Compliance Challe nge

According to Sarah Wilson, the head of the FSA's high street division, the next few months are some of the most important in the progression of the general insurance industry to regulation.

Winners

DAY ONE
Edward Yost - Home & Legacy - Insurance Services Ltd

DAY TWO
Kevin Andrew - CMR Insurance Services

DAY THREE
Mark Felman - EFM Insurance & - Financial group

DAY FOUR
Christine McLeod - Regal Cover

DAY FIVE
Julian Edwards - MCE

There was no overall winner
The winner for each day will receive a minidisc player Winners

The near final rules have been published on everything brokers and other retailers need to know. So now they need to be digested. By Christmas, insurers will be looking to brokers to prove that they have a long-term future in the regulated world. And so many companies with a 31 December financial year end will be frantically trying to apply the new rules to the current round of 2004 budgets that will be finalised in the coming weeks.

Judging by the reponse to our summer Compliance Challenge, the industry has little to fear. The response was good, indicating that people were keen to test their knowledge. And the number of people scoring highly was impressive and encouraging. The broking community should give itself a pat on the back as should the FSA. The regulations might be unpopular with many who reckon that there isn't much wrong with the selling of general insurance products, but the way in which the rules have been worked out has been pragmatic.

The FSA has had to learn fast about a sector that it knew little about and, apart from the issue of risk transfer, acceptable compromises have been reached on most of the early sticking points, such as commission disclosure and appointed representatives.

While we at Insurance Times know that many readers do not have direct responsibility for compliance, we are committed to publishing weekly updates on rules and best practice in our new Compliance Zone, which can be found on page 24 and at www.insurancetimes.co.uk . Please let us know what you are concerned about so that we can try to help. The FSA has agreed to answer any of your questions through Insurance Times and these can be relayed confidentially. So please get in touch (email: michael.faulkner@insurancetimes.co.uk )

Here are the answers to the Compliance Challlenge in which f ive questions on regulation were emailed to users of the insurancetimes.co.uk website for five consecutive days

DAY ONE Q&A
1 The implementation date for the regulation of long-term care is the 14 January 2005. True or False?

False. An implementation date isn't set.

2 When is the deadline for applications for authorisation to be submitted to FSA?

a) December 2003

b) January 2005

c) June 2004

Answer: c. To qualify for early application fee discount. 13 July 2004 is deadline for submitting applications to ensure they are processed by the 14 January 2005 start date.

3 In order to become authorised, a firm must satisfy the five threshold conditions contained in Schedule 6 of the FSMA. True or false?

True. These are

1) Legal status,

2) Location of offices

3) Close links

4) Adequate resources

5) Suitability

4 Firms must consider the requirements of the Principles for Businesses specifically Principles 3 and 4. What are these principles?

Principle 3: Management and control - a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

Principle 4: Financial prudence - a firm must maintain adequate financial resources.

5 In addition to the Insurance Mediation Directive (IMD), which other EU Directive will the FSA's rules specifically take into account?

a) Distance Marketing of Consumer Financial Services Directive (DMD)

b) EU Solvency I Life Directives

c) USITS Directive

d) EU Solvency II Non-Life Directive

e) Investors Compensation Directive.

Answer: a

DAY TWO Q&A
1 The IMD requires that intermediaries possess appropriate knowledge and ability as determined by the home member state. These requirements can be adjusted in line with the regulated activity and the type of insurance involved. In the UK, firms will have to meet the requirements set out in the Training and Competence sourcebook. What are the five commitments in TC1?

The commitments apply to every firm. The firm's commitments to training and competence should be that:

1) Its employees are competent

2) Its employees are adequately resources

3) Its employees remain competent for the work they do

4) Its employees are supervised for a set amount of time per day

5) Its employees' competence is regularly reviewed

6) Its employees are appropriately supervised

7) The level of competence is appropriate to the nature of the business.

Answers: 1, 3, 5, 6, 7

2 Under the draft rules on contract cancellation, when does the cancellation period start?

a) The day after the day on which the contract is concluded, or if later, the day after the day the customer receives the contractual terms and conditions and other required information

b) The day the contract is concluded

c) Two days after the contractual terms are dispatched to the customer.

Answer: a

3 The draft ICOB rulebook contains a number of rules requiring firms to make and keep records of documents that the FSA can use for supervision and enforcement purposes. What are these?

a) Records of the customers savings and investments

b) A copy of the statement given to the customer explaining the reason for any personal recommendation. As evidence of advice and selling standards

c) A copy of the policy summary and policy document, as evidence of product disclosure

d) Details of claims made, for claims handling evidence.

e) Recordings of any face-to-face sales.

Answers: b, c, d

4 How long does the draft ICOB rule book propose records should be kept for?

a) Three years and no longer

b) A minimum of three years but a maximum of ten

c) A minimum of three years

Answer :c

5 The draft ICOB rule book (apart from rules on complaints) differentiates between customer types under what criteria, private and non-private customers. True or False?

False. Customers are classified as either retail or commercial. A retail customer is defined as a policyholder or potential policyholder acting outside their trade, profession or business. A commercial customer is defined as a policyholder or potential policyholder who is not a retail customer.

DAY THREE Q&A
1 Rules on complaints refer to 'eligible complainants'. Which of the following constitutes an 'eligible complainant'?

a) Private individuals, commercial customers with a group annual turnover of less than £1m

b) Commercial customers with a turnover less than £10m

c) Charities with an annual income of less than £1m

d) Charities with an annual income of less than £10m

e) Trustees of a trusts with a net asset value of less than £1m.

Answers: a, c, e

2 Under the draft ICOB rules firms must disclose to customers information about themselves. This is the same for all sales procedures. True or false?

False. Information for telephone sales differs from other sales. This is because the DMD (Distance Marketing Directive) has different requirements for telephone sales.

3 The DMD relates to all non-investment insurance contracts. True or false?

False. DMD stands for the Distance Marketing of Consumers Financial Services Directive and is relevant only to distance contracts, i.e. where there is no face-to-face contact between the retail customer and an insurer or intermediary in the offer, negotiation or conclusion of the contract.

4 Under the draft disclosure of information rules insurers and intermediaries need to disclose information about themselves to retail customers. The IMD and DMD require that this information be given on a durable medium. There are no exceptions to this standard. True or false?

False. The exceptions are:

5 The status disclosure information that the draft rules will require to be disclosed to commercial customer by an intermediary is different from what is required from an insurer. True or false?

True. Insurers need only provide information on fees.

DAY FOUR Q&A
1 Disclosure of fees must be made before the conclusion of the contract when dealing with all types of customer. True or false?

True

2 What will firms have to do to achieve the passport to operate throughout the EU?

a) Set-up registered customer service centres in target countries

b) Register in their member state, subject to a meeting a common set of financial and professional standards

c) Register in both the member state and the foreign state.

Answer: b

3 How do the requirements within the draft rules for advised sales require that the recommended product must be suitable to meet the customers demands and needs and that the customer must be given a statement setting out the reasons for the recommendation, as well as a statement of his demands and needs? True or false?

True. For a non-advised sale- the customer must be given a statement of his demands and needs, unless the policy is sold by an insurer directly to a commercial customer.

4 The draft rules intend to prevent insurers and intermediaries from offering and giving, soliciting or accepting an inducement if it is likely to create a conflict of interest. Specifically the rules intend to prevent volume overrides and profit sharing agreements. True or false?

False. Draft rules do not prevent any specific inducements, volume overrides and profit sharing agreements are of particular concern but insurers and intermediaries are not prevented from providing these as long as they are not unfair.

5 The draft rules prevent insurers and intermediaries from making excessive charges to their retail customers. Is there any guidance firms can use to consider whether a charge is excessive? Yes or no?

Yes. Guidance suggests firms can:

DAY FIVE Q&A
1 Insurers' responsibilities during claims handling is to be no different for retail customers than commercial customers. True or false?

False

2 For contracts more than one years duration the DMD requires the renewal is treated as a new contract and all the pre-sale disclosure rules will therefore apply, is this the case for all contracts under ICOB? Yes or no?

Yes

3 Under the draft ICOB rules there is no proposal for customers to be notified in advance of premium changes. True or false?

False. Customers must be notified unless changes follow a pre-agreed formula, e.g. a percentage increase per year.

4 Under the draft rules all retail customers will have cancellation rights. True or

false?

False. These rules will not apply to general insurance contracts that provide cover of less than one month e.g. travel insurance or special events insurance

5 Draft rules require intermediaries to disclose conflicts of interest that may arise from acting for both parties during handling claims. True or false.

True. Where an intermediary who has delegated claims handling responsibilities cannot act without breaching his duties he should ensure that alternative arrangements are in place to handle such claims.