Consultation CP16/42 Reviewing the funding of the Financial Services Compensation Scheme (FSCS)

Transcription

1 31 March 2017 Mr C Gibson Redress Policy Strategy & Competition Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Dear Cosmo Consultation CP16/42 Reviewing the funding of the Financial Services Compensation Scheme (FSCS) BIBA welcomes the opportunity to respond to this consultation paper. The British Insurance Brokers' Association (BIBA) is the UK's leading general insurance intermediary organisation representing the interests of insurance brokers, intermediaries and their customers. BIBA membership includes just under 2,000 regulated firms, who employ more than 100,000 staff. General insurance brokers contribute 1% of GDP to the UK economy; they arrange 54% of all general insurance and 79% of all commercial insurance business. Insurance brokers put the client s interests first; providing advice, access to suitable insurance protection and risk management. Within our Manifesto for 2017, BIBA called for the FSCS levy on GI insurance brokers to be reflective of the risk posed and not to increase the already unfair burden on insurance brokers. BIBA also called for the FCA to reconsider BIBA's proposed fairer funding model separating pure insurance brokers from secondary intermediaries whose core business is selling something else. The following provides our specific feedback on the proposals covered in the consultation paper. Q1: Do you agree with the introduction of risk-based levies? Should we also consider other regulatory responses? BIBA members have expressed differing views on this question. A common point made in those responses is the need to have definitions of high-risk products which are clearly defined and regularly reviewed. It has also been suggested that account should be taken of whether the alleged high-risked products have been sold with or without advice. British Insurance Brokers Association 8 th Floor, John Stow House 18 Bevis Marks London EC3A 7JB Members line: Consumer helpline: Facsimile: enquiries@biba.org.uk British Insurance Brokers Association is a Limited Company Registered in England No Registered Office: John Stow House 18 Bevis Marks London EC3A 7JB

2 BIBA Letter 31 March 2017 FSCS funding review Page 2 of 8 It is worth mentioning - using the example of Payment Protection Insurance in the non-investment insurance field that the product was not high risk; the issue came down to how the product was sold and to whom it was sold (and one might add by whom it was sold). It is also important for BIBA s members to have it highlighted that PPI was not a product that was or is commonly sold by general insurance brokers (and where it is, the full demand/ needs and suitability requirements are followed), yet these same general insurance brokers have been left picking up the tab for the mis-selling activities of others. This unsustainable position was highlighted in oral evidence to the Treasury Select Committee in October 2015 by Tracey McDermott the then acting FCA CEO, when Ms McDermott recognised that a review was needed as the good guys are funding the bad guys. Q2: Do you believe that risk-based levies could be appropriate in relation to: a) higher risk investment products; b) insurance brokers that choose to place business with unrated insurers; and c) any other types of specific products or services? Focusing specifically on point b) the challenge raised is whether it would be treating customers fairly and conducive with good customer outcomes to place clients cover with a credit-rated insurer whose credit rating is C, or to use an unrated insurer for which available data suggests that it is well-capitalised. It is understandable to want to discourage use of insurers which may be unrated and whose product is marketed at rates substantially and artificially below competitive and better offerings. At the same time though, the use of risk-based levies may deter conscientious brokers from helping clients access any cover, rather than using an unrated insurer that happens to be the only market participant which is prepared to offer terms. There is also a European-wide move, following the 2008 crash, to try to move away from such heavy reliance on credit ratings and the credit rating agencies. It is worth remembering that within the insurance sector, the last big collapse was Independent Insurance in 2001, which saw the FSCS involved in compensating customers for more than 13 years and which had at the time a very healthy credit rating. The implementation of the requirements from the Solvency 2 Directive should also go some way to mitigating the risk arising from using an unrated insurer. Rated or not, an insurers must be able to demonstrate going forward to their respective regulators that they hold a sufficient amount of capital. A number of the largest insurance brokers operate market security teams which assess the viability of an insurer, whether that insurer has a credit rating or not, before approving that insurer as a placement option. Levying additional charges for unrated insurers would fundamentally undermine the good work these teams do. As an aside, the FCA s general insurance supervisory team is aware that BIBA has made an online tool available to its members (called the BIBA Litmus Test Report) to enable members to assess several financial indicators of a number of unrated firms. BIBA is willing to demonstrate this tool to other members of the FCA team if it would assist.

3 BIBA Letter 31 March 2017 FSCS funding review Page 3 of 8 Q3: Do you agree in principle that product providers should contribute towards FSCS funding relating to claims caused by intermediary defaults? It is possible to see the logical connection between this proposal and EU-derived FCA rules around the responsibilities of a product manufacturer for the distribution of their product(s) as part of that product manufacturer s product oversight and governance obligations. Linked to the response to question 1, there is also a potential consideration of whether or not high risk products are sold with or without advice and the extent to which a provider firm s governance, systems and controls mitigate the risks associated with the distribution of their products. As a cautionary note; it would run contrary to the FCA s competition objective if product providers were to start using the levy contribution as an excuse to refuse or cancel agency arrangements with intermediaries and BIBA would strongly encourage the FCA to monitor this risk going forward. Q4: Do you have any views about the current effectiveness, or otherwise, of PII cover including in reducing the number and cost of claims on the FSCS, and about the role of PII in providing compensation to consumers who have claims against failed firms? It is worth making the point for clarity s sake, that professional indemnity insurance (PII) is not a de facto consumer protection tool. It serves to protect the viability of the professional firm (be that a regulated intermediary, a solicitor, accountant, etc) in the event of a claim against that firm for negligence. The cover provides the insured party with a means to satisfy a financial award against them (which is to the benefit of a consumer claimant) or meet the costs of defending a negligence claim (which is not to the benefit of a consumer claimant) without jeopardising the firm s balance sheet solvency. It would be worth understanding what data the FSCS holds on the types of firms that are most commonly causing calls on the FSCS compensation fund rather than their PII. Research produced for BIBA some time ago highlighted that general insurance (GI) brokers were contributing 71% of the levy to their FSCS pot but generating 1% of the claims under that pot, which suggests that brokers are not going bust and one of the many reasons for that could be that PII arrangements for GI brokers are operating effectively. Our members have highlighted two concerns that warrant FCA and FSCS consideration. The first concerns the extent of cover and the associated rating that would go with providing PII cover for high risk products. Would insurers have an appetite to provide cover for these? The second concerns hindsight regulation whereby regulators take action against firms based on the rules/standards/conditions that exist now, rather than the conditions/standards of knowledge/ etc that existed at the time of the sale. Such regulatory action could have the effect of restricting the appetite of PII providers (as they had not collected a premium commensurate with activity that is now rated as high risk but was not at the time of agreeing cover). Q5: Do you have any views or suggestions about the possible features of more comprehensive, mandatory PII insurance? Do you have any suggestions about other possible tools, remedies or approaches which could be used to reduce the scale of funding currently required by the FSCS? Given the contentious issue of unrated insurers in the general insurance market following the recent highprofile collapse of two such insurers (that passported into the UK on a Freedom of Services basis), one

4 BIBA Letter 31 March 2017 FSCS funding review Page 4 of 8 suggestion put forward by a member is to make it a requirement of the rules that only rated insurers would be acceptable. Running contrary to this is another view that forcing insurers to provide certain levels of cover may be beyond the appetite of some insurers and so dissuade these insurers from looking to provide this type of insurance at all. Obviously any reduction in competition could result in price rises. It has also been suggested that insurers may be more willing to enter and stay in the PII market, if they could take some form of comfort that the FCA would not be taking retrospective actions against firms for something that may have been acceptable at the time but which has current regulators thinking differently. Q6: Do you have any views on the impact of a requirement on PIFs to hold more comprehensive PII? For example, what would be its impact on the PII market, the financial advice market and on consumers in general? As mentioned above in response to Q5, the concern is that forcing insurers to provide certain levels of cover may go beyond the appetite of some insurers and so reduce competition and increase prices in this sector. BIBA understands that the FCA (as the FSA at the time) abandoned the concept of minimum terms in 2003 following the significant difficulties the IFA sector was having at the time in obtaining cover. Like much of the compulsory insurance obligations, obtaining PII cover is often regarded as a grudge purchase. It may be more valuable to encourage firms to be risk-based in the decision-making on what would be an appropriate level of cover for their individual business. Q7: Would you support an increase to the FSCS compensation limit in relation to any or each of the investment provision, investment intermediation and life & pensions intermediation classes? If so, do you have any views on what those limits should be? BIBA members have expressed no opinion on these matters, so BIBA leaves it to the FCA to judge what might secure the appropriate degree of consumer protection. Q8: Would you support a proposal to differentiate between investment provision and investment intermediation, and to introduce higher limits for either? If so, do you have any views on what those limits should be? Again, BIBA members have made no comments on this. Q9: Would you support a proposal to seek to make a distinction between pensions-related investment business and non-pensions investment business, and apply higher limits for pensions-related investments? If so, do you have any views on how the distinction might be made and what those limits should be? BIBA recognises the public policy element to this proposal. BIBA is aware of the views of fellow trade body, APFA, in this area, so defer to them for opinion on this point.

5 BIBA Letter 31 March 2017 FSCS funding review Page 5 of 8 Q10: Do you have any comments about the possible risks to investors posed by crowdfunding and whether these might justify introducing FSCS protection? Crowdfunding is understood by financial market participants as a higher-risk-higher-reward alternative to mainstream investing. It may be more appropriate for the FCA to make rules on disclosure for the P2P sector to highlight the risk and lack of FSCS cover to potential investors, so that they make a more informed decision about whether to risk their money in this way. Q11: Do you have any comments about the scope of the FSCS and whether promoting financial products, or any other activities, should be included within its coverage? BIBA members consider it unlikely that firms will be conducting financial promotions without some connection to a firm that is conducting the regulated activity of Arranging and so the need to bring financial promotions into scope seems very limited. Q12: Do you agree that it would not be justified for the FSCS to utilise a credit facility to further smooth levies, given the costs involved? Based solely on the figures contained within the consultation paper, BIBA members would be persuaded by the argument. There is however a question about whether the FSCS should be able to secure a better deal for itself with a regulated bank or syndicate of banks. Alternatively and quite topically, would be the idea of establishing an insurance special purpose vehicle (ISPV) and benefiting from the operation of an insurance linked security (ILS). Such an approach would support HM Government s desire to make the UK a centre for Insurance Linked Securities, as well as offer the security of a vehicle that will be subject to FCA and PRA scrutiny (the FCA has published its own proposals in CP17/3: Proposed Handbook changes to reflect the new regulatory framework for Insurance Linked Securities). Unlike a credit facility (for which the FSCS pays a significant fee in the hope that funds will be available when it needs them), an ILS will provide a fully-capitalised vehicle, with the funding invested and earning interest so that the FSCS may have access to an even greater sum than the capital invested, should it need it. Further, in the event of no call on the fund, the cost of borrowing the money should be met from investment returns. Being available only to Qualified Investors, the option also safeguards against consumers funding the facility. Q13: Do you believe that we should seek to reduce the number of funding classes, in order to reduce volatility of FSCS levies? Both the FCA and FSCS are aware of BIBA members position on this point, in that members are fundamentally opposed to any reduction in funding classes which would see them forced to contribute more for an even wider range of firms with whom they share no affinity, as has already been the case with FSCS compensation payments related to PPI mis-selling by credit intermediaries. As mentioned in response to Q12, the volatility could also be smoothed by use of the ILS.

6 BIBA Letter 31 March 2017 FSCS funding review Page 6 of 8 Q14: What are your views on the different funding classes we have set out here? Do you have any alternative proposals? As both the FCA and FSCS are aware from BIBA s discussions with both organisations, BIBA members are vehemently opposed to Option 1, which just magnifies the issue of paying for the malfeasance of entirely unrelated businesses and for activities with which our members have absolutely no connection. As mentioned in response to Q1, BIBA members have carried the financial burden from bailing out credit firms that mis-sold PPI while not being sellers of the product themselves and with the advent of pension freedoms which the market foresees as creating the next big scandal and clamour for compensation, BIBA members reject any arrangement which sets them up for carrying the can for more activities which have no connection with their own business activities. BIBA has in the past, presented a model that was created by Oxera (an organisation that had provided a model for the FSCS funding classes which the FCA/FSCS had adopted) which suggested separating out the funding class for pure insurance intermediaries. Contrary to opinion expressed in the consultation paper, Oxera s findings at the time of carrying out their study and drafting the report for BIBA, indicated that the result would still maintain sustainable classes. Q15: Do you agree with our intention to keep the current class thresholds for intermediary classes, merging the thresholds if appropriate to adopt a revised class structure? As BIBA members have not expressed views on the appropriateness of the funding thresholds, BIBA has no comment to make beyond suggesting that the FSCS may look back at its history of interim levy raising, the instances where such have triggered a call on the retail pool and based on their knowledge of the sectors, consider the viability of adjusting the thresholds Q16: Do you agree with our intention to keep our current class threshold of 200m for the investment provision class? Linked to our responses to previous questions, BIBA would defer to the FSCS and relevant market participants with a connection to this market, to pass comment. Q17: Do you have any views on the idea of a fixed levy for smaller firms? Whilst the principle of a fixed levy for smaller firms would be a welcome measure for budgeting purposes, the proposed charge of 850 is far too high. Using the FCA s online fee calculator and entering an income for a small firm of 100,000 (to align with the income level for the FCA minimum fee) generates a current FSCS levy of Moving to a FSCS levy of 850 would result a seven-fold increase. BIBA would be doing a disservice to its smaller members if we did not strongly oppose a fixed levy of the size proposed. It is worth noting that a fixed levy would also inhibit the FCA/FSCS proposals for risk-rated levies (eg for higher risk products).

7 BIBA Letter 31 March 2017 FSCS funding review Page 7 of 8 Q18: Do you have any comments on the mechanism by which we would propose to incorporate product provider contributions into the intermediary claims classes, for the various different class structure options described? BIBA members have made no comments on the proposed mechanism. Q19: Do you agree with our proposals to include protection for client money for debt management activities within the scope of FSCS protection and our proposed funding arrangements? Q20: Do you have any views on whether or not coverage should be extended to negligent advice provided by debt management firms? Q21: Do you agree with our proposals to extend FSCS protection to structured deposits intermediation and to fund it through the Investment Intermediation and Investment Provision classes? Q22: Do you agree with our proposed approach to provide FSCS protection for claims relating to fund management? An observance may be made that the proposal aligns with FCA views that all firms should be considering the end-customer outcomes from their activities. Q23: Do you agree with our proposed new approach to Lloyd s of London? As a product provider operating and competing in the same market as other insurance providers, those BIBA members that have expressed an opinion on this, see the logic in this proposal. Q24: Do you agree with our proposal for a new reporting requirement on higher risk products in the RMAR? BIBA members are generally supportive of this proposal, but caution that the definition of higher risk products and the types of products which fall into this categorisation must be absolutely clear. Q25: Do you agree with our proposal to remove the rule relating to paying FSCS levies by quarterly direct debits or should we consider other options? As the quarterly direct debit facility has not been set up, BIBA members have no objection to the rule being removed. However our members encourage the FCA/FSCS explore all options that may help firms meet their funding obligations. Q26: Do you have any comments on our proposed class threshold and tariff measures for the new debt management claims class?

8 BIBA Letter 31 March 2017 FSCS funding review Page 8 of 8 Q27: Do you have any comments on our proposed tariff measures and metrics for calculating the deposit taker contribution for direct sales in relation to structured deposits? Q28: Do you have any comments on how, in future, we might calculate any provider contributions required from deposit-takers, in relation to structured deposits, if we were to consult in detail on this approach? Q29: Do you have any comments on our decision to maintain the current tariff measures, except for life and general insurers? Q30: Do you have any comments on our proposal to bring the tariff bases for insurers into line with the PRA s approach? Q31: Do you agree with our proposal to require firms that must pay some of their FCA/PRA levies on account to also make a payment on account in respect of their FSCS levy? Those BIBA members that have expressed an opinion raised no concerns with the proposal. We would be happy to discuss any of our points further if this would assist. Yours sincerely David Sparkes ACII Head of Compliance & Training sparkesd@biba.org.uk