Welcome to the insurance and financial services update for July-September 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 collague 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:


Financial Regulation

On 26 July 2010, the Treasury published a consultation paper on the coalition government’s proposals for reform of financial regulation in the UK. This follows the government’s announcement in June 2010 of its intention to abolish the FSA and the current tripartite regulatory system, whereby responsibility for financial regulation is divided between the FSA, the Bank of England and the Treasury.

 The consultation invites views on the proposals to:

  • create two new entities under the Bank of England’s control: the Financial Policy Committee (FPC) responsible for macro-prudential supervision; and the Prudential Regulation Authority (PRA) to supervise the safety and soundness of individual firms; and
  • create a new Consumer Protection and Markets Authority (CPMA) to act as a single regulator focussed on conduct in financial markets.

The consultation closes on 18 October 2010.

Financial promotions and new media

On 9 June 2010, the FSA published a Financial Promotions Industry Update on the use of new media channels. These include social networking sites such as Facebook and Twitter, blogs, forums and iPhone apps. The Update follows a review carried out by the FSA in early 2010 of various Twitter and Facebook pages and internet forums which revealed a mixture of good and poor practices among firms who have adopted new media channels to communicate financial promotions. Poor practices identified included:

  • the lack of risk warnings on some promotions; and
  • an assumption by firms that communications made using new media channels were automatically image advertisements and therefore exempt from the financial promotion rules. 

The Update includes general guidance for firms considering using new media for promotions and communications. 

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FSA update on past performance misconceptions

The FSA published an Update on 6 September 2010 to clarify some common misconceptions relating to the past performance rules, contained in the Conduct of Business Sourcebook at Rule 4.6.2, and how to comply with them. The Update emphasises the potential for disciplinary action by the FSA for failure to comply with the rules. 

FSA’s new enforcement powers

The FSA, in a paper published on 23 July 2010, set out its new enforcement powers introduced by the Financial Services Act 2010, which enable it to suspend or impose restrictions on authorised and approved persons and to impose penalties on persons that perform controlled functions without approval. The rules also enable the FSA to impose financial penalties on those persons who breach the short selling prohibition or disclosure rules. The paper states that the FSA will use its suspension powers “whenever it is appropriate to do so” and therefore not necessarily only in the most serious cases. 

New FSA webpage on the Solvency II Directive

The FSA published on 6 July 2010 a new webpage relating to the Solvency II Directive. This encourages firms to take part in the European Commission’s fifth Quantitative Impact Study (QIS5) which aims to field test the current thinking on quantitative aspects of Solvency II. The Study runs from August to November 2010 and allows firms to influence the remaining uncertain elements of Solvency II, in particular the level 2 implementing measures. The webpage also includes a QIS5 timeline setting out key dates. 

The Committee of European Insurance and Occupational Pensions Supervisors published on 7 September an updated version of its QIS5 website.

Goldman Sachs International faces £17.5million fine

On 9 September 2010, the FSA fined Goldman Sachs International (GSI), a firm based in London, £17.5million for failure to ensure that it had in place adequate systems and controls to enable it to comply with its regulatory reporting obligations in the UK. The FSA found that GSI had not deliberately withheld information but “defective systems and controls meant that the level and quality of its communications with the FSA fell far below what [they] expect of an authorised firm”. Because of GSI’s co-operation with the FSA investigation, it qualified for a 30% discount on the fee imposed which would otherwise have been £25million.

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Law Commission Consultation on the duty of good faith

On 9 July 2010, the Law Society and the Scottish Law Commission launched a joint consultation on the insurance policyholder’s duty to act honestly during the life of a contract, and seeking clarity in the existing law in relation to the remedies which the insurer may take if a policyholder makes a fraudulent claim. The current law is based in s.17 of the Marine Insurance Act 1906 which states that if a policyholder acts fraudulently, the insurer may deny the whole insurance contract and demand back any money paid on previous claims. The courts have, however, adopted a different approach and have said that a fraudulent claimant should forfeit their entire claim, even that part which is legitimate, but this should not affect their other claims.

Responses to the consultation must be received by 11 October 2010.

OECD consultation on insurer governance

On 17 September 2010, the Organisation for Economic Co-operation and Development (OECD) launched a consultation on the new draft guidelines on insurer governance developed following a review process in 2008-09. The guidelines, while non-binding, apply to any insurer licensed to underwrite life, non-life and reinsurance policies and are intended to provide guidance and serve as a reference to policymakers, insurers and other relevant stakeholders in OECD and non-OECD countries.

The guidelines cover four sections which are:

  • governance structure
  • internal governance mechanisms
  • groups and conglomerates
  • stakeholder protection
  • Comments must be received by 21 October 2010.

FSA introduces long stop for consumer redress schemes

In a new Guidance Note on consumer redress schemes published in July 2010, the FSA introduced a 15-year long stop on advice investigated under these schemes. The Note states that: “The power is limited so that the only failures a scheme can address are those a court or tribunal would find to have been failures at the time the activities were carried on rather than a subjective assessment by the FSA of the reasonableness of a firm’s actions”. This means that the statute of limitations applies to consumer redress schemes rather than being measured against standards set by the FSA or the Financial Ombudsman Service. 

The consumer redress schemes were provided for by the Financial Services Act 2010. In summary, this provides that the FSA may make and enforce rules requiring firms to establish and operate a consumer redress scheme where it appears that there may have been a "widespread or regular failure" by a firm to comply with requirements applicable to the carrying on by them of any activity, and it appears that consumers have suffered loss or damage as a result of this. 

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General insurance 

Employers’ Liability Tracing Office

On 15 June 2010, the FSA published a consultation paper on tracing employers’ liability insurers following a government policy review which identified evidence of consumer detriment in this area. 

A Department for Work and Pensions consultation and support from the Ministry of Justice, an Employers’ Liability Tracing Office (ELTO) is to be created. This will manage an electronic database of Employers’ Liability (EL) policies to help people trace relevant insurers and obtain compensation. 

The FSA has noted in its consultation paper that it cannot force insurers to submit data to the ELTO, as it cannot sub-delegate its consumer protection powers in this way. Instead, the FSA proposes to introduce rules to improve consumer protection until primary legislation is in place. 

The proposals include requiring:

  • all general insurers to notify the FSA if they carry out (i.e. are potentially liable for) UK commercial lines EL insurance contracts; and
  • all insurers carrying out UK commercial lines EL insurance to make certain policy and other information they generally have available for tracing purposes in a specified easily accessible form. This could be on the insurer’s website or through a tracing office if the tracing office used by the insurer meets certain conditions.

A policy statement setting out the feedback to the consultation proves is to be published later in 2010.

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Life insurance

Responsible lending

The FSA published a consultation paper on responsible lending on 13 July 2010. The paper sets out its proposals for ensuring a more sustainable mortgage market that works better for consumers. The key proposals include:

  • requiring affordability assessments to be carried out for all mortgage applications and ultimately ensuring that lenders are responsible for assessing a borrower's ability to pay;
  • verifying borrowers' income in every case, thereby banning self-certification and fast-track mortgages where income is not verified; and
  • using a stricter affordability test to ensure that vulnerable borrowers with credit-impaired histories are protected.

The FSA is asking for comments on its approach to regulating interest-only mortgages and non-bank lenders by 30 September 2010 and on other proposals by 16 November 2010.

FSA fine for unfair treatment of customers

The FSA on 15 July 2010 fined Redstone Mortgages Limited £630,000 for unfair treatment of customers who had fallen into arrears on mortgage repayments. In addition, the firm agreed to repay an estimated total of £500,000 to customers who had been charged unfairly. The failings identified by the FSA included: failing to ensure that its staff had adequate understanding of treating mortgage arrears customers fairly; focussing on reducing arrears to less than two months, regardless of the customer’s personal and financial circumstances; using policies that led to unnecessary litigation to secure arrangements to pay; sending repetitive, excessive and confusing correspondence; and applying charges to customers’ accounts that were unfair and/or excessive. These were in breach of the FSA rules that a firm must pay due regard to the interests of its customers and ensure they are treated fairly.

The £630,000 fine represents a reduction of 30% under the FSA’s settlement discount scheme due to Redstone’s co-operation and the fact that it has made significant improvements to its arrears handling and mortgage litigation procedures.

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Financial Ombudsman Service

Mortgage underfunding cases

The FOS reported in its August/September 2010 issue of Ombudsman news that its technical advice desk had seen an increase in calls from consumers about mortgage underfunding. This occurs where the lender has calculated mortgage payments incorrectly and leads to complaints from the consumer that while they had been paying the amount quoted by the lender they were then shocked to find that the outstanding mortgage balance was more than they had originally been told. As a result of the increase in complaints, the FOS produces a technical note on this issue which can be found at this link.

Guidance on compensation for financial loss

The FOS has published a technical note on its approach to compensating consumers for financial loss. The note focuses particularly on compensation for consumers who have been “deprived” of money and those who have suffered investment loss.

Complaints data

On 14 September 2010 the FOS published its latest complaints data which reveal that in first six months of 2010 complaints made to it had increased slightly from the previous six months (an increase from 82,136 to 84,212 complaints). The data also revealed that more than half the complaints (47,507) related to five financial services groups, with the bank attracting the highest number of complaints (12,750) being Lloyds TSB. The FOS upheld 44% of complaints in favour of the consumer in the first half of 2010 as opposed to 53% in the second half of 2009.

Case Law

Consumer Credit

Joseph Sternlight & others v Barclays Bank plc & others (2010)

In a summary judgment application the court robustly dismissed five test cases from borrowers concerning credit card agreements which, it was claimed, were unenforceable because the APR was the “driver” for the rate of interest. The court found that the rate of interest was in fact the rate stated on the agreement and struck out the claims.

Black Horse Ltd v Speak & Speak (2010)

The defendants entered into a consumer credit agreement with Black Horse and then failed to maintain their repayments. At trial, the defendants contended that the claimant had required them to take out payment protection insurance (PPI) as a condition of obtaining the loan or had in the alternative misrepresented that PPI was a pre-condition to obtaining the loan and in doing so had acted in contravention of the Insurance Conduct of Business Rules. The court found that, as a matter of fact, Black Horse had not required the defendants to take out PPI and the agreement was therefore enforceable. Obiter, the court stated that if Black Horse had represented the PPI to be compulsory but had then described it as optional on the agreement itself, this would not in itself make the PPI optional.

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Bribery Act

The Ministry of Justice has announced that the Bribery Act 2010, which replaces the previous laws on bribery and corruption and widens the definition of bribery, is to come into force in April 2011. On 14 September 2010 the Government launched a consultation exercise on the guidance about procedures which commercial organisations can put in place to prevent bribery on their behalf. The deadline for responses is 8 November 2010 and a response will be published in early 2011 along with the final version of the guidance.

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