Roy Bartholomew Life & GI Policy Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS.

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1 Roy Bartholomew Life & GI Policy Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS 7 September 2016 Dear Roy LMA response to FCA CP16/17: Quarterly Consultation No. 13 The Lloyd s Market Association (LMA) represents the 59 managing agents at Lloyd s, which manage the 85 syndicates underwriting in the market, and also the 3 members agents which act for third party capital. Managing agents are dual regulated firms by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) and members agents are regulated by the FCA. For 2016, premium capacity is in excess of 27 billion. We appreciate the opportunity to respond to this consultation and whilst this response is distilled from the views of our members, the views of individual members may differ. We list a number of points under Question 2.1 in respect of ICOBS 8 and deal briefly with Question 2.2. [The Insurance Act 2015 is referred to below as the IA ; the Enterprise Act as the EA ; and the Consumer Insurance (Disclosure and Representations) Act 2012 as CIDRA together, the Acts.] Question 1 Do you agree with the changes to ICOBS 8 and COBS 17 to align the Handbook with the Act and, where relevant, preserve the existing policy? We agree with the objective that any FCA rules and guidance connected with the IA, EA and CIDRA should be aligned with the Acts. To achieve this, our view is that existing language in the rules and guidance, which cause possible conflict or confusion with the Acts, should not be preserved. The Acts were the result of many years of consultation by the Law Commission, and both the Commission and Government felt that interests of stakeholders had been properly balanced in this legislation. 1

2 Therefore, the FCA should not in our view in any way gold-plate or extend the requirements of the Acts. In particular, both the Law Commission and HM Treasury in their various reports and impact assessments repeatedly said that contracting out should be allowed in proper circumstances, where the parties agree, and expect this to occur in specialist markets in respect of large or sophisticated risks, typically where brokers are advising clients. The transparency requirements need to be met for contracting out to be effective, i.e. under s17 of the IA the relevant contract term needs to be drawn to the attention of the insured before contracting and the term needs to be clear and unambiguous as to its effect. Therefore, the Acts contain sufficient safeguards and FCA rules and guidance need not be more restrictive than the Acts. Given this backdrop, we have the following points on chapter 2 proposals: (1) Para 2.6 first bullet: We would appreciate the opportunity to review and comment on the new guidance in respect of ICOBS 8.1.1R, when drafted. It is not clear whether this will be limited to consumer contracts, or will relate to consumer and non consumer contracts? It will be important in the guidance that definitions of a consumer insurance contract and non-consumer insurance contract are aligned to the definitions in CIDRA/IA in view of the different regimes for pre-contractual disclosure/representations and contracting out. (2) Para 2.6 second bullet: ICOBS 8.1.2BR relates to consumer policyholder claims. We assume the definitions will be aligned with CIDRA/IA. The proposed new ICOBS 8.1.2BR goes beyond the IA, because it extends to a condition or term that is not within section 10 or 11 of the Insurance Act. It is not clear what sort of term this would be perhaps the FCA could give some examples? Would this be a term which defines the risk as a whole (see s11 of the IA)? In that case, how could a breach or acting outside the policy limits not be relevant to any claim under the policy. We understand the attempt to preserve the existing rule exactly, but this seems an unnecessary complication, when the Acts provide a comprehensive framework. It is contrary to the objective of alignment. For example, say a policy is taken out to cover a consumer s valuable personal property when in the UK only (watches, jewellery etc). The property is lost in Australia. The geographical limits would probably fall outside s11 of the IA because this defines the risk as a whole. Therefore, the loss in Australia would not be covered (unless the consumer had extended coverage and paid additional premium before travelling). However, under ICOBS BR, would the claim be payable on the basis that the consumer could have mislaid the property anywhere and location was irrelevant? If the answer is Yes, then the rule goes too far; if the answer is No, then the FCA can rely on s11 of the IA and this rule is redundant. (3) Para 2.6 third bullet: ICOBS 2.5.2AR relates to consumer and non consumer policies. It goes beyond the IA because it requires insurers to operate warranties so they are connected to the risks to which they relate. The first problem is what is the meaning of risks - is it broad or narrow? We assume the purpose is to 2

3 require an element of causation between a breach of warranty and a loss (and hence the reference to ICOBS 8.1.2R, although we do not understand the seemingly inconsistent statement about [not] purporting to create liabilities at the rejection stage where the Act says there is no liability ). This proposed rule is perhaps not a significant issue in respect of consumer policies, because s11 will operate to this effect and parties cannot contract out of s11 in respect of consumer contracts. However, it is potentially a significant extension to the IA in respect of non-consumer contracts, because it will (we believe) preclude the option of contracting out of s10 and s11 of the IA in respect of warranties. This seems to go a long way beyond alignment of ICOBS with the IA. If this had been considered desirable, then the Law Commission would not have produced, nor HM Treasury promoted, the contracting out framework for nonconsumer contracts. For example: in a marine hull policy it is agreed as a warranty that a ship will be certified as in class within 21 days of inception of the policy and the insurer will hold covered during this period; the parties agree to contract out of s11 of the IA, so that if the class requirement is not met, the cover is suspended entirely after 21 days (note: this is belt and braces, since the Law Commission took the view that satisfactory class survey goes to the risk as a whole and therefore s11 does not bite). It seems that ICOBS will preclude this sort of commercial arrangement, which is within the IA. This is because under ICOBS, but not the IA, if the warranty is breached, the underwriter will still be on cover for anything which is arguably not related to the class certificate, when the clear agreement is that the ship being in class is a prerequisite of continuing cover. To give a further example: a D&O policy contains a warranty that none of the insured s directors or officers has a criminal record or has been the subject of regulatory enforcement action. Under s10, we believe breach of this warranty could not be remedied, since it is a matter of fact; and s11 is not relevant, because this is a factual circumstance and not a term with which the insured complies. How would ICOBS operate, if it turns out that a director has a criminal record and has been fined by the FCA but a claim does not relate directly to this? Would ICOBS make this sort of warranty potentially ineffective, and how would this sit with the objective of fighting financial crime? It could be the case that an insured wishes to agree certain warranties in return for reduced disclosure obligations (i.e. to preserve the superfluity requirement in the pre-ia law where disclosure does not have to be made where circumstances are warranted see s18(3)(d) of the Marine Insurance Act 1906). It would seem that ICOBS 2.5.2AR would make such an agreement inadvisable for the insurer and thus remove a commercial option, since contracting out of s10 would go hand-inhand with varying s3 of the IA to put this arrangement into effect. In relation to the proposed new guidance ICOBS 2.5.2CG, there could be a potential problem in the reinsurance arena. If an insurer operates a warranty in 3

4 such a way that it pays claims, effectively, on an ex gratia basis, then its relevant reinsurance contracts may not respond, where these cover only underlying contractual obligations. We believe that ICOBS 2.5.2AR and 2.5.2CG are unnecessary, because the IA contains appropriate safeguards. If the FCA decides to implement them, then the FCA should limit them to consumer contracts to ensure that they do not have the (we assume unintentional) effect of precluding contracting out of s10 and s11 of the IA in respect of non consumer contracts. (4) Para 2.8 Enterprise Act: we agree that ICOBS 8.1.1R does not need to be amended, because these rules do not cut across or extend the implied term that claims are paid in a reasonable time, and indeed the rules are complementary. As mentioned in our point (1) above, we would ask that we are given the opportunity to review any further guidance. (5) Insurance contracts where an overseas law is the applicable law of the contract: this is the case in many non consumer contracts underwritten in the London market; it is also the case for consumer contracts where, for instance, these are entered into by an overseas coverholder under local law (indeed, the Rome regulations may preclude a choice of English (or other UK) law). Therefore, the FCA needs to be wary of making rules which do not sit well with different systems of law. To give examples: ICOBS 8.1.1R contains good conduct principles which sit with different law systems; whereas the proposed ICOBS 8.1.2AG and 8.1.2BR are specific to English law (or other UK law) contracts where the Insurance Act applies. Therefore, for example, in the case of 8.1.2AG (b), the insurer would not be able to rely on the Insurance Act where a US State law applies, and so on the face of it is guided by the FCA that it cannot reject a claim for fraud or breach of warranty. Question 2: Do you have any comments on our cost benefit analysis? (6) Paras 2.10 and 2.11: the Act makes specific provision for contracting out where the transparency requirements are met in respect of non consumer contracts: therefore, we do not agree that the changes will not impose additional costs, because they may preclude the possibility of contracting out where the parties wish to do so on agreed terms, for example, where ICOBS 2.5.2AR may be breached during the course of a contract if the parties contract out of s10 and/or s11 of the IA. Altering the regime so carefully constructed by the Law Commission and enacted by Parliament will affect costs and benefits. (7) Para 2.13: we do not agree that the changes have a neutral impact on competition, because they remove choice in the non consumer arena in relation to contracting out of the IA on bespoke terms. Similarly, we do not agree that the changes merely align FCA rules and guidance with the Act. 4

5 Our view overall is that ICOBS should contain helpful conduct rules (for example 8.1.1R) but should not confuse or restrict the operation of the Acts, which contain appropriate provisions to protect consumer and non consumer policyholders, whilst allowing choice by contracting on bespoke terms in appropriate circumstances. Should you have any questions in relation to our response, please do not hesitate to contact me at Yours sincerely Kees van der Klugt, Director Legal & Compliance 5