PROTECT

LEGAL AND REGULATORY REVIEW

NOVEMBER 2015

A “very special” regulatory update??

Photo © The Devine International Corporation

A particularly frightening regulatory update

I would normally tell you about . .

One IDD going (from ICOBS) and another IDD (EU) one coming FCA embarrassment over mess ups in its complaint handling

proposals Finalised Guidance about Performance Management The Opt Out and Informed Decision Remedies under the Add-on

Insurance Market Study ( . . . or not as it turned out) The proposed extension of the Senior Managers and Certification

Regime beyond the banking sector The wider implications of FCA’s escape route from PPI redress and

“Plevin” New requirements on whistleblowing, references and anti-money

laundering The Bank of England Bill - and changes at the PRA CMA Guidance on Unfair Contract Terms (and the Consumer

Protection Act coming into force)

And I would bang on about . . . .

But not today . . .

But - before you eat your lunch

I do want to tell you that . .

We live in a very different (regulatory) world . . .

I used to talk to you about FCA requirements

“Black letter law”

You would be told whether something was right or wrong

You might have hated them - but “Legal and Compliance” would tell you:-

what you could do . . .

. . and what you could not do

That is no longer the case . . .

Now we talk about FCA’s “expectations”

Some words and phrases from FCA over the past couple of months . . .

“Firms must consider how they can be smarter in their communication with customers”

“A firm must notify FCA if it has, or may have, committed a significant infringement”

“We expect you to examine your business models and culture and to understand the conduct risk in your strategies”

You must take reasonable steps to ensure that a consumer is given appropriate information”

“The question whether a relationship is fair cannot be the same question as whether ICOBS has been complied with”

“ this is non-binding guidance for all firms we supervise”

Your CEO now has to ask . . “does my firm”

have the right culture and a good business model?

provide appropriate information to our customers?

have a fair relationship with our customers?

give customers what they need?

meet customers’ expectations?

have any conduct risk?

have the right governance in place?

have effective systems and controls?

So, if FCA come knocking on his/her door . . .

He/she has to be ready to prove to FCA that the answer is “yes”

Why do I say this?

FCA is changing its approach to supervision

You don’t need me to tell you the link between “supervision” and “enforcement”

It is all part of a process to make firms:-

take much more day to day responsibility for their decision taking;

and to place less reliance on firms simply meeting FCA rules

This what FCA says . . .

“As a general principle, we want to promote good conduct standards across whole sectors

rather than solely on a firm by firm basis. Accordingly, our focus is towards sector-based

work, including thematic reviews, where we use our findings to address issues and drive

improvements across the sector”

PROTECT Represents a “sector”

It has never been more important to engage

with other firms within the sector and in a co-ordinated manner in

response to FCA initiatives and

supervision rather than solely on a firm by firm

basis

But the responsibilities of each firm are increasing . . .

“Our focus is on addressing the most important issues that affect our objectives. We will expect you as a firm to fix the root causes of problems as well as the symptoms. Instead of using our resources to carry out extensive follow-up work, we expect you

to have a comprehensive and credible plan of action to mitigate risks. In some cases you will have

to formally attest that risks have been addressed and demonstrate that appropriate outcomes have

been achieved”

So each firm must be proactive . . .

In identifying and understanding what FCA expects

In actively looking for failures and shortfalls from those expectations

In changing culture, business, products and operations to correct shortfalls

And if a firm is not?

Then FCA gives this leaden warning:-

“If issues arise that mean you are no longer meeting your threshold conditions, we will

respond accordingly”

The Threshold Conditions include the requirement that a firm must

have . .

A business model (that is, a strategy for doing business) suitable for a person carrying on the regulated activities that it carries on

And FCA are telling firms that . .

That the “suitability” of their whole way of doing business

Is a matter of understanding and reflecting what FCA regard as suitable

That is a long way away from where most firms are . .

There is a big job to be done in the GI market (as a whole), and the protection market in particular, to bridge that gap

It has never been more important for firms to understand . .

What FCA “expects”?

Where the gaps are?

Minding the Gaps

These are not “technical compliance” issues

These are issues which are fundamental to every firm’s ability to remain in business

My experience is that very few firms really understand the risks they now face from FCA and . . .

even fewer really know how to deal with them

The only good news is that . . .

FCA have not left you high and dry

FCA have set the agenda for you . . .

In effect . . .

FCA is delegating its own “Supervision Principles” to the management of each firm to implement

So we better find out what they are!!

FCA’s Supervision Principles . .

You must ensure fair outcomes for consumers and markets “This is the dual consideration that runs through all of our work. We assess issues according to their impact on both consumers and market integrity”

  Be forward-looking and pre-emptive “identifying potential risks and

taking action before they have a serious impact”  Be focused on the big issues and causes of problems “We

concentrate our resources on issues that may have a significant impact on our objectives”

Take a judgement-based approach “with the emphasis on achieving the right outcomes”

  Ensure your firm acts in the “right spirit” “which means firms

consider the impact of their actions on consumers and markets rather than just complying with the letter of the law”

FCA’s Supervision Principles . .

Examine your business models and culture “and the impact they have on consumer and market outcomes. We are interested in how a firm makes its money, as this can drive many potential risks”

Put an emphasis on individual accountability “ensure senior management understand that they are personally responsible for their actions – and that we hold them to account when things go wrong”

Be robust when things go wrong ”making sure that problems are fixed, consumers are protected and compensated, and poor behaviour is rectified along with its root causes”

Communicate openly with industry, firms and consumers (and of course the FCA!) “to gain a deeper understanding of the issues they face”

Here is a little more detail from FCA . . .

Business model and strategy

“We have seen in the past that certain aspects of some strategies, such as aggressive growth

targets or over-reliance on cross-subsidisation, can drive behaviours that lead to poor customer and often poor market outcomes. We expect you to examine your strategies and business plans, to

assess and mitigate the risks they generate”

Culture

“You must decide what type of culture is suitable for your firm, and demonstrate

appropriate behaviours from the top down. An effective culture will ensure that you treat

customers fairly in everything you do, and that you do not abuse the market you operate in”

Front-line business processes

“Your business processes, from product development to complaints handling, should

be designed to give customers what they need and meet their expectations”

Systems and controls

“You can reinforce the right culture and business practices with effective systems and controls

designed to identify and deal with conduct risks. We expect these to be proportionate to the size of your firm, and that they ensure customers are treated

fairly”

Governance

“The people responsible for running your firm have a key role to play in determining its

business model, strategy and business practices, and ensuring appropriate systems and controls

are in place. They should understand the conduct risks in your strategies, and the way they implement consumer and market-focused

values”

As you contemplate lunch ask yourself

Does our Business Strategy lead to poor customer outcomes?

What culture would FCA find when they knock on the door?

Will FCA find proactive and effective processes at the centre of our business aimed at ensuring products are designed to meet customer needs and deliver on their expectations?

Are the management committed to handling change and to supporting the ability of staff to deliver consumer and market focused values?

A simple test . . .

If not - your firm will not have a prayer in dealing with what . . . .

Thank You

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