Welcome to the insurance and financial services update for April-June 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 Adam Finch.
All links are correct at the date of publication. The following topics are covered:
- Complaints handling
- Financial Ombudsman Service
- Case law
Regulatory priorities in the life insurance sector
Ken Hogg, FSA Insurance Sector Director, gave a speech on 19 May 2010 outlining the FSA's priorities in the regulation of the life insurance sector.
The speech reflects the FSA's priorities for 2010/11, set out in its Financial Risk Outlook for 2010 and its Business Plan for 2010/11, in particular the FSA's intensive supervisory approach and its supervisory approach to conduct risk.
Of particular interest are the examples of how the FSA is taking a different approach to the life insurance sector through intensive supervision. These include:
- A greater willingness to intervene in firms' businesses to address potential problems before they arise. He cites as an example the FSA's intervention in the transfer of an insurance business outside the UK and the FSA's ring-fencing of UK firms from financial weaknesses elsewhere in those firms' groups.
- A new programme of reviews on key areas of financial risk, such as asset quality, liability assumptions and hedging.
- The FSA's expectations of firms in their compliance with the new reverse stress testing requirements. The FSA expects firms to take account of the results of its 2009 stress-testing exercise and, in particular, expects firms' boards of directors to engage closely with the process.
Late payment of insurance claims
A recent Law Commission paper has suggested that insurers who delay paying valid claims should be liable to policyholders for any foreseeable losses they cause.
Under current law, even if payment of an insurance claim is delayed for years, the insured cannot claim compensation for any additional losses caused by that delay. However, in an Issues Paper published on 23 March 2010, the English and Scottish Law Commissions state that this position is unfair, biased and ignores commercial reality.
The Commissions have been looking into the question of late payment as part of their comprehensive review of insurance contract law. Their suggested solution is to amend the law so that policyholders would be able to claim damages in cases where an insurer acts in bad faith and to make insurers liable if they fail to pay a valid claim within a reasonable time.
At this stage the paper is for discussion only, before any formal consultation process begins. The Commissions have asked interested parties to submit their comments by 24 June 2010.
FSA, OFT and FOS joint discussion paper on addressing consumer complaints
The FSA has published a joint discussion paper with the Office of Fair Trading (OFT) and the Financial Ombudsman Service (FOS), entitled "Consumer complaints (emerging risks and mass claims)" (DP 10/1).
Publication of the paper follows HM Treasury's White Paper, "Reforming Financial Markets", published in July 2009, which called, amongst other things, for improvements to the processes for consumer complaints and redress in the financial services sector.
A key proposal in the paper is the creation of a coordination committee, consisting of FSA, OFT and FOS executives. The committee's role would be to coordinate analysis of new and emerging risks and to determine whether such risks should be addressed through regulatory action or through consumer complaints. The new committee is intended to be an improvement of the existing wider implications process.
The paper also seeks views on a number of issues relating to consumer redress, including:
- The scope for improvements to the FSA's complaints handling rules (Chapter 1 of the Dispute Resolution: Complaints sourcebook (DISP)) and to the exchange and use of information by the FSA, the OFT and the FOS.
- How firms can be encouraged to address new and emerging risks before they turn into widespread issues.
- How "mass claims" (that is, where a single issue generates a large number of the same or similar complaints) can be addressed more effectively. On this issue, as well as the proposed coordination committee, the paper considers the proposals in the Financial Services Bill concerning past business reviews and collective actions.
FSA report on complaint handling
The FSA published a report on 28 April 2010 entitled: "Review of complaint handling in banking groups". Although the review focuses on banking groups, the FSA expects all firms that handle complaints to take note of its findings.
The review follows FSA concerns about the quality of banking groups' complaints handling which was highlighted in work on payment protection insurance (PPI) and bank overdraft charges. The FSA identified poor complaint handling as a key conduct risk in its Financial Risk Outlook for 2010.
The FSA assessed complaint handling standards in banking groups responsible for over 70% of complaints reported to it and for over 60% of complaints resolved by the Financial Ombudsman Service (FOS). The FSA found poor standards at most of the banks assessed:
- Most banks did not have a culture that focused on delivering fair outcomes for complainants. This was often caused by a lack of senior management engagement and accountability and by incentives schemes that made staff reluctant to pay customers redress, even where the bank was at fault.
- Banks that undertook effective analysis of the root cause of complaints were able to identify problems before they became widespread.
- Complaint handling by front-line staff was poor in most banks assessed. The FSA found that these staff were given inadequate support, for example in training and technical support.
- Banks' quality assurance processes focused on checking
adherence to process rather than assessing the quality of the
response and the fairness of the outcome.
Five of the banks assessed have agreed to make changes as a consequence of the FSA's work and two of the five banks have been referred to enforcement for further investigation.
The FSA expects all firms which handle complaints to take note of its findings and make changes to their processes where appropriate. The FSA will continue to monitor complaint handling data submitted by firms and produced by FOS and will take action against firms where appropriate.
The FSA has also published a complaint handling file review template, together with explanatory notes, which it uses when assessing firms' complaint handling files. It suggests that firms may wish to adapt the template to assess their own complaint handling processes, although use of the template is not mandatory.
Following the review, the FSA is considering making changes to its Dispute Resolution: Complaints sourcebook (DISP) to:
- Strengthen senior management oversight and engagement in complaint handling.
- Remove the DISP 1.6.5 R "two-stage process", which the FSA regards as a potential barrier to fair complaint handling.
- Strengthen root cause analysis requirements.
- Strengthen factors that firms should consider when
investigating and assessing complaints, especially FOS
The FSA intends to consult on these changes in the third quarter of 2010.
FSA framework for financial penalties
The FSA has pressed ahead with amendments to its Decision Procedure and Penalties Manual which alter the system for calculating fines, despite criticism that it could result in disproportionate penalties for individuals who break the rules.
The new regime came into force on 6 March 2010 and will apply to any breaches occurring on or after 6 March 2010. It could double or even triple the fines payable in some cases. Firms could be fined up to 20% of relevant income and individuals up to 40% of their total salary and benefits (including bonuses) for regulatory breaches. Serious market abuse cases against individuals, such as insider trading, will attract a minimum penalty of £100,000.
The process now consists of a five-step system for calculating financial penalties for both firms and individuals.
- Under the first step, the FSA will deprive the firm or person of any benefit derived from the breach, such as a profit made or loss avoided.
- The second step imposes fixed fine levels according to the nature, impact and seriousness of the breach. In cases against firms, this figure will be 0%, 5%, 10%, 15% or 20% of income earned from the product or business area to which the breach relates. Individuals will face fines of 0%, 10%, 20%, 30% or 40% of the gross benefits earned from relevant employment, including salary, bonus, pension contributions, share options and other benefits. The FSA has stuck to its original proposal to target individuals with higher penalties.
- The third step takes into account mitigating or aggravating circumstances.
- The fourth step enables the FSA to increase the fine as a general deterrent, for instance if industry standards have failed to improve despite previous regulatory action.
- Under step five, the regulator will apply a discount of up to 30% for early settlement, as under the previous regime.
The FSA has stated that flexibility is important, given the broad range of cases it has to deal with, even if it means more cases may be referred to the Regulatory Decisions Committee and the Financial Services and Markets Tribunal.
Requests for information
The Financial Ombudsman Service is reducing the time limit for firms to respond to its requests for information from 21 days to 14 days.
The FOS acknowledges that the change may “cause short-term
difficulties for some businesses” but it insists that moving
to shorter timescales will improve its service.
The FOS does, however, state that if new or unusual information is required, it may give more time for a response but that "we reserve the right to progress the case to the next stage of our process, including to a final ombudsman decision, if a financial business or a consumer continues to delay responding to us.”
FOS annual review
On 19 May 2010, the Financial Ombudsman Service published its 2009/10 annual review. The review outlines the activities and role of the FOS during the 2009/10 financial year and presents information and statistics on the consumer enquiries, complaints and cases it has dealt with.
The key points from the review are:
- The FOS has received a record 166,321 new complaints and handled 925,095 consumer enquiries.
- Complaints about payment protection insurance (PPI) increased by 58% on 2008/09 and accounted for three in ten cases referred to the FOS.
- Complaints involving current accounts rose by 85%.
- Complaints about consumer credit increased by 110%.
- Complaints about motor insurance disputes decreased by 13% and complaints about pensions decreased by 27%.
- The number of new cases relating to credit cards, mortgages, buildings insurance and income protection insurance has levelled off.
- 28% of cases were referred by commercial claims-management companies on behalf of consumers.
Complaints to FOS
The Financial Ombudsman Service (FOS) published a technical note on 20 May 2010 explaining the six-month time limit which applies to the referral of complaints to it.
Under the FSA's rules, the FOS cannot consider a complaint referred to it more than six months after the date on which the financial business sent the consumer its "final response" to the complaint (see DISP 2.8.2R(1)). There are exceptions to this rule, however, including where the consumer's failure to respond within the six-month period was "as a result of exceptional circumstances".
The note explains the FOS's approach to applying the rule, including the position if the final response does not mention the six-month time limit to the consumer, how to calculate when the six-month time limit ends and what constitutes a referral. It also provides case studies which help to clarify what amounts to an exceptional circumstance.
A customer brought an action against his bank for damages claiming that he had suffered loss as a result of its failure to carry out his instructions whilst requests for consent under the Proceeds of Crime Act 2002 were pending. On appeal from the bank's successful application for summary judgment, the court held that there was no reason why the bank should not to be put to proof, at trial, of its suspicion that the sums involved were criminal property. It was not enough for the bank to obtain an order for summary judgment simply by adducing a witness statement by its solicitor attesting to its suspicion of money laundering.
The court of first instance held that the defendants were liable for the claimant losing millions of pounds as a result of their fraudulent misrepresentations that the claimant was trading successfully when it was not. On appeal the Court of Appeal held that the lower court was correct to award damages for lost profits for trading during both the period of the fraud and from the date of discovery of the fraud to trial. There was no reason why the discovery of the fraud should be a cut off point for determining the date of claim for damages. The claimant was entitled to recover damages until trial.
The Bribery Act has received Royal Assent and is likely to come
into force in October this year. The Act completely replaces
the previous laws on bribery and corruption and widens the
definition of bribery. It also introduces a new corporate
offence of bribery, which makes an organisation liable for bribery
by an employee if it is found to have failed to put in place
adequate anti-corruption procedures.
The maximum penalty for bribery has been increased from 7 to 10 years' imprisonment with an unlimited fine.
Under the new offence, a commercial organisation is guilty of an offence if an "associated person" bribes another person intending to obtain or retain business, or an advantage in the conduct of business, for the organisation.
If the offence is proved to have been committed with the consent or connivance of a "senior officer" (which includes a director, manager, secretary or similar officer) of a corporate body the senior officer is liable to be convicted as well as the corporate body. The new offence is committed irrespective of whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
The Act defines an "associated person" as a "person who perfoms services for or on behalf of " an organisation. The capacity in which the services are performed for or on behalf of the organisation does not matter and so the associated person may be an employee, agent or subsidiary. Employees are presumed to perform services unless the contrary is shown. Further, whether or not the associated person is someone who performs services for or on behalf of the organisation is to be determined "by reference to all the relevant circumstances" and not merely by the relationship between the two. "Associated persons" could therefore include others over whom the organisation has no direct control. On the face of it there could be liability in circumstances where the organisation concerned did not know that, say, an agent had bribed others.
It is a defence for the organisation to prove that it had in place "adequate procedures" to prevent associated persons from undertaking such conduct.
The Act requires the Secretary of State to publish guidance about procedures that relevant organisations can put in place to prevent persons associated with them from bribing. It is thought that such guidance will be published this summer.
It is not known exactly what will be in the guidance but it is likely that it will reflect the Organisation for Economic Co-operation and Development ("OECD") good practice on ethics and controls. It has been suggested that issues to be addressed will include the responsibilities of an organisation's board of directors; the identification of a named senior officer with particular responsibility for combating bribery; risk management procedures; gifts and hospitality policy; facilitation payments; staff training; financial controls; and reporting and investigation procedures.
Financial Services Act
The Financial Services Bill received Royal Assent on 8 April 2010. The Financial Services Act 2010 reforms financial services regulation and contains provisions to improve redress for consumers and improve financial education and awareness.
The Act includes:
- A new statutory financial stability objective for the FSA;
- A new independent consumer financial education body, established by the FSA;
- Provision for regulations on remuneration transparency, and a duty for the FSA to make rules on remuneration;
- A duty for the FSA to make rules requiring firms to produce recovery and resolution plans (also known as “living wills”);
- Power for the FSA to ban short selling of certain instruments, and establish a permanent disclosure regime; and
- Greater disciplinary powers for the FSA, including earlier disclosure of investigations.
The FSA website contains information about its implementation of relevant provisions of the Act.