< Picture to go here > Conduct Standards Kick-off meeting Lloyd s 1
Cast list Peter Spires, Head of Legal & Compliance Claire Schrader, Manager, Legal & Compliance Paul Brady, Manager, Legal & Compliance Peter Montanaro, Head of Delegated Authorities Steve Southall, Head of Insurance Regulatory Advisory Ernst & Young David Sansom, Senior Manager, Insurance Risk, Ernst & Young Lloyd s 2
Agenda Where we are and how we got here [10 mins] How we proceed together [5 mins] 2014 Programme for the rest of the year [5 mins] 2015 Conduct Assurance Programme [5 mins] FCA current activity [15 mins] Lloyd s in a broader context [15 mins] Q&A Lloyd s 3
Where we are and how we got here LMA Sub-Group COG RegComm LMA Board LIIBA FCA support and territorial scope Market Consultation Issued 30 July In force 1.1.2015 MI 1.1.2016 Lloyd s 4
How we proceed together Commitments to move the market together take the FCA with us build on existing best practice circulate best practice reduce duplication wherever possible reach out to all key stakeholders mandate where it makes sense Need your active support engagement and commitment within your organisation Lloyd s 5
2014 Programme for the rest of the year Questionnaire issued 26 August and due 15 September Don t agonise over it! Will help with preparing case studies and content of workshops Workshop sessions Assessing & recording product risk Corporate culture, governance, MI (inc. role of the board, management & staff, Product Oversight Group, Use of MI, Training) 23/26 Sept October Director briefing Underwriter focussed workshop (product design, review and role of distributors) November November Broker workshop November Self-assessment templates to be issued in early November: 8 weeks to submit Progress discussions with FCA on overseas complaints: FCA priority is understanding how overseas complaints are handled in a way which satisfies the aims & objectives of DISP. Lloyd s working on providing further info to FCA to move the discussions forward. Detail on Lloyd s assurance process in 2015 coming up next. Lloyd s 6
2015 - Conduct Assurance programme Aim - robust, consistent and proportionate approach to assessing Agents compliance with Standards commence from January 2015 dedicated Conduct Standards Assurance Team being established (cross-departmental and external resource) overseen by a new Conduct Assurance Working Group Chaired by Peter Spires/reports to Syndicate Risk Committee work closely with FCA Lloyd s 7
Conduct Assurance programme current aim to conduct 16-20 reviews in 2015 2 concurrent reviews all agents will be reviewed by 2016 prioritise agents with High Product Risk commence with Pilot of 2 agents in Q1 review process approx 1 month (3 weeks notice) increasing intensity of areas of focus during 2015 review output RAG rated report Identify good practice as well as gaps Consider agent s implementation plan a lot of work will need agents help to achieve! Lloyd s 8
Timeline 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 2016 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Pilot 1 5 9 14 Pilot 2 6 10 15 3 7 11 16 4 8 12 17 13 Input CASG pilot selection CASG review prioritisation SCR Pilot SCR Assurance type/intensity SELF assess received Focus in plan & resources, culture and governance (other standards high level review) RC RC FB Also focus on plan progress, Also focus on sales, distribution All standards (ex MI) - Intensive product design and assessment customer-outcome focussed Full (inc. MI) Key: Initiation letter CASG meeting
The FCA 2014/2015 Business Plan We act to ensure that a firm has its customers at the heart of how it does business, giving them appropriate products and services, and putting their protection above profits or remuneration Our general insurance thematic work will focus more on wholesale activities, recognising the connection between retail and wholesale participants in general insurance markets, with many retail general insurance products coming from wholesale insurance providers. In particular, we will consider the impact on personal lines and small commercial customers who buy products provided by wholesale firms. Lloyd s 10
Current Thematic Activity Coverholder Thematic o Distribution chains in firms that operate in wholesale markets o Focus on - o o how insurers manage and oversee arrangements which involve delegation of underwriting and claims handling authority and how parties within the distribution chain meet their regulatory responsibilities and obligations to customers. covers Coverholders and TPAs 4 managing agents have been written to information requests Expected to be completed by Q4 Other Current/Planned Thematic s in GI o o o Premium finance Protection of client money by small firms Commercial Claims Lloyd s 11
Recent Thematic Activity May 2014 - Claims Thematic (Household/Retail Travel) o key issues included consumer outcomes in long chains of delegation (eg use of coverholders/tpas) what matters is that consumer outcomes do not vary depending on how the insurance is bought communication and ownership throughout the claim management of supply chains. clarity of product documentation. July 2014 - General Insurance Add-On Market Study consumers purchasing products that were of poor value/not what they needed. remedies paper to be published later this year Lloyd s 12
Recent FCA Enforcement Action (1) Stonebridge (2014) Insurer fined 8.3m (pre settlement discount approx. 12m) PA/accidental death/accidental cash plan Stonebridge failed to oversee outsourced sales providers. o Problems with sales process o Problems with cancellation process Stonebridge failed to implement adequate systems and controls in relation to its outsourcing o o o Ineffective challenge from Board/Exec Committees No adequate MI from outsourcers Remuneration no input into incentive schemes at outsourced companies. Lloyd s 13
Recent FCA Enforcement Action (2) HomeServe (2014) o Intermediary fined 30.6m (largest ever retail fine) pre settlement discount 43.7m o Plus 16m in redress o Sold home emergency and repairs insurance cover (12m policies/customer base of up to 3.3m) o No dedicated compliance representation on the Board o Examples of not investigating complaints but simply negotiating with the customer o Inappropriate remuneration structures o Incentivised complaints handlers to close as many complaints as possible o Sales failed to explain exclusions etc/failed to help compare products/sales rushed/reliance on cancellation rights to sell to customers Lloyd s 14
Recent FCA Enforcement Action (3) Swinton (2013) Intermediary fined 7.3 m (pre discount - 10.5 m) Sold monthly add-on insurance policies (home emergency/pa/breakdown) Strategy culture of placing drive for profit over fair treatment of customers. Problems at point of sale Poor Call Monitoring (4) Porta Verde (2013) Insurance intermediary fined 25,000 (fine would have been 354,000 but for serious financial hardship) Emergency plumbing insurance and insurance for satellite TV equipment Failure to monitor / control ARs (pressure sales) Lloyd s 15
Lloyd s in a broader context EY Steve Southall & David Sansom Lloyd s 16
Lloyd s in a Broader Context Regulatory Approach to Conduct The regulators approach to meeting their objectives has changed over the last 10 years, and regulated firms have had to respond to those changes REGULATORY APPROACH 2004 2013 RULES PRINCIPLES RISKS FSA Handbook ICOBS rules from 2005 Increased emphasis of Principle 6 July 2004 FSA report Treating customers fairly progress and next steps Creation of the FCA Risk based regulator risk not rules based approach INDUSTRY RESPONSE Legal based approach to Compliance Are we compliant with the letter of the law? Greater operational ownership of compliance More emphasis on measurement of customer outcomes through MI Challenge to apply the tools and technique of risk management to conduct and to be more forward looking Not TCF Mark 2 Lloyd s 17
Lloyd s in a Broader Context Conduct Risk Industry Timeline However, the regulatory change in approach has been driven at a supervisory rather than policy level meaning that different sectors have progressed at different speeds. The London Market is therefore is in catch up mode FCA DIALOGUE DESIGNING CONDUCT RISK FRAMEWORK IMPLEMENTING FRAMEWORK EMBEDDING FRAMEWORK BANKS Q1/2 2013 Q3 2013 onwards ONGOING INSURERS Q3/4 2013 Q4 2013/Q1 2014 onwards ONGOING BEGINNING LONDON MARKET London Market have not had the benefit of early engagement and push from the regulator until 2014. Therefore the design of a conduct risk framework is just beginning approximately 12 months behind other markets. Explicit request from some Supervisors to some firms to develop framework Lloyd s 18
Lloyd s in a Broader Context Lessons Learned and Challenges Although Lloyd s and the London Market are starting on their journey later than other markets, there is at least the advantage of learning from others. Key lessons and challenges that we have seen include: Approach Conduct risk needs to be considered top down starting with the business strategy and business model. What do we sell, to whom and through what channels? Where do we make money? Given the answers to those questions, where are our key conduct risks and how do we mitigate them The answers to these questions elsewhere has led to some difficult conclusions stop selling a product and/or using a distributor Risk management framework The FCA expects the tools and techniques of risk management to be applied to conduct. Hence there is an expectation that firms will develop a conduct risk appetite and MI to support the assessment of whether they are in or outside appetite. Other Sectors have found both the definition of a risk appetite statement, and the assessment of where they are, a considerable challenge. Firms may need to revise their risk frameworks to reflect conduct risk. Lloyd s 19
Lloyd s in a Broader Context Lessons Learned and Challenges (2) Roles & responsibilities Governance Compliance has often reported at Audit Committee, risk at Risk Committee. Where should it be discussed going forward? At an Executive level, many firms have TCF-type Committees but in many cases these are backward looking Committees that review MI. They need to be more forward looking and encompass a more proactive management of potential risks through, for example, greater oversight of product development. Firms need to consider governance arrangements over conduct both at a Board and Executive level Control functions Compliance and Risk functions have often been separate departments in firms reporting to different members of the Executive. Terms of reference for these functions do not necessarily reflect conduct risk responsibilities. Given the overlap of compliance and risk firms need to consider roles and responsibilities in the context of conduct risk. In other Sectors we have seen Risk and Compliance functions merge. Control frameworks Control frameworks need to be updated to reflect conduct risk Lloyd s 20
Lloyd s in a Broader Context Lessons Learned and Challenges (3) Management information The area of greatest challenge, not least because of the need to obtain MI from distributors, but also because of lack of robust data internally. Most banks and insurers still struggling with this issue Conduct Risk MI is not necessarily the same as TCF MI there are overlaps but Conduct Risk MI is typically more forward looking The mistakes of TCF are still being repeated i.e. volumes of data but not enough information. Lloyd s 21
Any questions? Lloyd s 22
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