Lloyd s Minimum Standards MS11 Conduct Risk

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1 < Picture to go here > Lloyd s Minimum Standards MS11 Conduct Risk Mid-2015 Feedback to Lloyd s Managing Agents 1 & 2 July 2015 Lloyd s 1

2 Agenda Introduction: Paul Brady: Manager, Market Conduct, Lloyd s Legal & Compliance FCA: Mike O Hagan: Manager, Lloyd s and London Market Team Mark Bernacki: Head of Property at Beazley and Chairman of Beazley s Conduct Review Group Questions for Mark Bernacki or FCA Conduct Standards Assurance Team: Feedback on work to date and review findings Paul Brady: Overview of reviews to date Ian Bryant: Themes on Culture and Governance Rupert Findlay: Themes on Product Design and Risk Assessment Simon Baker: Themes on Sales & Distribution Claire Holland: Themes on Product Servicing Andrew Smith: Management Information Questions Lloyd s 2

3 < Picture to go here > FCA Mike O Hagan: Manager, Lloyd s and London Market Team Lloyd s 3

4 < Picture to go here > Mark Bernacki Beazley Head of Property and Chairman of Conduct Review Group Lloyd s 4

5 Any Questions for Mark or FCA? Lloyd s 5

6 < Picture to go here > Mid-2015 Feedback From Conduct Standards Assurance Team Paul Brady Conduct Standards Assurance Team Lloyd s 6

7 Agenda Assurance process at half-year Self assessments Reviews to-date Some key messages when facing a review Findings to date Good Practice Common Gaps Lloyd s 7

8 Assurance Update The self assessment Standards Self-Assessment In line with Corporation objective to move to self-assessments against all Standards All self-assessments completed and reviewed by CSAT. Feedback provided to every agent. Following slide shows market compliance as recorded in the selfassessments. Key areas market working on were - Product assessment and design Training Management information Progress update recently requested from all agents as at 30 June 2015 Lloyd s 8

9 Proportion of Standards Met for Lloyd s Market as a Whole Assurance update The self assessment Compliance Planned to be Achieved By Section 1-Jan Mar Jun-15 1-Jan-15 1-Jan-16 CR 1: Fair Treatment of Lloyd's Customers 74% 93% 99% CR 2: Role of the Board Management and Staff 59% 86% 99% CR 3: Product Oversight Group 56% 90% 100% CR 4: Effective and Proportionate Product Controls 37% 77% 96% CR 5: Assessing and Recording Product Risk 46% 82% 98% CR 6: Product Design - General 48% 76% 97% CR 7: Product Design High Product Risk 49% 78% 98% CR 8: Obtaining Assurance from Others 57% 81% 98% CR 9: Product Sales 69% 88% 99% CR 10: Product Service 65% 86% 99% CR 11: Product Service Handling and Determining Claims 78% 91% 99% CR 12: Product Service Complaints 85% 97% 99% CR 13: Conduct Management Information 14% 99% CR 14: Product Review 36% 68% 99% CR 15: Distributor Appointment Review and Audit 66% 85% 100% CR 16: TPAs 62% 87% 99% CR 17: Training 25% 67% 92% CR 18: Miscellaneous 92% 98% 100% Lloyd s 9

10 Assurance update The assurance review process Most reviews undertaken by 4 members of CSAT Preliminary Documentation Desk Review (2 weeks) On-Site Fieldwork (1 week) Product walkthroughs Meetings with: CEO Compliance and Complaints INED Underwriters & Claims staff Delegated Underwriting Manager Draft and Final Report (Final Report shared with FCA) Follow-up meetings scheduled A number of key themes have emerged. These will be fed back to market via our workshops/newsletters and discussed in following slides On target to complete 20 reviews by year-end Lloyd s 10

11 The assurance review process Review Outcomes All reviews are given an overall RAG rating and each Standard is also RAG rated 8 reviews completed 2 Red 5 Amber 1 Green Wide scope (17 Standards and 86 requirements) and detailed nature of findings means each review has generated in excess of 40 actions Additional interventions, where necessary, e.g. Restricting the underwriting of high product risk binders Feed outcomes into CPG and business plan reviews Lloyd s 11

12 The assurance review process Agents RAG rated against their compliance with each of the 18 Minimum Standards RAG results of individual agents for reviews to date: 18 Review Outcomes Not Assessed Green Amber Red 0 Agent 1 Agent 2 Agent 3 Agent 4 Agent 5 Agent 6 Agent 7 Agent 8 Red Amber Green Not Assessed Agent Agent Agent Agent Agent Agent Agent Agent Lloyd s 12

13 The assurance review process Individual Standards Level Analysis of Report Action Points CR 1: Fair Treatment of Lloyd's Customers Total Red Amber Green CR 2: Role of the Board Management and Staff CR 3: Product Oversight Group CR 4: Effective and Proportionate Product Controls CR 5: Assessing and Recording Product Risk CR 6: Product Design - General CR 7: Product Design High Product Risk CR 8: Obtaining Assurance from Others CR 9: Product Sales CR 10: Product Service CR 11: Product Service Handling and Determining Claims CR 12: Product Service Complaints CR 13: Conduct Management Information CR 14: Product Review CR 15: Distributor Appointment Review and Audit CR 16: TPAs CR 17: Training Total Lloyd s 13

14 Some key messages when facing a review The assurance review process Help us to help you! Make sure you tell us what you think we need to know Please get documents to us as soon as possible ( drip feed if necessary) Consider for yourselves who are the right people for us to meet Lloyd s 14

15 < Picture to go here > Culture & Governance Ian Bryant Conduct Standards Assurance Team Lloyd s 15

16 Typical Review Approach: Culture Meet with a cross section of people within agents, from CEO to underwriters and claims handlers Meet with INED to gain their perspective Ask similar questions to gauge responses against other agents and be consistent Mix and match our review teams to aid comparisons with other agents Walk-through of selected products Lloyd s 16

17 Review Findings: Culture Good Desire and knowledge of how to do the right thing is obvious when meeting people Training delivered that encourages good culture Evidence of having taken a sound course of action when issues have been identified Strong historical evidence of a tone from the top on matters of ethics, conduct and fair treatment of customers Objectives set, or being set, that are/will be explicit on conduct responsibilities Senior management embracing the need for change in attitudes Not so Good Lack of awareness of issues affecting conduct risk, e.g. 0% loss ratios Training yet to be performed, or effectiveness not tested Insufficient effort to ensure fair treatment of customers, e.g. wordings unclear or unfair Insufficient pro-active action, clarity and tone from the top, e.g. no conduct risk policy to explain the board s vision of desired culture Absence of relevant objectives for reelvant staff and directors Documentation giving the impression that conduct risk is only a regulatory issue Lloyd s 17

18 Typical Review Approach: Governance Review of POG terms of reference, minutes and packs (or other relevant committee if no POG) Discuss POG activity and how it integrates with existing governance Assess level of board engagement and support for the project Review of recent board minutes and pack (particularly indicative around business planning periods) Seek evidence of Customer Challenge Lloyd s 18

19 Review Findings: Governance Good POG established to provide clarity of governance around product review Appointment of executive director as sponsor for Conduct project Not so Good Most POGs are in the infancy of their development. The POG s role is sometimes blurred against that of existing governance, e.g. DUA committee Board engagement lacking, resulting in insufficient resource focussed on implementing conduct risk initiatives Regular updates to board on progress against conduct project as well as some MI on conduct risk status Very limited MI on Conduct Risk and little evidence in board minutes of consideration of relevant issues, particularly around the time of business planning and strategy setting Appointment of a non-exec to be a Customer Champion and the voice of the customer at board meetings Very limited, if any, evidence of Customer Challenge during either board meetings or POG meetings Lloyd s 19

20 < Picture to go here > Product Design and Risk Assessment Rupert Findlay Conduct Standards Assurance Team Lloyd s 20

21 Product Development Typical Current Financial Services Product Design Process Identify the target audience Design a product that meets their needs Robust Approval & Oversight Process Market Identification Product Monitoring Product Design Product Testing Monitor the product to see how it is performing in practice Test the product to make sure it delivers fair outcomes Lloyd s 21

22 Review Findings: Product Risk Assessment Good Risk assessments that include: i) Initial high level assessment of all products ii) More granular assessment of all factors of those products identified from stage 1 iii) Effective use of weightings covering all CR5 risks Not an exercise for its own sake but risk based and specific to the nature of the product and/ or coverholder - Clear what controls are driven from these assessments Result in consistent outcomes across the organisation Overly simplified Not so Good e.g. not considering all aspects of the standards and simply defining risk depending on whether consumer or not consumer. Overly complex - Too mechanical - No common sense oversight Allow too much free form with insufficient structure Inconsistent across open market and binding authorities Lloyd s 22

23 Review Findings: Product Controls Good Reviewed and enhanced product controls following the introduction of the standards Defined levels of product controls set for each level of assessed product risk e.g. due diligence or MI requirements Coherent framework understood across the organisation Clear lines of escalation & clear responsibilities of committees including POG Informal and formal feedback from Claims and Complaints Not so Good No defined levels of product control Inability to articulate how new products are developed Differing processes used or understood by different people Unclear purpose of committees Generally surprised at the lack of feedback loops Lack of consideration for conduct impact of underwriting changes. No consideration or definition of a material change Lloyd s 23

24 < Picture to go here > Sales and Distribution Simon Baker Conduct Standards Assurance Team Lloyd s 24

25 Review Findings: CR 9 Product Sales Good CR 9.1 Advised Selling Drafting a standard endorsement for all binding authorities setting out instructions on advised selling. Where a coverholder provides advice, monitoring staff training and providing additional assistance (where necessary). Not so Good Not knowing which coverholders (if any) are undertaking advised selling. A lack of awareness as to whether any coverholders provide advice. CR 9.2 and 9.3 Document Issuance Implementing a process to monitor document issuance. Failing to properly consider required timescales. CR 9.4 Cold Calling Drafting a standard endorsement for all binding authorities setting out instructions on cold calling. Reviewing sales scripts (whether used for cold calling or other call centre-related activities) to ensure they are appropriate. Not assessing which coverholders (if any) are undertaking cold calling. Failing to communicate stance/ risk appetite in relation to cold calling to coverholders. Lloyd s 25

26 Review Findings: CR 10 Product Service Good CR 10.1 Product Service Introducing customer survey tools to encourage direct feedback from customers about their experience. CR 10.2 Barriers Including appropriate cancellation and complaints clauses in policy wordings. Using twenty-four hour claims and service lines for appropriate products. Considering the appropriateness of non-standard rate telephone numbers for service requests. Not so Good Failing to adequately consider product service during coverholder due diligence. Charging fees for cancelling a policy (and being unable to justify those fees based on the actual cost of cancellation). Failing to adequately consider other potential barriers (e.g. lack of clarity of how to contact insurer/ broker). Charging cancellation fees during the cooling-off period. Lloyd s 26

27 Review Findings: CR 15 Distributor Appointment, Review and Audit Good Developing a form for auditors to complete to demonstrate an understanding of conduct risk. Monitoring audit reports to assess an auditor s conduct risk expertise. Inviting the agent s panel of auditors to attend a training session on conduct risk. Tailored CPB questionnaires based on nature of product and / or coverholder. Not so Good Taking a one-size-fits-all approach to coverholder due diligence. Failing to link the product assessment and coverholder approval process. Employing limited procedures to assess auditor competence and knowledge of conduct risk. Using template consumer product binder questionnaires (this may encourage copying and pasting). Failing to provide auditors with sufficient information to test a coverholder s conduct risk exposure. Lloyd s 27

28 < Picture to go here > Product Servicing Claire Holland Conduct Standards Assurance Team Lloyd s 28

29 Typical Review Approach: Claims Speak to both your Head of Claims and Claims Adjusters Topics will include: governance and oversight claims involvement in conduct oversight Management of delegated authorities Specific questions on selected contracts Most questions focused on How do you know that? Lloyd s 29

30 Review Findings: Claims Good Generally a well embedded culture of treating customers fairly Not so Good Lack of meaningful service levels internally Improving picture of communication between claims and underwriting Lack of service levels in place with third parties Some good examples of engagement with third parties with claims authority: Panel of preferred TPAs which are promoted to underwriters, brokers and coverholders Auditors of TPAs and coverholders listening to live calls as part of audit Training provided to third parties Insufficient relevant MI. Qualitative MI and MI from coverholders a particular challenge. Customer satisfaction surveys following a claim Inconsistency between an internal claims philosophy and external promotion of the claims service Lloyd s 30

31 Typical Review Approach: Complaints So far have asked about the process and oversight Who s involved? What instruction are they given? Do third parties handle complaints? How do you ensure all complaints are identified and reported? How is complaints MI used to improve products and services? For the rest of the year Lloyd s complaints team will be completing concurrent in-depth complaints reviews Lloyd s 31

32 Review Findings: Complaints Good Generally a good approach to customers by those who handle complaints Not so Good Lack of recording of complaints very low numbers complaints not being identified? Typically, effective procedures in place for following Lloyd s Complaints Code Good examples of peer review used within the complaints process Quality of root cause analysis is variable sometimes due to low volumes and no recording of non-reportable complaints Insufficient oversight of the use of redress Some training completed at third parties regarding complaints Complaints staff remuneration policies do not include positive incentivisation In addition, disappointing lack of communication with coverholders as to the Lloyd s complaints code and reporting requirements Lloyd s 32

33 < Picture to go here > Management Information Market Review of Progress towards CR13 compliance Andrew Smith Independent Consultant Lloyd s 33

34 Overview 53 Managing Agents A sample of Brokers LIIBA Lloyd s Delegated Authorities Legal & Compliance Conduct Standards 2 months 90 minute meetings High level review Confidential / Nonattributable Identifying problems and barriers Draft report seen already by Lloyd s and the LMA Lloyd s 34

35 Overview This was not about Rating or criticising individual firms Changing CR13 Amending Lloyd s timetable The focus was on potential problems at market level and to consider possible solutions to assist the market in coming into compliance. By highlighting the problems to the market, Managing Agents should now understand the issues better and have a better chance of addressing them. Lloyd s 35

36 Issues covered during meetings with Managing Agents The meaning of the deadline Completeness of data sources Managing Agents data requirements External communication and relationships Brokers Coverholders Leaders and followers Data handling & analysis turning data into MI Governance around MI What goes where? The role of the Board & NEDs Lloyd s 36

37 High level conclusions Design and Build more or less finished Risk Assessments and data requirements identified Implementation underway Communication and Gap Analyses Role of Lloyd s and Reps offices Market needs to work better together Embedding just starting Unlikely to be achieved by Early stages of analysing data and creating reports and dashboards Role of Boards/NEDs needs better emphasis Lloyd s 37

38 What are the problems and barriers? Late starting? Did not appreciate scale of task? Fear of losing business Leaders and Followers Standardisation Sharing risk assessments Stating data requirements Sharing MI Lloyd s 38

39 What are the problems and barriers? Binder Management Tools Capabilities External dependencies Governance Board input and oversight What does a good dashboard look like? How does MI link to risk appetites and business strategies? Lloyd s 39

40 What happens next? Clarify Lloyd s rules and expectations Improve market processes and protocols Developing LMA guidance best practice Lloyd s 40

41 The assurance review process Key Observations So Far Good Overarching desire and willingness to achieve good customer outcomes Appointment of additional resource (both external and internal) e.g. Conduct Risk Managers, Business Analysts, Wordings Experts etc. Recognition that customer/ conduct risk is a real threat to the business and needs adequate management Not so Good Project timescales underestimated & self-assessments sometimes proven inaccurate Insufficiently robust or timely product reviews Lack of appreciation of impact of the Standards, particularly where HPR is not a core element of business Pro-active steps to amend binder wordings with agent s preferred approach Approach could be more risk based; not a one size fits all approach for all business Communication strategies devised for gathering MI from coverholders Still a lot of work to do on MI Lloyd s 41

42 And finally. Any Questions? Lloyd s 42

43 Lloyd s 43

Lloyd s minimum standards

Lloyd s minimum standards Lloyd s minimum standards Ms11 Conduct Risk Ms12 - Operating at Lloyd s June 2014 July 2014 Disclaimer 1 Introduction The Franchise Board is concerned to protect the interests