Regulatory trends: what is attracting attention?
Providers of financial services have been under intense regulatory scrutiny in recent years. This increased scrutiny seems set to continue.
So, what have insurers and insureds been faced with recently, both in terms of the Financial Conduct Authority (FCA), and in terms of complaints to the Financial Ombudsman Service (FOS), which works closely with the FCA?
Economic consultancy, NERA has observed that FCA financial penalties fell substantially in the second half of 2015/16. It has also referred to significant ‘conduct-related costs’, for example FCA ordered redress payments.
In addition, there has been an increased focus on the role of individuals, and there are plans to extend the Senior Managers and Certification Regime to all FCA and Prudential Regulation Authority authorised institutions.
In terms of the FCA’s priorities moving forward, the FCA Business Plan 2016/17 identified seven priority areas. A number of these remain the same as last year, including “Financial crime and Anti-Money Laundering”, and “Innovation and technology”. In this article, we have focused on two priority areas that relate to the treatment of customers. We have also referred to a number of products that have attracted criticism or complaint.
Payment protection insurance
Large financial institutions have been exposed to significant complaints involving the mis-selling of payment protection insurance (PPI) and, in some instances, FCA criticism for the way in which complaints have been handled. Whilst insurers and insureds might have hoped that these complaints were going to subside, the FCA recently announced that it was considering a deadline of June 2019 for further complaints to be submitted.
Packaged bank accounts
It has been reported in the press that there has been a significant increase in complaints to the FOS regarding ‘packaged’ bank accounts. Complaints relate to bank accounts offering add-ons such as insurance, where consumers feel the product was mis-sold to them, or it was not made clear that the additional cost was being included.
The FCA was due to complete a thematic review of packaged bank accounts in quarter 3 of this year. We await the FCA’s comments with interest.
There has been increased scrutiny of pension freedoms, since the arrival of legislative changes in 2015 designed to give consumers better access to their pensions, for example by making annuities optional, and lowering taxes on distributions. The FCA states that pensions and retirement income is an ongoing priority area. Its work in this area includes an ongoing review of the sale of enhanced annuities to consumers by authorised firms, and future implementation of caps on exit charges for cashing in pensions.
It is also important to note the risk of future claims in respect of the secondary market in annuities that is due to commence next year. This will allow existing annuity holders to sell their annuity for a lump sum. Whilst the FCA will work to put consumer safeguards in place, the usual risks of mis-selling will exist, which could give rise to claims in the future.
FCA priority areas
This year, treatment of existing customers remains a priority area, and the FCA has added “Advice” to its priorities.
The Financial Advice Market Review was published in March 2016, and included recommendations for the FCA, including that it should simplify and clarify the regulation of financial guidance. The FCA will also continue to assess how suitable advice to consumers is. It has highlighted the need for consumers to have affordable, professional advice.
With regard to the treatment of existing customers, the FCA has observed poor practice, including a failure to inform customers about other available products and creating barriers to reduce competition. There has been an increased focus on competition in recent years, and the FCA has worked with the Competition and Markets Authority (CMA) in relation to a retail banking investigation. It expects to work with the CMA to implement proposals and improve competition in the retail banking sector. The FCA will also carry out further work on the treatment of long-standing customers in the life insurance sector.
Impact for insurers
Insurers are often faced with claims for significant costs in respect of enforcement investigations, the handling of redress payments, and FOS complaints. In addition, indemnity may be sought for other significant costs, for example section 166 skilled persons reports.
Whilst the FCA’s focus may shift slightly from year to year, we can expect these sorts of claims for costs to continue. Insurers will have to consider whether the trigger for cover has been satisfied in respect of the costs incurred, and whether any other policy provisions impact on the cover that is available.
In addition, in its latest business plan, the FCA has referred to its focus on the culture and governance of authorised firms (another priority area), observing that it is aiming for:
an increase in the proportion of crystallised risks that are self-identified and proactively addressed by the firms rather than by the regulator.
An example of the increased focus on self-identified risks is the expansion of whistleblowing rules for the financial sector in 2016. As a result, insurers may see more claims for costs and redress to rectify perceived failings before complaints come in from consumers.