C2 - Legal and regulatory framework Flashcards
(76 cards)
1
Q
What law is involved when delegating any authority to another
A
The law of agency
The principal delegates to the agent, where the agents duties are in law and duties over and above these are set out in the delegated underwriting contract.
2
Q
What agreements do brokers have with insurers that set out matters such as the holding of funds
A
Terms of business agreements (TOBAs).
3
Q
what is the danger of a broker also being a coverholder
A
If the broker is also a coverholders then there’s a danger that the TOBA and the delegated underwriting agreement deal with the same issue whilst having contradictory terms.
The LM deals with this by clarifying in the TOBA that the binder takes precedence. This is subject to conditions should the binder not require funds to be held in segregated trust accounts or in accordance with the CASS rules.
4
Q
How does the LM model deal with
A
5
Q
What two regulators within the UK cover the financial services industry
A
- Financial Conduct Authority (FCA)
- Prudential Regulation Authority (PRA)
6
Q
In addition to the regulators, who is responsible for the identification of emerging risks and providing strategic direction
A
The Financial Policy Committee (FPC) of the Bank of England
7
Q
Who are brokers regulated by
A
Solely the FCA
8
Q
The Lloyd’s market itself and Lloyd’s managing agents (insurers) are regulated by ….
A
Both the FCA and the PRA
9
Q
Who are CH-MGAs regulated by
A
Solely the FCA as they are defined as intermediaries.
This poses regulators issues as they are different from those of a pure broker intermediary
10
Q
What are the different types of customer that ICOBS differentiates between
A
- Consumers who are natural persons acting for purposes outside their trade, business or profession.
- Commercial customers, who are anyone who is not a consumer.
11
Q
What is ICOBS and what is the aim of it
A
The Insurance: Conduct of Business Sourcebook.
Are rules set out by the FCA to ensure that all customers are treated fairly, and therefore still apply to delegated authority.
12
Q
What are some important considerations for a broker, relating to ICOBS, in the context of delegated authority
A
If a broker has delegated authority, there is inherent conflict of interest as you acting for both the insurer and the customer. Therefore any actions or advice provided to the customer needs to be in their best interest.
13
Q
What are some important considerations for a CH-MGA, relating to ICOBS, in the context of delegated authority
A
As an insurer has given you authority, you are exposing them to a breach of these rules if there is failure to comply.
14
Q
What are some important considerations for an insurer, relating to ICOBS, in the context of delegated authority
A
Information about the product needs to be clear and unambiguous. Hence, pre-sales documentation and advertising material sent out by the CH-MGA needs to be checked.
15
Q
What are some important considerations for a claims handler, relating to ICOBS, in the context of delegated authority
A
Need to be aware of the rules which apply to claims and have procedures in place to ensure claims handling activity complies with ICOBS requirements.
16
Q
What does the FCA define as a complaint
A
“Any expression of dissatisfaction, whether oral or written, and whether justified or not”
This can be at any stage of the process, not just when making a claim.
Any party who has customer contact should be able to recognise that a communication from a customer might fall under this definition and has to be dealt with accordingly.
17
Q
In the FCA’s Principles for Business (PRIN), what does Principle 6 state
A
That a firm must pay due regard to the interests of its customers and treat them fairly
18
Q
How can insurers ensure that regulatory requirements are satisfied
A
- Good staff training and awareness
- Making sure the client is aware of how to make claims, cancel policies or make other changes
- Taking care to consume the quality of documentation that goes out to the clients
- Making good service central to the business and ensuring that the procedures support the ethos
- Having a clear complaints policy
19
Q
How can CH-MGAs ensure that regulatory requirements are satisfied
A
All the same points as the insurers.
20
Q
How can brokers (not holding authority) ensure that regulatory requirements are satisfied
A
- Good staff training and awareness
- Giving clear advice to customers and making sure that the files are documented
- Making sure the client is aware of how to make claims, cancel policies or make other changes
- Making good service central to the business and ensuring that procedures support the ethos
- Ensuring that good advice is given to the client about their options should they wish to make a complaint
21
Q
How is management information used in relation to ensuring the customer is treated fairly
A
- It’s used to monitor the outcomes the firm is achieving for its customers
- Should be forward looking to identify risks to customer outcomes
- It enables the insurer to monitor the CH-MGAs compliance with FCA requirements for fair treatment of customers
- Should be acted on where necessary
22
Q
What is the 5th core duty within the CII Code of Ethics
A
Members are required to: ‘treat people fairly regardless of: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion and belief, sex and sexual orientation’
23
Q
The overall objective of the FCA and PRA combined, is to ensure:
A
- Consumers get financial services and products that meet their needs from firms they can trust
- Markets and financial systems are sound, stable and resilient with transparent pricing
- Firms compete effectively, with the interests of their customers and the integrity of the market at the heart of how they run their business
24
Q
What are the key drivers of conduct risk, set out by the FCA
A
- Inherent
- inadequate financial capability among customers
- information problems
- unconscious or conscious bias or use of mental shortcuts, thus focusing on the wrong information - Structures and behaviours
- ineffective competition
- culture and incentives
- conflicts of interest - Environmental
- economic and market trends
- technological developments
- regulatory and policy changes
25
The FCA refined the key drivers of conduct risk into a 5 cross market risks:
1. Firms do not design products and services that respond to real consumer needs or that are in the consumers’ long-term interests
2. Distribution channels do not promote transparency for consumers on financial products and services
3. An over-reliance on, and inadequate oversight of, payment and products technologies
4. A shift towards more innovative, complex or risk funding strategies or structures that lack oversight, posing risks to market integrity and consumer protection
5. A poor understanding of risk and return, combined with the search for yield or income, leading consumers to take on more risk than is appropriate
26
In May 2021, what was the trigger for FCA investigations into general insurance pricing practice
The fact that loyal home and motor insurance customers were paying higher prices than those charged to new customers for the same risk.
The FCA ruled that customers should not pay any more than the equivalent new business price in a range of measures effective 1st Jan 2022
27
What is the FCA Consumer Duty requirements designed to do
Set higher and clearer standards of consumer protection across all financial services.
28
What are the 4 individual outcomes that the FCA expects to result from Consumer Duty requirements
1. Products and Services - must meet consumers’ needs and objectives
2. Price and Value - products should offer fair value meaning there should be a relationship between the cost of production and overall benefit the consumer receives from it.
3. Consumer understanding - Firms should provide relevant material in a way that is easy to understand, to ensure consumers are equipped to make good decisions.
4. Customer support - getting support should not be a hard task for the consumer. Firms should be responsive and helpful at every stage of their relationship with the consumer
29
What does the FCA expect insurers to be able to evidence
1. That is has considered the needs, characteristics and objectives of their customers
2. That is has considered how their customers might behave
3. That it has thought about every part of the insurance lifecycle process with the consumer in mind
30
The consumer duty rules brought what new Principle for Business into force in July 2023
PRIN 12: “a firm must act to deliver good outcomes for retail customers”
This means that PRIN 6 no longer applies to those companies to which the Consumer Duty applies
31
When does the Consumer Duty not apply
1. Reinsurance
2. Contracts of large risks sold to commercial customers
3. Contracts of large risks sold outside the UK
32
How does the FCA define “large risks”
Rolling stock, aircraft, ships, goods in transit, liability of ships and aircraft, credit/surety.
Other insurances which exceed TWO of the following criteria:
- balance sheet = €6.2m
- net turnover = €12.8m
- avg number of employees = 250
33
What does Consumer Duty require firms to do in respect of Management Information
Requires firms to collate and assess MI on a regular and ongoing basis to evidence they are meeting the 4 CD outcomes.
Additionally, an annual review of MI monitoring to ensure the firm is meeting the requirements of Consumer Duty is required.
Firms must also appoint a senior member with authority as a Consumer Duty Champion (CDC) to be able to challenge the board on their compliance with the Duty.
34
What is CASS
The client assets sourcebook within the FCA Handbook
35
What does CASS 5 deal with and who do the rules apply to
Intermediaries holding funds
The rules apply to any intermediary holding funds on behalf of the client (known as client money)
36
What are the 2 ways in which client money must be held under the CASS 5 rules
1. Statutory trust bank account - No flexibility with regard to pre-funding (I.e premium can only be paid to insurers once received from client)
2. Non-statutory trust bank account - Allows an intermediary to pay premium to insurers from its client bank account before receiving funds from the client (subject to certain controls being in place).
37
Under what circumstances is an intermediary exempt from the normal client money rules
When it has authority under a binding authority to accept risks or agree claims and may be receiving funds in this capacity.
This is known as ‘risk transfer’
38
What is the difference between client money and risk transfer
If a CH-MGA is empowered to receive and hold funds on behalf of the insurer, then it’s deemed to be in receipt of the funds as soon as the CH-MGA has them.
It is a requirement of CASS 5 rules that there’s written agreement (often within the BA agreement) with the insurer to this effect.
39
Who decides how risk transfer monies are held
The insurer.
Typically, monies will be held separately from the intermediary’s own monies. However, CASS 5 rules allow for Co-mingling and subordination.
40
What is Co-Mingling of monies
Where monies are held in the same account as client monies
41
What is RMAR and how often does it need to be completed
Retail Mediation Activities Return (RMAR)
A questionnaire for details on how client money/risk transfer is held and the highest balances.
The FCA requires it to be completed every 3 to 6 months, depending on the firm’s size, for any firm that holds money for general insurance distribution activity.
42
What is the Insurance Distribution Directive
A piece of EU law (despite BREXIT key provisions still apply) that aims to make it easier for firms to:
1. Trade across borders
2. Strengthen policyholder protection
3. Provide a level playing field
43
44
What are the 6 key provisions of the Insurance Distribution Directive
1. Customer’s best interests rule - Requires all firms to act honesty, fairly and professionally in the customers’ best interests.
2. Professionalism - firms must possess appropriate knowledge and ability to complete their tasks and perform their duties adequately.
3. Renumeration disclosure - Pre contract disclosure of any intermediary renumeration.
4. Other pre-contract disclosures - must state whether they are an intermediary or an insurer.
5. Harmonisation - Allows Member States to set stricter requirements if they deem this necessary.
6. New product governance requirements - enhancement of FCAs product governance requirements.
45
What regime covers the concept of individual accountability of for all aspects of running a regulated business.
Senior Managers and Certification Regime (SM&CR)
Applied to CH-MGAs and brokers in the same way as insurers.
46
What is Solvency II
A review of the capital adequacy regime for the European insurance industry.
Aims to establish an EU-wide capital requirements and risk management standards to increase policyholder protection.
47
Who’s remit does Solvency II fall under in the new UK regulatory regime
The PRA
48
What are the 6 main types of risk an insurer can face w.r.t solvency issues
1. Counterparty risk - clients not paying premium, reinsurers not paying claims, CH not transferring premiums
2. Operational risk - system failures, staff or CH acting outside their authority
3. Group risk - shared reinsurances being exhausted
4. Liquidity risk - cash flow issues
5. Reserving risk - being under/over reserved
6. Market risk - failure of wider market
49
What replaced Solvency II now the UK is no longer part of the EU
Financial Services and Markets Act 2023
This brings the UK financial services regulations back ‘in house’
50
What is one of the main consequences of Brexit
There is no longer mutual recognition of each others regulatory systems, meaning the UK has to obtain ‘equivalence’ status from the EU. Meaning that the EU doesn’t recognise the UK as having an equivalent robustness of that of the EU.
The UK granted that status to the EU, however the EU is yet to reciprocate.
51
Who has the power to make internal laws, known as bye-laws, in Lloyd’s
The council of Lloyd’s
52
What are 7 reasons for the Intermediaries bye-law in Lloyd’s
1. Permit the acceptance of business at Lloyd’s through CH-MGAs
2. Permit the determination of claims at Lloyd’s through delegated claims administrators
3. Specify to whom a managing agent is allowed to delegate its underwriting, policy issuance and claims handling to
4. Provide for the registration of persons to whom DA is given
5. Provide for the registration of certain contracts of delegated authority
6. Provide for the Council to prescribe conditions and requirements relating to contracts of delegated authority and to insurance documentation issued by persons to whom delegated authority is given
7. Provide for the registration of Lloyd’s brokers
53
Who can be authority be delegated to in Lloyd’s
1. Another managing agent or authorised insurance company in accordance with the terms of a lineslip
2. Another managing agent in accordance with the terms of a consortium agreement
3. Others who the Council may permit in accordance with the terms of a contract of delegated authority
54
How can documents be issued for delegated authority in Lloyd’s
1. Via Xchanging Ins-sure Services as for open market business
2. Another managing agent or authorised insurance company in accordance with the terms of a lineslip
3. Another managing agent in accordance with the terms of a consortium agreement
4. An approved CH-MGA
5. Others that the Council may permit in accordance with the terms of a delegated authority contract
55
What is an exception to the Lloyd’s rule over whom can issue documents under a delegated contract
Marine Cargo business
Certificates under binders can be issued by Lloyd’s Agency Departments, Certificate Branch
56
What does the Lloyd’s Intermediary bye-law permit in terms of claims handling
The delegation of claims handling.
TPAs/DCAs have to be positively approved by Lloyd’s to protect the name or reputation of Lloyd’s.
Typically this delegation will be direct from insurer as opposed to sub-delegation from CH-MGA.
57
What are the 5 requirements under the intermediaries bye-law
1. The requirement for registers of CH/DCAs etc to be maintained and who can inspect them
2. The criteria for approval of CH/DCAs etc
3. What should included in a BA/lineslip or consortium document
4. What should be included in a DCA agreement
5. What should be in the contracts of insurance issued under a binder
58
Do the Lloyd’s Codes of Practice and and Principles for Doing Business apply to delegated authority
Yes, although not specific to DA, many of the principles apply.
59
What are the 4 key areas of governance that the Lloyd’s Principles indicate
1. The managing agent must have a clear strategy for writing and managing delegated authority business as part of its overall plan
2. Managing agents shall carry out and be able to evidence a due diligence assessment of CHs.
3. Managing agents shall have contracts for delegated authority in place with each party
4. The managing agent shall proactively delegate underwriting contracts once incepted
60
What 4 sections need to be included to assess a managing agents clear strategy
1. Executive summary - an overview of the current position and a plan for the coming year
2. Business rationale - an explanation as to why the managing agent wishes to delegate
3. Roadmap - includes information on resourcing, extent of delegation, claims procedure, due diligence and monitoring.
4. Underwriting - projected UW results, classes of business, geographical distribution, # of contracts that the UW leads, CAT exposure
61
What parts of a managing agent should be part of the due diligence process
1. Underwriting
2. Finance
3. Claims
4. Operations
62
What 9 criteria should be a minimum when considering a new business partner
1. Quality of underwriting function
2. Ability to operate a binder
3. CH-MGA business plan
4. Quality of claims function
5. Good reputation
6. Financial standing
7. Regulatory/licence status
8. Ability to manage the risk of financial crime
9. Adequacy of professional indemnity cover
63
What is the Lloyd’s definition of Service Company Coverholder
A company that is associated with a managing agent by reason of:
- it being a wholly owned subsidiary of the managing agent
- it being a wholly owned subsidiary of the managing agent’s holding company
- others who the Franchise Board acklowledges
Also has to be in contract with the managing agent in accordance with the terms of a service company agreement
64
What are the benefits of using the Lloyd’s standard wording for use with service companies
1. The language recognises the ownership relationship between MA and service company
2. Allows for MA to permit service company to sub-delegate its authority to other approved CH-MGAs
65
What 3 topics are addressed within the Code of Practice for service companies
1. Risk management
2. Procedures
3. Audits
66
From a Lloyd’s perspective , how does it expect a service company to behave
As if it were done by UW in Lloyd’s itself, with all of the same controls in place.
67
What are the 10 key areas of Appendix E of the Service Companies Code of Practice
1. Plan - each service company works to a plan set out by the MA board
2. Authority - clarity on UW limits
3. Pricing - pricing guidelines on all classes of business
4. Exposures - MA is able to demonstrate its CAT exposures using RDS
5. Reinsurance - The MA can express its relevance of the reinsurance programme
6. Data - documented process for how data is captured, checked and monitored
7. Multiple showings - processes are in place to identify potential business that has been offered to an insurer as open market business and also via a binder
8. Performance monitoring - a reporting regime is in place to ensure board is able to assess UW performance
9. Claims - consistent approach to the management of claims
10. Regulatory Issues
68
Where do MGAs who want to write EU risks have to get coverholder appointment agreement from
Lloyd’s Brussels
69
What matters does an have to consider when writing international risks (irrespective of open market or DA)
1. Pre-placement consideration
2. Tax
3. Financial issues
4. Routes into the market
5. Documentation
6. Processing and servicing
70
What is compliance
The concept of behaving in accordance with requirements
71
What is the starting point for compliance
Knowing what you have to comply with, this responsibility is on the compliance function. These departments’ size depend on the relative size of the organisation.
72
What is the most basic safety mechanism for compliance
Staff training and awareness
73
How often does Lloyd’s require CH-MGAs to complete a compliance attestation
Annually
74
What do CH-MGAs have to do in the compliance attestation
Review and update their details on the central database called ATLAS.
Such as their PI insurance and financial information
This process has to be completed once a year regardless of the # of binders or brokers
75
What is the concept of due diligence
The act of making independent enquiries about a party before entering into business with it
76
What are the major practical risks for a CH-MGA with multiple binders
The CH-MGA may not be able to manage all various compliance issues related to the binders and it’s differing obligations to different principals
