From two cases that highlight brokers’ responsibilities, to add-ons and the FSCS, we answer some key regulatory questions
1. The RA Rossborough case
What was the RA Rossborough case and what risks has it highlighted for brokers?
RA Rossborough was an insurance broker that was sued by a client, Jersey restaurant Café de Lecq, after a deep fat fryer caused a fire that destroyed the property.
The insurer, AXA, refused to pay out on the claim because the fryer was not safe enough to meet the policy warranties. Café de Lecq thought that the broker had not properly explained the warranty or the consequences of not meeting it, and last month the Royal Court of Jersey awarded £528,500 damages to the restaurant.
The case established that brokers can be sued for not making sure their clients understand the insurance they have bought.
What do brokers need to do to make sure they avoid this outcome?
RWA Associates chairman Robin Wood says that brokers must first make sure they properly understand their clients’ risk themselves, so they can make the best recommendations about cover to the client and the insurer.
Wood adds that the broker must ensure that the client has enough information about the policy to be able to make an informed decision about the cover. “This is where we start moving into the arena where the insurer turns a claim down for breach of warranty and the member of the public says: ‘I didn’t understand the warranty or the effects of it, and it’s the broker’s fault’,” Wood says.
How does this work in practice?
Wood suggests that brokers could start giving their clients glossaries of commonly used insurance terms, and that brokers should explain insurance warranties in the simplest possible language to drive the point home.
In the RA Rossborough case, the client was unaware that an insurance warranty was different to the sort of warranty that would cover electrical goods.
“I think the broker has to use their experience to understand what sort of customer this is and then have a routine that gives this information in a form they would reasonably expect a layman to understand,” Wood says.
Biba head of compliance and training Steve White says that call recording is one answer, as is proper note-taking. “From a regulatory and a legal perspective, if it isn’t written down, it didn’t happen,” he says. Wood adds that brokers should also make sure they spend enough time with their clients to check this understanding. “Brokers should be able to train their staff to spend 15 or 20 minutes with a customer without a second thought,” he says.
2. The Environcom case
What is the Environcom case, and how has it affected brokers?
The Environcom case established that brokers cannot rely on standard warnings or demands and needs statements to show they have done their jobs properly.
In the case, fridge recycling company Environcom sued its broker, Miles Smith, for negligence after a fire claim was rejected in 2007. Although Environcom eventually lost the case, the precedent resulting from it is that brokers are responsible for testing that their clients understand the rules around disclosure of important facts when taking out a policy. Brokers can be held liable if their client’s claim is denied and it emerges that the client didn’t understand the disclosure.
What do brokers need to do?
Biba’s Steve White suggests that brokers should make sure that they properly understand their client’s business and risks, including questioning the client to make sure all the facts about a risk are revealed. As in the RA Rossborough case, brokers must also ensure their clients understand what happens if they fail to reveal all the facts.
A recent Biba briefing on Environcom said that brokers generally need to know more about insurance law than they did before the judgment.
Brokers also need to make sure they communicate properly with the customer, the briefing said. This can be hard, as brokers are under pressure to make sales as quickly as possible, and the growth of internet sales has not helped. The briefing said that the increasing use of call centres and computers had led to brokers spending less time talking to clients, and that this did not help them meet their legal obligations to provide a good service.
3. FSA Arrow visits
I’ve heard the FSA is carrying out more Arrow visits on smaller brokers. What’s that about?
The regulator can carry out Arrow visits for several reasons, but sources say the FSA has been particularly interested in broker client money issues recently.
“They are terrified that small brokers are spending insurers’ money,” one source said. “If a broker is not adhering to their rules, they will get very tough on it.”
The FSA has also been carrying out Arrow visits to check how brokers’ boards work and to probe the understanding of non-executive directors. Recipients of Arrow visits say the FSA has been more hard-hitting than it has in the past.
What does the FSA want from these Arrow visits?
Arrow visits are normally carried out en masse around certain themes, such as client money issues.
The visits happen if the regulator thinks a broker poses a risk of some kind. Generally, the regulator just wants to find and fix these risks rather than dish out punishment. However, if an Arrow visit is designed to check for financial crime and bribery, then the FSA can fine firms or shut them down.
4. Brokers selling add-ons
I’ve heard a lot about FSA interest in add-ons recently. Should I be worried?
It depends what sort of broker you are, and how you sell add-ons. In its 2012/13 business plan, the FSA said it was concerned about add-on insurance sales. The regulator wants to crack down on these being mis-sold or badly explained to consumers, and is particularly interested in add-ons that “replicate other existing rights or free services”. The regulator will focus more on the problem over the next 12-18 months.
The FSA also named add-ons as an “emerging risk” in its Retail Conduct Risk Outlook, which said that consumers were often focused on the primary sale and “may not understand the overall cost and value of the add-on to them”. However, the good news for general insurance brokers is that the regulator is likely to concentrate on non-brokers, such as car dealerships and mobile phone retailers.
Does that mean the FSA is not interested in general insurance brokers selling these products?
No, the FSA is still touring the country to check how general insurance brokers sell and explain add-ons.
What do general insurance brokers need to do to prove they sell add-ons properly?
They need to prove that they have not sold add-ons just to make money on low-margin policies, but that they have sold customers add-ons that they really needed. Brokers also need to make sure they have explained the add-on products properly. Most brokers should be doing this anyway.
5. The FSCS
What’s happening with the review of how the FSCS is funded?
The FSA should finish consulting on the Financial Services Compensation Scheme (FSCS)’s funding in the first half of 2012. The review is good news for general insurance brokers, as there is a chance that the FSA will overhaul the amount it charges this part of the financial services industry.
Insurance brokers pay more than their fair share of FSCS fees, as they are lumped in with banks and other advisers that mis-sold payment protection insurance (PPI). Advisers are going bust, which means brokers are left to pay compensation for their disputed PPI claims. Biba and Insurance Times are campaigning for a fairer deal for brokers.
My FSCS bill seems to go up every year. What will happen this year?
Generally, brokers’ FSCS bills have risen out of all proportion to the risk they pose, and the amount has risen almost tenfold in two years.
However, this year brokers will see a slight reduction in their bills because the average value of each PPI claim dealt with by the FSCS has fallen, even though the volume of PPI claims has risen.
So will my bill keep going down from now on?
Unfortunately, it looks like this year’s reduction is a blip. The slight drop this year is because the FSCS has almost completed the handling of PPI claims made against Picture Financial, which left the scheme to pick up about £38m of claims when it went into administration in August 2009.
Each PPI claim made against the FSCS on Picture Finance was worth about £10,000, and the average claim size now is around £4,000. The FSCS expects a higher volume of PPI claims to come in, meaning bigger bills for brokers unless the funding model is drastically changed.
The FSCS bill a broker earning £1m per year will have paid in the 2011/12 financial year, according to the IIB.
The same bill for a broker earning £1m per year in 2009/10
The amount the Royal Court of Jersey awarded a claimant suing its broker, RA Rossborough
The total amount of compensation for mis-sold payment protection insurance in 2011, according to the FSA