UK: In-sight - Corporate Insurance Newsletter - March 2014

Regulatory

IMD 2

Despite it having appeared that the new draft IMD 2 Directive ("IMD 2") had been kicked into the long grass, there have been some recent developments.

On 22 January, the Economic and Monetary Affairs Committee ("ECON") of the European Parliament adopted its draft report on IMD 2 which also contained a draft Parliament legislative resolution on IMD 2. This report was then considered at the Parliament's plenary session on Wednesday 26 February.

By way of brief background, IMD 2 is intended to deal with deficiencies in the Insurance Mediation Directive ("IMD") (which came into force on 15 January 2005). There is broad agreement that IMD is not working well, and has resulted in a patchwork of national regulations, inconsistencies in selling practices, and information provided to consumers which is dense and legalistic.

The objectives of IMD 2 are to ensure a more level playing field, strengthen policyholder protection and align with other regulatory reforms. The recent ECON report noted the following:

  • IMD 2 should not apply to the professional management of claims nor to loss adjusting nor expert appraisal of claims
  • All steps should be taken to identify conflicts of interest, and in order to mitigate this, it would be necessary to ensure sufficient disclosure of remuneration and there should be an obligation to inform the customer on request about the nature and source of its remuneration
  • IMD 2 should not be too burdensome for small and medium-sized insurance undertakings and there should be a proper application of the proportionality principle
  • When insurance is offered together with another service or ancillary product as part of a package, the customer should be informed and offered the possibility of buying the different components either jointly or separately, and should receive premium, pricing and risk information for each of the components
  • Member States may introduce or retain additional disclosure requirements concerning the amount of remuneration, fees, commissions or non-monetary benefits in relation to the provision of intermediation provided that, amongst other matters, the resulting administrative burdens remain proportional to the intended level of consumer protection

Fortunately, the ECON report has not called for full compulsory disclosure of fees, commissions and other non-monetary benefits which will be welcomed in the UK.

At its plenary session, the Parliament voted on certain amendments but not the underlying legislation as a whole. We will need to digest whether any significant changes have been proposed by the Parliament, but it would appear not. As the final text of IMD 2 is yet to be agreed by the European Commission, Council and Parliament, the new IMD 2 regime is not expected to come into force until sometime in 2016 at the earliest.

The UK will be hoping that as it introduced a "gold-plated" insurance mediation regime, it is likely that many of the provisions of the final text of IMD 2 will be of limited impact in the UK.

Compliance

JLT Specialty Limited: The FCA's cautionary tale

In December 2013, the UK Financial Conduct Authority (FCA) imposed a GBP 1.9 million fine on JLT Specialty Limited (JLTSL) after concluding that it did not have appropriate systems and controls in place to counter the risk of bribery and corruption.

The FCA found that, between 2009 and 2012, JLTSL failed to have in place appropriate checks and controls to guard against the risk of corruption associated with making payments to third parties who helped win and retain business from overseas clients, particularly in high risk jurisdictions. This is familiar ground for the regulator whose predecessor imposed substantial fines on two major insurance brokers for similar breaches.

Overarching messages

Taken together, these are the overarching messages that regulated firms should take away from the three insurance broker enforcement actions:

  • Adequate due diligence should be conducted before entering into a relationship with, or making a payment to, a third party. In particular, it is important to take adequate steps to establish whether a third party is connected with the clients it introduces and/or any public officials
  • Relationships with third parties should be subject to ongoing reviews. Firms should move towards a practice of carrying out a risk assessment each time a third party introduces a new business as opposed to only carrying out a risk assessment at the start of a new relationship
  • There should be a concerted effort to improve gaps in senior management oversight and provide additional guidance and employee training in this area. In addition, checks should be carried out to ensure that any improvements are being implemented correctly

What does this mean going forward?

The indications are that corporate governance will be high on the FCA's agenda for 2014, with particular emphasis on ensuring firms have appropriate systems and controls which are regularly monitored. Firms should consider:

  • The nature of their relationships with third parties and if their current policies and procedures adequately capture how relationships should be managed
  • Issuing documented guidance which sets out the practical steps that employees must take in order to fulfil the requirements of the firm's anti-bribery and corruption (ABC) policy
  • The need for specific employee training including the rationale behind the need to obtain information on third parties appropriately to help move away from a "box ticking exercise"
  • The appropriateness and frequency of risk assessment in relation to their bribery and corruption risk exposure and if resource allocation is aligned to the output from the risk assessment
  • The level of senior management oversight of ABC
  • The collation of sufficient, meaningful MI and record retention
  • The quality of their assurance processes and whether it would have helped identify the issues in these enforcement actions

With the FCA adopting such a proactive stance, firms would be well-advised to take stock of these recurring themes if they wish to avoid joining the list of cautionary tales.

A full copy of this article, which was produced with KPMG, will be available on our website.

Corporate governance

Corporate hospitality

The RBS 6 nations rugby tournament is in full-swing now and is shaping up to be a very close-fought tournament, with it being very difficult at this stage to call who might end up winning.

A number of people in the insurance market will no doubt have attended a match, or will be doing so. Where this is part of corporate hospitality, this does raise the issue of whether in any circumstances this could fall foul of the Bribery Act 2010 (the "Act").

Many firms now have policies in place requiring that prior approval is obtained before a ticket can be offered or accepted to, for instance, a sports event such as a rugby match, particularly if the invite includes a lavish lunch or other hospitality. The issue becomes a much more live one if the invite is to one of the away internationals, such as in Paris or Rome, which may include travel and accommodation being paid for.

So what is the position? Well, unhelpfully, not as clear as it could be. The Ministry of Justice has published Guidance which is welcome but, as might be expected, is quite general. The Guidance states, for example, that the "Government does not intend for the Act to prohibit reasonable and proportionate hospitality". In addition, the director of the Serious Fraud Office has commented that "most routine and inexpensive hospitality would be unlikely to lead to a reasonable expectation of improper conduct".

Assessing whether a particular invite is proper or not will require a consideration of all of the relevant circumstances. Much will turn on the seniority of the individual invited and what kind of entertainment he or she is used to enjoying. Also, the context could be relevant – for example, is the host going to be shortly pitching for some business from the invitee? If so, that could suggest an intention to try to influence or secure a business advantage. Finally, there is no substitute for common sense – if a particular invite seems almost too good to be true, then it may not be regarded as reasonable and proportionate, and, as a result, caution should be exercised in offering it or accepting it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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