Insurance and Financial Services Update

This update is relevant to anyone with an interest in the field of insurance or financial services.

08/03/2010

Adam Kendall

Adam Kendall

Partner

Welcome to the insurance and financial services update for January-March 2010.

If you require the full text of any of the cases referred to or further information about any of the items referred to, or if you have been forwarded this update by a colleague and would like to receive it direct, please contact Fran Mussellwhite.

All links are correct at the date of publication.  The following topics are covered:

News

Publishing complaints handling data

The FSA has confirmed that it will require firms to publish information on how they handle complaints.  The aim is to help people see how firms are performing in this area and to drive up complaints handling standards across the industry.

Firms that receive 500 or more complaints in a six month period will have to publish the following information twice a year:

  • how many complaints they have opened and closed;
  • the percentage closed within eight weeks; and
  • the percentage of complaints upheld.

This information must be published under five product areas:

  • banking;
  • home finance;
  • general insurance and pure protection;
  • life and pensions; and
  • investments.

The FSA will then collate this information and publish a consolidated list of complaints data covering all affected firms twice a year.

The FSA will continue its usual practice of requiring firms to collect complaints data and report it to the FSA every six months.  While the new rules come into force on 6 April 2010, they cover complaints returns covering periods ending on or after 1 January 2010.  Therefore, where the reporting period ends between 1 January and 30 June, the data must be published by 31 August (with the FSA producing its first set of consolidated data in September 2010).  Where the reporting period ends between 1 July and 31 December, the data must be published by 28 February of the following year.

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Fine for acquiring an authorised firm without FSA approval

The FSA announced on 17 February 2010 that Semperian PPP Investment Partners Limited Partnership (Semperian) had pleaded guilty for proceeding to acquire an authorised firm without FSA approval.

The provisions in the Financial Services and Markets Act 2000 (FSMA) relating to change of control require anyone who is proposing to become a controller of an FSA authorised firm to notify the FSA of their intentions. It is a criminal offence for a person who has made a notification to proceed with a step that would lead to them becoming a controller until the FSA has given its approval.

Although Semperian notified the FSA that it proposed to acquire an authorised firm, it did not wait for FSA approval before completing the acquisition three weeks later. The court held that Semperian had taken a calculated risk that the FSA would not prosecute.  Semperian was fined £1,000  This level of fine took into account the fact that Semperian had pleaded guilty at the earliest opportunity and there had been no harm to consumers.

The FSA Director of Enforcement and Financial Crime, Margaret Cole, said: "This is an example of a controller putting its commercial interests before its regulatory responsibilities and the FSA is taking a much tougher line with those that seek to avoid or ride roughshod over the change in control regime .... Today’s result is a clear warning to other potential controllers that the FSA will prosecute change in control offences in appropriate cases."

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New FSA framework for penalties - fines could treble in size

The FSA has published a new framework for penalties which is intended to link fines more closely to income.  The new penalty regime comes into effect on 6 March 2010 and applies to any breaches which occur on or after this date.

Fines will be based on:

  • up to 20 per cent of a firm’s revenue from the product or business area linked to the breach over the relevant period;
  • up to 40 per cent of an individual’s salary and benefits, including bonuses, from their job relating to the breach; and
  • a minimum fine of £100,000 for individuals involved in serious market abuse cases.

The FSA says its new policy is part of its principle of credible deterrence through imposing harder hitting penalties that reflect the scale of a firm’s wrongdoing.

The setting of financial penalties will be based on the following steps:

  • removing any profits made from the misconduct;
  • setting a figure to reflect the seriousness of the breach;
  • considering any aggravating and mitigating factors;
  • achieving the appropriate deterrent effect; and
  • applying any settlement discount.

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New steps to reduce mortgage fraud and treat borrowers in arrears fairly

The FSA has set out a package of measures designed to ensure that mortgage holders in arrears are treated fairly and to reinforce the FSA’s tough stance in its battle against mortgage fraud.  

The new proposals will also make all mortgage advisers, and those who arrange non-advised sales, individually accountable to the FSA.  Advisers will need to demonstrate that they are 'fit and proper' for their role.

The key proposals regarding arrears are to:

  • make plain that firms must not add early repayment charges on arrears charges and interest levied on those charges;
  • clarify that firms must not apply a monthly arrears charge where the firm and the customer have agreed an arrangement to repay the arrears;
  • compel firms to consider all options for borrowers.  Repossessions should always be the last resort;
  • confirm that payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later; and
  • oblige firms to record all arrears handling telephone calls and to keep all records for three years.

Lesley Titcomb, FSA director responsible for the mortgage sector, said: "Today’s proposals underline the standards that firms must meet and will help to ensure that homeowners in financial difficulties are treated fairly. Lenders need to be in no doubt of their obligations to customers who fall behind with payments and must realise that such circumstances are not an opportunity to create further profits."  

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The Jackson costs report

Lord Justice Jackson produced the final report into his review of civil litigation costs on the 14 January 2010.  This contains a broad range of proposals for reform. 

The main recommendations of the report focus on personal injury cases but much of what is proposed will apply to, and could affect, all insurers.

Costs shifting

The proposal is to replace the current system on costs in a number of areas (and in particular personal injury claims) with one-way costs shifting.  This means that a claimant will not be required to pay the defendant’s costs if it loses its claim but a defendant will be obliged to pay the claimant’s costs if the claim is successful.

There is a suggestion that there could be an increase in spurious claims but we do not believe that this will be the case.  Claimants will still be obliged to pay their own costs if their claim is unsuccessful.

The effect of one-way costs shifting on insurers may be significant, however, as they will be unable to recover their costs even if they are successful in defending a claim.  It seems likely that the result of this proposal will be more cases settling at an earlier stage.

Litigation funding

LJJ hopes to counter-balance the effect of one-way costs shifting on defendant insurers and other defendants by making after the event insurance (ATE) premiums and the success fee under conditional fee agreements (CFAs) irrecoverable for a claimant. 
 
CFAs have been identified as “the major contributor to disproportionate costs in civil litigation”.  At present, claimants are entitled to recover the success fee payable under the CFA from their opponent in the event that they are successful.  In addition, after the event insurance premiums which have been or are to be paid are also recoverable from the losing side. 

Under the proposals, success fees under CFAs and ATE premiums will not be paid by the losing defendant in addition to costs but will instead be deducted from the claimant’s damages.  By way of compensation, general damages will be increased by 10% in a number of areas.

LJJ anticipates that the result of making ATE premiums and CFA uplifts irrecoverable will be that the level of both will be reduced in the future.  Whether this is the case remains to be seen.  An alternative outcome may be that there is a lower take up by claimants in both these areas of funding, or that fewer insurers/solicitors are willing to enter into these arrangements.

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Fixed costs

LJJ identified that personal injury fast track cases (claims worth more than £5,000 but less than £25,000) are often disproportionate, so fixed costs are proposed at all stages. He has set out the recommended costs allowable.

For non-personal injury cases, there should be fixed costs for specific categories of cases (road traffic accident and housing cases) in the fast track, and in all fast track cases there should be a financial limit on costs recoverable. An upper limit of £12,000 for pre-trial costs is suggested.  There is no intention at present to consider a fixed costs scheme to cover multi-track (claims worth more than £15,000) cases.

Fixed costs will clearly provide a larger degree of certainty for all parties and will assist in ensuring that costs incurred are proportionate to the amount being claimed.

Alternative dispute resolution

There is strong support for the use of alternative dispute resolution (ADR) methods, particularly mediation, in the report as a way of reducing costs.  Although there is no support for making mediation compulsory, a culture change is recommended.  Greater use of ADR should help to resolve more claims at an earlier stage and thereby reduce the costs incurred for all parties.

Settlement offers

The report proposes an additional incentive for defendants to accept claimant's offers to settle.  Where a defendant fails to beat a claimant's offer to settle made under part 36 of the Civil Procedure Rules, the claimant's damages should be enhanced by an additional 10% recovery.  At the moment, whereas a defendant who fails to beat an offer is penalised by having to pay a greater proportion of the claimant's costs, the level of damages payable is not affected.  However, this proposed change would place defendants under greater pressure to settle as a 10% increase in damages could be substantial.

On the whole, the proposals are likely to be good news for liability insurers.  They are, however, geared towards encouraging early settlement of claims.  On the other hand, ATE and before the event insurers face uncertainty and it is difficult at this stage to predict exactly how the proposals will affect those businesses.

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Case law

Dhami & another v Lloyds TSB General Insurance Ltd (2009)

The respondent insurance company repudiated a building and contents insurance policy on the basis that the claimants had failed to disclose the criminal convictions of one of their sons who was living in the house.  On appeal the court held that it was not appropriate to admit fresh evidence at the appeal where that evidence would have reinforced rather than altered the decision of the trial judge.

Goldsmith Williams (a firm) v Travelers Insurance Co Ltd (2010)

An insurer who insured a third party firm of solicitors under a professional indemnity insurance policy was not liable to the claimant (to whom a right of claim had been assigned by a mortgage provider which had advanced sums to the directors of the third party solicitors) in proceedings brought under the Third Parties (Rights Against Insurers) Act 1930.

The court held that the directors of the third party solicitors had been engaged in or condoned mortgage fraud and the insurer was entitled to repudiate liability under the policy as a result of an exclusionary clause which provided that the insurer was not liable in the event of the directors' fraud or dishonesty.

Shah & another v HSBC Private Bank (UK) Limited (2010)

The court considered multiple causes of action brought against HSBC by an account holder after the bank made a report of suspected money laundering under the Proceeds of Crime Act 2002.

The court held that where a report was made the bank had a defence for not effecting the relevant transaction until permitted to do so if the suspicion was based on a possibility which was more than fanciful. It did not matter whether that suspicion was based on reasonable grounds, was irrational or arose from ‘negligently self-induced suspicion’.  Concerns about ‘tipping off’ that prevent a relevant bank employee giving evidence at an interim stage were unlikely to arise at trial and even if they did sufficient protections could be put in place to allow the issue of fact to be determined.

A banker’s duty of care to an account holder is not completely excluded by the 2002 Act and a delay in making a relevant disclosure to the authorities might give rise to a breach of that duty.  It could not be seriously arguable, however, that a bank could breach that duty by failing to seek advance consent in respect of future transactions because it is impossible to imagine the authorities giving consent in the abstract before any payment instruction is given.  It was equally not seriously arguable that a bank should make a disclosure at the time monies are received in to the account where the customer is known and trusted because it is only on the payment instruction that the question of money laundering arises.

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