must buy the same policy as a big City law firm. Insurers believe the ability to vary the policy terms is crucial to maintaining a stable and sustainable market.
Source: Association of British Insurers
ABI Website
ABI Website
The ABI has warned that unless action is taken to curb the rising cost of settling personal injury claims, motor insurance premiums will continue to rise. This stark warning comes as figures released last week by the AA show that the average motor insurance premium has risen 40% over the last year.
Nick Starling, the ABI’s Director of General Insurance and Health, said:
“Enough is enough. Putting the brake on ambulance-chasing lawyers and claims management firms cannot come a moment too soon. Motorists have rightly had enough of paying for excessive legal costs, which add an extra 10% to the cost of motor insurance. It cannot be right that for every £1 motor insurers pay out in compensation, an extra 87 pence is paid out in legal costs.
“The Government’s recently announced plans to reform civil litigation will go a long way to cutting out unnecessary and disproportionate legal costs and should lead to cheaper motor insurance in the future. What we now need is a ban of referral fees - where details of potential personal injury claimants are sold on to solicitors and claims management firms. It is vital that the Government acts to outlaw referral fees, as part of its wide-ranging reforms to civil litigation”.
Nick Starling, the ABI’s Director of General Insurance and Health, said:
“Enough is enough. Putting the brake on ambulance-chasing lawyers and claims management firms cannot come a moment too soon. Motorists have rightly had enough of paying for excessive legal costs, which add an extra 10% to the cost of motor insurance. It cannot be right that for every £1 motor insurers pay out in compensation, an extra 87 pence is paid out in legal costs.
“The Government’s recently announced plans to reform civil litigation will go a long way to cutting out unnecessary and disproportionate legal costs and should lead to cheaper motor insurance in the future. What we now need is a ban of referral fees - where details of potential personal injury claimants are sold on to solicitors and claims management firms. It is vital that the Government acts to outlaw referral fees, as part of its wide-ranging reforms to civil litigation”.
Source: Association of British Insurers
ABI Website
A recent legal case in England has dealt with the issue of whether or not legal expenses insurers can restrict the insured’s right to choose their own lawyer once proceedings have been commenced. The court decided that following established Legal Expenses Regulations, the legal expenses insurer could not. The court also decided that this applied to the insured’s right to instruct a barrister directly – in other words, the legal expenses insurer could not insist on a solicitor being instructed.
The insurance policy in question contained a clause which stated that the insured was free to choose an "appointed representative" but that the insurer "may choose not to accept [the insured’s choice], but only in exceptional circumstances". The Insurance Companies (Legal Expenses Insurance) Regulations 1990, SI 1990/1159 which govern legal expenses insurance in the UK state that, amongst other things, the insured has the right to choose its own independent legal representation as soon as proceedings have commenced.
The Court pointed out that the Regulations do not specifically provide for a restriction of this right in "exceptional circumstances". Accordingly, the Court considered that the Regulations appear to contemplate no circumstance in which a legal expenses insurer might choose not to accept the lawyer chosen by the insured. The Court granted the declaration sought and the insured was not obliged to go through a solicitor in order to instruct her barrister.
This case highlights the fact that courts in the UK will not hesitate to apply the Regulations to legal expenses insurance policies. Legal expenses insurers should be aware that the mandatory provisions of the Regulations are clear and place significant restrictions on things like the ability insurers have to control who an insured may instruct under a legal expenses insurance policy. Legal expenses insurers will clearly need to ensure that their policies comply with the Regulations, particularly given that the FSA has taken an active interest in the way in which insurers are writing this class of business.
The insurance policy in question contained a clause which stated that the insured was free to choose an "appointed representative" but that the insurer "may choose not to accept [the insured’s choice], but only in exceptional circumstances". The Insurance Companies (Legal Expenses Insurance) Regulations 1990, SI 1990/1159 which govern legal expenses insurance in the UK state that, amongst other things, the insured has the right to choose its own independent legal representation as soon as proceedings have commenced.
The Court pointed out that the Regulations do not specifically provide for a restriction of this right in "exceptional circumstances". Accordingly, the Court considered that the Regulations appear to contemplate no circumstance in which a legal expenses insurer might choose not to accept the lawyer chosen by the insured. The Court granted the declaration sought and the insured was not obliged to go through a solicitor in order to instruct her barrister.
This case highlights the fact that courts in the UK will not hesitate to apply the Regulations to legal expenses insurance policies. Legal expenses insurers should be aware that the mandatory provisions of the Regulations are clear and place significant restrictions on things like the ability insurers have to control who an insured may instruct under a legal expenses insurance policy. Legal expenses insurers will clearly need to ensure that their policies comply with the Regulations, particularly given that the FSA has taken an active interest in the way in which insurers are writing this class of business.
Source: C/M/C Cameron McKenna
