INTRODUCTION TO THE FCA MODULE (Treating Customers Fairly..) Completion of this section will ensure that:- You understand what the FCA is; What and who they regulate; The basic principles of compliance; Responsibilities of the individual and the Authorised Company. What Is The FCA? The FCA (Financial Conduct Authority) is the regulator of the financial services industry, that regulates financial Conduct, markets and firms. It sets the standards they must meet and can take action against firms that fail to meet them. The FCA was set up by the Government originally called the Financial Services Authority (FSA) and is an independent body financed by the financial services industry and Her Majesty's Treasury appoints the FCA Board. In turn the Board sets the FCA's overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive. As the FCA is an independent body they do not receive any funding from the Government, but finance their work, through FCA fees charged to all authorised firms, that carry out activities, they regulate and fines imposed for firms failings. What Does The FCA Do? The FCA aim is to maintain confidence in the UK's financial marketplace. As a broad description, their directive is to achieve a market place that is run in an efficient, orderly and clean manner whilst ensuring that consumers receive a fair deal, by being properly informed and appropriately protected. It has four main objectives under the Financial Conduct and Markets act 2000:- 1. Maintaining market confidence Having a controlling body enforcing people to be responsible and accountable strengthens public and industry confidence. The FCA achieve this by, amongst other things, supervising support bodies (e.g. The Stock Exchange), regulating financial institutions (Banks and Insurance Companies), mediators (Insurance Brokers or retailers mediating financial or insurance related products, conducting market surveillance, and transaction monitoring. 2. Promotion of public understanding of the financial system Due to the complexity of the financial system the FCA insist that sellers gain all the knowledge, aptitude and skills they need help buyers become informed consumers, so that they can manage their financial affairs more effectively.
3. Securing an appropriate degree of protection for consumers Ensuring customers are treated correctly and scrutinising those who wish to sell insurance and financial products, before they can begin to operate ensures only those firms and individuals satisfying the necessary criteria (including honesty, competence and financial soundness) engage in regulated activity. Once authorised, the FCA expect firms and individuals to maintain particular standards set by them and ongoing the FCA monitor how far firms and individuals are meeting these standards. Where serious problems arise the FCA investigate and, if appropriate, discipline or prosecute those responsible for conducting financial business outside the rules. The FCA can also use their powers to restore funds to consumers and and offer recourse against unfair actions and penalty to the perpetrator. 4. Fighting financial crime To ensuring criminals do not profit from utilising money laundering techniques, the FCA's work focuses on three main types of financial crime i.e. money laundering, fraud, and criminal market misconduct (such as insider dealing). The overall effect is to reduce the extent to which it is possible for business carried on by approved and regulated people to be connected with financial crime. How and Why does this affect you? In early 2005, the FCA s remit ( previously the FSA ) was extended to include Insurance Mediation, as a response to the European Insurance Mediation Directive and brought the Retail Motor Industry into scope. Therefore any automotive dealer that is involved in a regulated activity must seek authorisation from the FCA before that activity can be performed. What is a Regulated Activity? The activities included are:- Introduction of insurance products; Proposal of insurance products; Preparation of insurance contract through to conclusion of contract; Administration of insurance contract; Handling of claims for insurance contract; Mediation/complaints procedures. This includes notifying an insurance claim to the insurer and negotiating settlement of the claim on behalf of the customer. If you are only handling claims on behalf of the insurer and not the customer, or simply providing information to a claimant or insurer in connection with the assessment of a claim, you are not involved in a regulated activity.
How does a firm become registered with the FCA? If, a dealer is not FCA authorised, they cannot sell or administer regulated insurance products. In order for dealers to become approved by the FCA to deal in General Insurance they must either:- 1. Become directly FCA authorised. Apply and become authorised by the FCA. 2. Become an Appointed Representative (AR) An Appointed Representative is a firm that does not wish to have its own direct authorisation, but has an agreement with a primary FCA Authorised Firm (the principal, i.e. Automotive Compliance Ltd.) and operates under their authorisation. The principal accepts full responsibility for the Compliance, FCA Reporting and Staff Accreditation Testing of the Appointed Representative. Some motor manufacturers, Warranty companies and finance houses offer this route to control the sale of their products. However, if you are a multi insurance seller you would have to be authorised by every single product supplier. One rule of the FCA is that you either get appointed in your own right or become an Appointed Representative by your suppliers - not both. 3. Be an Introducer Only (passive) If you do no more than introduce your customers to insurers or brokers, you may be excluded from regulation. For example, you may have brochures or leaflets on display, but do not sell or offer product advice.. or, for example, you would be able to rely on this exclusion to give customers information about a specific kind of car insurance or the contact details of car insurance provider, without being authorised. The customer then approaches the insurance company themselves to set up the insurance, with no advice or help from the dealer.. You can rely on this exclusion even if you receive a commission from Insurers for introducing your customers to them. 4. Not selling insurance products Thereby missing out on an important revenue stream for the dealer and denying the customers the opportunity buying advantageous insurance products. Also dealers who offer regulated products increase their chances of ongoing and repeat sales. Authorised firms were expected to be complying with all aspects of the rulebook from the 14th January 2005.
Business Principles for regulated firms are. This is what the FCA are trying to achieve:- 1. A business must conduct its business with integrity. 2. A firm must conduct its business with due skill, care and diligence. 3. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. 4. A firm must maintain adequate financial resources. 5. A firm must observe proper standards of market conduct. 6. A firm must pay due regard to the interests of its customers and treat them fairly. 7. A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. 8. A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client. 9. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment. 10. A firm must arrange adequate protection for clients' assets when it is responsible for them. 11. A firm must deal with its regulators in an open co-operative way, and must disclose the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice. If a regulated firm follows these principles then they will be deemed by the FCA of Treating Customers Fairly. Item 6 above is central to this initiative.
What are the Rules? Whilst the Business Principles above are a general aim, they form the basis of specific rules that are set out in the FCA Handbook and are the standards that firms must meet to comply with FCA requirements. The FCA Handbook lists and explains each rule in detail and are called ICOB Rules For General Insurance products, which is the area of operation for the Motor Trade the 8 ICOB rules are as follows : ICOB = (INSURANCE CONDUCT OF BUSINESS rules) ICOB 1 Application ICOB 2 General matters ICOB 3 Distance communications ICOB 4 Information about the firm, its conduct and remuneration ICOB 5 Identifying client needs and advising ICOB 6 Product information ICOB 7 Cancellation ICOB 8 Claims handling What Products are in scope of FCA Regulation? For the UK Retail Industry insurance policies regulated by the FCA, most commonly sold within the Motor Industry include :- Credit Protection Insurance ( although most UK leanders have now withdrawn this product Extended Warranty and Mechanical Breakdown Products (not Dealer Guarantee Schemes and Manufacturer Warranties) Roadside Assistance/Rescue/Recovery Insurance Guaranteed Asset Protection (GAP) Motor vehicle Insurance MOT Insurance Tyre Insurance Early Termination Gap Key Insurance Some travel insurance or forward travel Insurance Phone insurance Dings and Dent Insurance
Does a firm have any choices to Make? If you are mediating insurance you have no choice but to be registered and regulated by the FCA. There are some choices that you can make within the regulation once registered. A firm may choose to sell any general insurance product as long as the insurance provider is also FCA regulated. If however you are an Appointed Representative, you Principle must approve your supplier. Firms are not forced to offer any insurance, but once they have decided to do so, you must make them available to all eligible customers. A firm may choose between making advised sales or non-advised sales. But both types of sales need correct disclosure to consumers, and those that give advice must record the reason for the recommendation via a compliant Demands & Needs (SODAN) Non-Advised Advised For example you may record in writing the following for a non-advised sale as follows:- Mechanical Breakdown Insurance on motor vehicles will meet the demands and needs of those people who wish to protect their vehicle from the unforeseen costs of mechanical failure For advised sales you may record the following:- Mechanical Breakdown Insurance on motor vehicles will meet the demands and needs of those people who wish to protect their vehicle from the unforeseen costs of mechanical failure. As you are responsible for the repairs to this vehicle and you are keeping the vehicle beyond the mileage and/or age restrictions of the given warranty we recommend an extended Mechanical Breakdown Insurance This type of record is known as a Demands and Needs statement.
What else should a firm do? Clearly the firm must ensure that all the relevant ICOBs are followed. Additionally the FCA has five main focus areas for managing staff:- 1. Recruitment Firms should take into account the knowledge and skills of the person being recruited in relation to the requirements of the role. They should also gather sufficient information about the person's previous relevant activities and training. 2. Training Firms should determine an individual's training needs and organise appropriate training to address those needs. Individual's training records must be kept for a minimum period of three years after the employee leaves the business. 3. Attaining competence An employee must not engage in or oversee an activity until they have been assessed by the employer or Principle if an AR, as competent (unless he is supervised). This is usually attained by taking an Annual Examination 4. Maintaining Competence Firms must have appropriate arrangements to ensure that an individual maintains competence, should organise structured planned refresher training and ensure all staff, that sell or recommend products undergo, Annual Accreditation Testing. 5. Supervising There must be suitable supervision of employees, including those who are attaining competence and those who have been assessed as being competent. The GABRIEL Firms must tell the FCA what s going on in their business via the GABRIEL GAthering Better Regulatory Information ELectronically). This replaced the RMAR reports during 2008 and is an online form that must be submitted to the FCA every 6 months for larger turn-over 3 months. It records all insurance related mediation activity including turnover, profitability, sales, training and complaints. In the case of ARs, the Principle reports on the ARs behalf.
So what do you have to do as an Individual? Those giving advice must follow the rules and the business principles above. Treating Customers Fairly All firms regulated by the FSA have to support the FSA Handbook s principle that a firm must pay due regard to the interests of its customers and treat them fairly. The TCF ( treating customer fairly ) principle aims to raise standards in the way firms carry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry. Specifically TCF aims to: help customers fully understand the features, benefits, risks and costs of the financial products they buy minimise the sale of unsuitable products by encouraging best practice before, during and after a sale In summary, for selling products individuals must:- Provide an Initial Disclosure Document outlining your regulation status and Conduct Publicise a complaints process Run through Demands and Needs Statements so that consumers understand why they need insurance and what you have recommended Give a clear Statement of Price Give out Key Facts and Policy Summary Point out where to find exclusions and other key information Have the ability to show evidence of Treating Customers Fairly In summary, for those handling insurances but not selling (for example administrators or claims handlers in service departments) you must:- Provide Policy documents Handle Claims Deal with Cancellations
What Happens If The Rules Are Broken? Should an authorised firm find itself in breach of any of the rules, the FCA have a variety of penalties they can adopt. This penalty will depend on the severity of the breach and the resulting severity of the affect or risk for the consumer. Penalties will include (but are not restricted to):- Consultation with regulated firm to support the rectification of an issue and to ensure processes are changed to alleviate re-occurrence; Prohibition orders (immediate stop to the sale of General Insurance Products, in many cases because of Manufactures Warranty and Used Car Warranty this will cease the Sales of Vehicles); Monetary fines; Criminal charges and potential jail sentences Any day-to-day complaints made regarding the sale of General Insurance products will fall under the remit of the Financial Ombudsman's Scheme (FOS). This service will be open to all customers of authorised General Insurance organisations once they have exhausted the firm's own complaints procedure. If a complaint cannot be satisfied by the firm's own procedures the Ombudsman scheme will be available and will charge a case fee to the authorised firm. Initial suggestions are that there will be no fee for the first couple of complaints but each subsequent time a complaint is raised the proposed fee will be charged and will not be refunded irrespective of the outcome of the complaint. An example of where things can go wrong... Selling GAP on a vehicle outside the insurers parameters would mean that the customer can not make a claim. In this case the policy was miss-sold, is in breach and is liable to penalty. Congratulations, You have reached the end of this online training module. You now need to take the knowledge test to be considered competent in this unit.