Insurance Regulatory eBulletin - Conduct regulation

Regulation round up
On 26 July, the FCA published its monthly Regulation round-up. The issue focuses the introduction of the Senior Managers & Certification Regime and the proposed Directory of financial services workers. The Hot Topics included Retirement Outcomes Review final report, the FCA and Practitioner Panel survey 2018 report Operational Resilience and the FCA’s Annual Report.

This edition includes the following articles that are relevant to insurers or insurance intermediaries:

• Insurance Distribution Directive (IDD) – the FCA is expecting firms’ preparations to be well under way;
• update on Alpha Insurance which has been declared bankrupt by the Danish FSA;
• FCA Business Plan and Priorities – speech by Andrew Bailey to the BIBA 2018 Annual Conference in May;
• digital regulatory reporting – publication of terms of reference for the pilot study;
• FCA: Live and Local regional programme events in 2018.

Agreement between FCA and Korean Financial Services Commission
On 27 June, FCA announced a Co-operation Agreement between the FCA and the Financial Services Commission of the Republic of Korea. The purpose is to establish a structure for cooperation and referrals between the innovation functions of both authorities, with the Agreement outlining how they plan to share and use information to promote innovation in their respective markets. It also includes a mechanism for referring which will allow the authorities to refer innovative financial service businesses between their respective innovation functions.

Retirement Outcomes Review: proposed changes to rules and guidance – CP18/17
On 28 June, FCA published a Consultation Paper (CP) on proposed changes to its rules and guidance in response to its Retirement Outcomes Review, in which the FCA assessed how the market is evolving and addressed emerging issues that could cause consumer harm.

The CP contains a proposal for a remedy package to address these issues and potential subsequent consumer harm. The aim of the package is to protect consumers from poor outcomes, improve the engagement of customers with retirement income decisions, and ensure clearer drawdown costs and easier comparisons to promote competition. 

The consultation is expected to be of interest to firms that provide pensions, annuities and income drawdown, as well as to consumers and stakeholders with an interest in pensions and retirement issues.

Comments on the FCA's proposals for discussion are required on or before 9 August 2018 with a further consultation occurring in January 2019. Comments on the proposals for consultation are required on or before 6 September 2018.

FCA regulated fees and levies 2018/19 – PS 18/13
On 3 July, FCA published a Policy Statement (PS218/13) setting out the regulatory fees and levies for 2018/19 and also presenting its feedback on responses to the consultation on its rate proposals. It publishes updated details for the FCA, the Financial Ombudsman Service general levy, the Money Advice Service, pensions guidance levies and the illegal money lending levy expenses of HM Treasury. Fee-payers will be invoiced from July 2018 onwards for their 2018/19 periodic fees and levies.

FCA reveals the fourth round of successful firms in its regulatory sandbox
On 3 July, FCA has announced the 29 firms that were successful in their applications to begin testing in the fourth cohort of the sandbox. The FCA highlights that it continues to see successful applications from a varied range of sectors, locations and firm sizes. The announce lists the names of the successful firms.

Over 40% of companies accepted to the fourth cohort are using Distributed Ledger Technology (DLT). Of these, six are using DLT to automate the issuance of debt or equity, and two are using DLT to support the provision of insurance. The FCA has accepted a small number of firms that will be testing propositions relating to crypto-assets to explore whether, in a controlled environment, consumer benefits can be delivered while effectively managing the risks.

The application window for cohort 5 of the regulatory sandbox will open later in 2018.

Building the UK financial sector’s operational resilience – DP01/18
On 5 July, the Bank of England, the FCA, and the PRA jointly published a Discussion Paper (DP) to generate feedback from a broad range of stakeholders about the expectations that regulators and the wider public might have of the operational resilience of financial services institutions.

Operational disruptions to the products and services that firms and financial market infrastructures (FMIs) provide have the potential to cause harm to consumers and market participants, threaten the viability of firms and FMIs, and cause instability in the financial system. The DP focuses on how the provision of these products and services can be maintained. Operational resilience refers to the ability of firms, FMIs and the sector as a whole to prevent, respond to, recover and learn from operational disruptions. Dealing with cyber risk is one important element of operational resilience. But the paper sets out a broader approach, which addresses how the continuity of the services that firms and (FMIs) provide might be maintained regardless of the cause of disruption.

Comments should be submitted on or before 5 October 2018. 

Price discrimination in financial services
On 5 July, the FCA issued a research report that sets out a framework for approaching the fairness of price discrimination and how to balance this with economic considerations.

The FCA regularly find different consumers paying different prices for the same product. This practice is known as price discrimination and is common in financial services. The FCA notes that price discrimination is not in itself an unfair practice. Some forms of price discrimination are widely accepted, such as student discounts. Some forms of price discrimination can provoke strong views on how firms treat their customers, such as longstanding customers receiving a significantly worse deal than new customers. This raises obvious questions on fairness and economics: when are such pricing practices fair to consumers? And are these practices an outcome of markets working well?

In the report, the FCA set out a framework for considering both economic and distributive fairness considerations, focusing on their interaction with one another. The framework is applicable on a market-by-market basis and helps to identify any harm from price discrimination. It also explores what factors are at play when considering how to remedy the identified harm.

How can we ensure that big data does not make us prisoners of technology
On 11 July, the FCA published a speech delivered by Charles Randell, Chair, FCA and the Payment Systems Regulator (PSR), at a Reuters Newsmaker event in London. Mr Randell discussed big data, artificial intelligence and behavioural science and the responsibility to innovate ethically in these areas as they become more ubiquitous in today's society. He cited people, purpose and trust as the three fundamental elements of good innovation and discussed examples. He concluded by confirming both the FCA and PSR's support of the government’s proposals for a Centre for Data Ethics and Innovation. 

Approach to consumers paper (alongside Discussion Paper on Duty of Care) – DP18/5
On 17 July, the FCA has today outlined the measures it will take to protect consumers and sets out when and how the organisation takes action. Its Approach to Consumers document sits alongside a new Discussion Paper on a Duty of Care (DP18/5) which taken together are intended to ensure there are no gaps in protection for consumers in the financial services sector.

The Approach to Consumers sets out the FCA’s expectations, first published for consultation in 6 November 2017, on how consumers should be treated by financial firms and where the FCA will intervene if things are going wrong. It gives a further insight into the wide range of powers the FCA has at its disposal to ensure consumers are protected, particularly some of the most vulnerable people in society. The paper sets out the FCA vision of what a well-functioning market looks like, when and how the FCA will act to protect consumers, and its policy positions on key issues.

The Discussion Paper explores if there is a need for a specific duty of care requirement for firms in financial services. It explores if a new duty of care could enhance good conduct and culture and provide additional protections for consumers. If changes are required the paper asks what those changes could look like and what the impact would be for consumers, firms and the FCA. It also explores what the possible alternative approaches to a new duty might be.

Comments on the Discussion Paper are requested by 2 November 2018.

Industry Codes of Conduct and Feedback on FCA Principle – PS18/18
In November 2017, the FCA published CP17/371 ‘Consultation Paper on Industry Codes of Conduct and Discussion Paper on FCA Principle 5’. This Policy Statement (PS), published on 18 July, summarises the feedback received on the consultation and outlines the FCA’s final policy and Handbook amendments on the its approach to the recognition of codes of conduct in unregulated markets, including the process and criteria for doing so, for the purposes of the Senior Managers & Certification Regime (SMCR).

The PS notes recognition of an industry code does not imply that an individual must follow a particular market code. It is not comparable with an FCA rule. However, if their firm is subject to the SMCR, Senior Managers and other individuals will be subject to Individual Conduct Rule 5 and will be obliged to meet proper standards of market conduct. Following a recognised code will be one way, but not the only way, to discharge that obligation, and may be applied proportionately to the activities undertaken

FCA Annual Report and Accounts 2017/18
On 19 July, the FCA published its Annual Report and Accounts 2017/18 for the year ended 31 March 2018. This report looks at the key pieces of work undertaken by the FCA during 2017/18. The FCA highlights in particular the work:

• to prepare for EU withdrawal;
• to implement major changes to the information and services that consumers can benefit from when they make payments (PSD2) and to transparency and customer protections in the markets for shares, bonds and other financial instruments (MiFID II);
• extending the Senior Managers and Certification Regime to non-executive directors and preparing to extend it to all financial services firms;
• on high cost credit and consumer debt;
• launching a campaign to alert PPI customers to the deadline for complaints about mis-selling.

FCA Practitioner Panel survey: 2018 report
On 23 July, FCA published a report on the second (2018) survey of regulated firms conducted jointly by the FCA and the FCA Practitioner Panel. The survey was carried out on their behalf by Kantar Public between January and March 2018. The report reviews, among other issues, regulated firms' perceptions of:

• the FCA's performance;
• aspects of international regulation;
• the FCA's communication with firms;
• firms' understanding of regulation;
• the FCA's enforcement procedure.

The report also includes specific analysis of consumer credit firms' views. Among its findings, the report highlighted an improvement in firms' perceptions of the FCA across all its operational objectives. Though firms continued to show less confidence in the FCA's promotion of competition, the proportion expressing confidence rose from 60% to 72% between 2017 and 2018. Satisfaction levels regarding relationships with the FCA and ratings of its regulatory effectiveness also increased slightly to 7.6 and 7.1 out of 10, respectively.