August 2014 GENERAL INSURANCE. The Latest FCA Enforcement Action

Transcription

1 August 2014 GENERAL INSURANCE The Latest FCA Enforcement Action

2 Introduction The Financial Conduct Authority's (FCA) enforcement action against Aegon subsidiary, Stonebridge International Insurance Limited 1, is the latest significant fine against firms selling insurance products, following on from Swinton Group (16 July 2013) and Card Protection Plan (CPP) (14 November 2012). As well as a financial penalty of 8,373,600, Stonebridge is to carry out a past business review and has already paid 400,000 in redress to UK customers. Stonebridge Stonebridge sold insurance products for personal accident, accidental death and accidental cash plans to low and middle income customers in the UK and EU. The sales process was outsourced to companies which contacted customers by telephone using telesales scripts provided by Stonebridge. Between April 2011 and December 2012, a total of 486,000 customers bought policies providing revenue in excess of 93 million. Stonebridge breached Principle 6 of the Principles for Businesses (a firm must pay due regard to the interests of its customers and treat them fairly) by: targeting low and middle income customers without higher education or professional qualifications with telesales scripts that did not give clear, fair and "balanced" information; using a sales process that emphasised concessionary introductory periods and the availability of cancellation rights to persuade customers to take out policies, suggesting that Stonebridge relied on its customers' inertia to sell policies; designing telesales scripts to "steer" customers with families towards more extensive and costly products which they did not necessarily need; and when customers wanted to cancel their policies, they were presented with barriers to cancellation. There were also serious weaknesses in Stonebridge's systems and controls including, crucially, its internal governance which should have alerted senior managers to inherent failings in the sales and marketing process. The information available to its management on sales data and trends was incomplete and unclear which negated the value of the "TCF dashboard" intended to monitor outcomes. Nor did its Board and various risk committees effectively oversee and challenge the identification and management of the risks to which its customers were exposed. The board committee with overarching oversight of the risk framework was found by the FCA to have provided "an inadequate level of sustained challenge of TCF risks." Swinton and CPP The Stonebridge fine follows the significant fines for high street broker, Swinton ( 7.38m), and card protection insurer, CPP ( 10.5m), where redress was also significant. Swinton did not consider customers' interests sufficiently when pursing an aggressive sales strategy of monthly add-on insurance products to counter a decline in sales elsewhere in its business. Again, it failed to provide adequate information or a sufficient explanation in sales scripts to customers about products and this fact was not identified (and acted upon) due to weaknesses in corporate governance, exemplified by not taking reasonable care to organise and control its compliance procedures. CPP provided customers with misleading information about cover which was either not required or where its sales force had exaggerated the risks concerned. In all three cases the firms had objection handling strategies. Insurance in the spotlight? With these fines, the FCA's general insurance add-ons market study, the thematic review on commercial brokers conflicts of interest, earlier thematics for mobile phone insurance and motor legal expenses insurance, and the Competition and Markets Authority's investigation into the private motor insurance market, the insurance sector might feel under the regulatory spotlight. Moreover, later this year the FCA will carry out thematic work in relation to cover holders, premium finance, commercial claims and client money as well as carry over work in relation to motor legal expenses insurance and mobile phone insurance. Discernible trends are making themselves apparent: not surprisingly, the FCA remains focussed on good customer outcomes. Stonebridge failed to treat customers fairly and to deliver on the FCA's TCF outcomes 2 ; 1 See 2 The six improved consumer outcomes which are the aims of the FSA/FCA's TCF initiative. These outcomes were first outlined

3 the importance of appropriate systems and controls and proper oversight. Specifically, there should be robust challenge as to whether existing systems and controls (see below) are fit for purpose; and whether customers are getting value for money? We see this as a question that will receive ever greater focus. In all of the above final notices it could be said that the cover was sold rather than bought and, while all were "low cost" products, there is an inherent question as to their value for customers. TCF Lessons When assessing outcomes, the FCA expects firms to put customers' interests at the heart of their sales process 3. In particular: the obligation to provide information to customers which is clear, fair and not misleading is particularly acute where the target market consists of vulnerable consumer groups. Moreover, firms need to ensure that customers receive balanced information; customers' best interests in terms of the appropriateness of a product must be embedded into its design, where factors such as the claims ratio 4 may be relevant as it can give an indication of the value of a product; and the sales process must not be distorted by aggressive sales targets or by subverting customer protections (e.g., using the availability of cancellation rights to persuade hesitant customers). Systems and controls The importance of taking reasonable care to organise and control a firm's affairs responsibly and effectively, with adequate risk management systems, must be emphasised, for example: firms must take reasonable steps to ensure that sales calls are properly monitored and subject to quality assurance; when firms use outsourcers adequate information must be obtained to enable the identification, measurement and identification of risks; and internal compliance and governance processes need to be robust and sufficiently resourced and independent of business to act on the information to safeguard TCF outcomes for customers. Value for money On the question of value for money, it is worth remembering the FCA has said in relation to the add-ons market study that: "[The study] confirmed that selling a product as an add-on often lead to consumers purchasing products that were of poor value and not what they needed. We also found that the value of general insurance products is not always clear. We remain committed to strengthening the transparency and comparability of the value of general insurance products and have proposed to impose a requirement on firms to publish claims ratios as a measure of the value of a product." 5 in the FSA's July 2006 publication, Treating customers fairly towards fair outcomes for consumers and remain core to what the FCA expects of firms. 3 The requirement to implement these outcomes is firmly rooted in the FCA s Principles for Businesses. 4 The difference in percentage terms between the amount paid out and what is received in premiums. 5 FCA Press Release, General Insurance Ad ons Market Study, 24 July

4 For further information please contact: Robert Garwood Managing Associate Paul Harris Associate Jennifer Young Associate

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