PROTECT

1. PROTECT LEGAL AND REGULATORY REVIEW MARCH 2014

2. In the next 30 minutes we are going to. . . • Talk about a sensible Ombudsman • Learn how not to be fined £30,647,400 • Smirk at an FCA man getting a bo**ocking • And find out why . . . (c) Paginator Limited 2014

3. These two are working at FCA (c) Paginator Limited 2014

4. A lot to get through • All the key events • Then the “biggies”:- • Consumer Credit • The HomeServe Enforcement • The Add-on Insurance Market Study – Preliminary Findings (c) Paginator Limited 2014

5. December Compliance Team (c) Paginator Limited 2014

6. The Consumer Contracts (Information, Cancellation And Additional Charges) Regulations 2013 • Made 11 December 2013 • Come into force on 13 June 2014 • Apply to “distance contracts” • Generally do not apply to “services of a banking, credit, insurance, personal pension, investment or payment nature” • But we do need to know about three of the Regulations . . . (c) Paginator Limited 2014

7. Regulation 38 • Does apply to financial services contracts • Provides that, if a consumer withdraws from, or cancels, a main distance contract “anyancillary contracts” (e.g. a warranty) are automaticallyterminated • BIS Guidance says that automatic termination “does not prevent the trader from contacting the consumer for their express consent should the consumer wish to keepa warranty, for instance if the warranty purchased will cover other items” – a bit odd since the warranty has been automatically terminated! • Be aware of ICOBS 7.2.10G. “A consumer's notice to cancel a distance contract may also operate to cancel any “attached” contract which is also a distance financial services contract”. This is not “automatic” as the consumer may give notice that the cancellation is not to operate to cancel the attached contract. (c) Paginator Limited 2014

8. Regulation 39 • Provides that no sum should be payable by a consumer in a distance contract “in addition to remuneration agreed for the trader’s main obligation unless, before the consumer became bound by the contract, the trader obtained the consumer’s express consent”. A pre-ticked box does not constitute “express consent”. • Regulation 39:- • does not apply if the main contract is a financial services contract; but • does apply where the additional payment is for such services • So Regulation 39 prohibits pre-ticked boxes to purchase add-on insurance - but does not ban them if insurance is the main contract • Note, however, that ICOBS 3.1.17R already effectively bans pre-ticked boxes for distance insurance contracts (as might Principles 6 & 7 for any contract) • FCA proposes a total ban as a remedy in the Add-on Insurance Market Review (c) Paginator Limited 2014

9. Regulation 41 • Bans premium rate help telephone lines • Does not apply to financial services contracts • But FCA announced that it “is committed to considering whether it could introduce a similar prohibition for those calling banks, insurance companies and investment brokers”. • Watch this space (c) Paginator Limited 2014

10. Before we move into 2014 . . . • Martin Wheatley’s Christmas Message • “I want to look ahead to 2014 and what is likely to be an important period of consolidation. Less ‘exciting’ maybe than previous years – but also a platform to bed in regulatory change and move things forward”. • We need to pause to think about that . . (c) Paginator Limited 2014

11. “A platform to bed in regulatory change” • FCA think that they have now delivered all they need you to know to be able to deliver on FCA’s expectations for conduct of business outcomes • It has given you its fundamental expectations for:- • Meeting the Principles for Business • Delivering the TCF Outcomes and eliminating unfair terms • Product design, (“target market”) suitability and distribution • Ongoing product governance • Claims, promotions and incentives • FCA will simply now enforce (brutally) against any breaches - and focus on ensuring that senior management are capable and engaged (c) Paginator Limited 2014

12. In a few moments we will find out how FCA will “move things forward” The real world Consumer Behaviour Price Ratios Market (c) Paginator Limited 2014

13. But first – January 2014 (c) Paginator Limited 2014

14. The Financial Services and Markets Act 2000 (Designated Consumer Bodies) Order 2013 • In force 14 January 2014. • Designates the consumer bodies (including CAB and the Consumer’s Association) which can bring “super-complaints” to the FCA, on behalf of consumers • The “super-complaint” system is now part of FCA’s role in ensuring that competition works well in the interests of consumers within the financial services market. • These bodies can submit a complaint, on behalf of consumers generally, if they consider that a feature, or combination of features, within a market for financial services in the UK is seriously damaging the interests of consumers • The decline of PPI began with a super complaint made to the OFT • FCA seems to be doing pretty well itself on competition - without any super complaints! (c) Paginator Limited 2014

15. Financial Promotions • MoneySupermarket.com required to formally agree not to publish or broadcast misleading advertisements • FCA announced that “the quality of financial promotions will be central” to its work in 2014 • FCA focus is on the fact that the context or environment in which a product is promoted can hugely affect whether the information is found by the consumer to be clear fair and not misleading • This is the reason for the need for “simple” products. You will increasingly be judged on consumer outcomes from your promotion – not product content • Always review product promotion and description from the consumer’s perspective – not yours (c) Paginator Limited 2014

16. The PRA • Yes it does exist!!! • Announced it would replace its Handbook with a . . Rulebook!!! • The idea is to get rid of the legacy link with FSA and be seen to be entirely separate from FCA and focused on prudential supervision (c) Paginator Limited 2014

17. ABI Good Practice Guide for Mobile Phone Insurance • Produced in response to FCA’s Thematic review • Good (and fairly brief) illustrations of how to handle the fundamental issues of:- • Product Design • Product Governance • Product Content • Financial Promotions • Consumer Comprehension • Claims Handling • But of interest for another reason . . . (c) Paginator Limited 2014

18. The Perimeter of Regulation • The Guide is specifically addressed to administrators and retailers and even to “retailers selling under the connected contract exemption”! • ABI only has any “jurisdiction” over its insurer members • Retailers undertaking connected contract sales are outside the scope of FCA regulation • Notwithstanding - FCA is increasingly focusing on the distribution models of regulated intermediaries and pressurising them to procure good consumer outcomes by unregulated retailers • ABI is merely reflecting this approach. (c) Paginator Limited 2014

19. The Consumer Rights Bill • Introduced into Parliament on 23 January • Will be subject to changes • Re-enacts the Unfair Terms in Consumer Contract Regulations 1999 with significant changes • The big change will be that “core terms” (price and cover) will be assessable for fairness unless they are “transparent” and “prominent” • Other clauses will mean that many elements of cover will no longer be regarded as core – and will be assessable for fairness however prominent they may be (c) Paginator Limited 2014

20. February (c) Paginator Limited 2014

21. This is where we . . . • Talk about a sensible Ombudsman; • Smirk at an FCA man getting a bo**ocking; and • Find a good question to ask candidates in the forthcoming European Parliament elections (c) Paginator Limited 2014

22. The Sensible Ombudsman (c) Paginator Limited 2014

23. A Speech to the Insurance Institute • More sense in 20 minutes than out of FOS in the past 10 years • Deals with the reality of changes in consumer expectation and behaviour in a digital market - and the inevitable implications for insurance • Discusses the issue from your perspective in a sensible and balanced manner • Hugely refreshing and thought provoking - anyone interested in “simple products” should read it (c) Paginator Limited 2014

24. And now (c) Paginator Limited 2014

25. FCA get a bo**ocking . . . • Martin Wheatley met the Treasury Select Committee! • He is told:- • FCA have not got to grips with controls over sales incentive schemes • He has failed to convince them that he can properly describe what constitutes an “advised sale” • More on incentives in a minute – so let’s look at advised sales (c) Paginator Limited 2014

26. Advised or Non-advised? • Treasury Select Committee:- “once customers have been taken a couple of steps through some sort of a guided process [e.g. on a website], a lot of people would feel they have been advised” • Martin Wheatley:- “we are spending quite some time talking to the industry about whether we need to revise our guidance and make products fall clearly into one class or the other” • Treasury Select Committee:- “We have agreed that this is a concern – I am asking you for evidence that you are bringing some clarity to the piece as uncertainty could drive firms out of the market altogether as they fear the consequences of a regulator changing its mind at a later point” (c) Paginator Limited 2014

27. Ouch!! • Whilst it is lovely to see FCA get told off – be afraid • The last time the Treasury Select Committee humiliated the Regulator we got Principles Based Regulation in response! • Do make sure you really do understand the current distinctions between advice and a non-advised sale – many do not • Be ready for more! (c) Paginator Limited 2014

28. And just to add to your work list . . • IMD2 • It hasn’t arrived – it hasn’t gone away • Changes proposed and approved by the EU Parliament on 28 February – most not helpful • Next steps is “trialogue negotiations” – later in 2014 “once the Parliament is in place following the May Elections” • So – you can amuse yourself by asking your Euro-candidates . . . (c) Paginator Limited 2014

29. What will your position be in the trialogue negotiations on IMD2? (c) Paginator Limited 2014

30. Into March . . . (c) Paginator Limited 2014

31. March – so far • The Mortgage Credit Directive is made – must be UK law by 21 March 2016 – big implications if you have any interest in MPPI • FOS published its complaints data. Non-PPI complaints are down 8% and the average uphold rate in favour of the consumer is just 51% • Maybe the Treasury Select Committee should next ask FCA why it continues to cheerlead “complaining” when half of the ensuing “complaints” are groundless? • But be careful you don’t get things wrong. CPP are paying out £1.3 billion in redress and Yorkshire Building Society’s redress package (of a mere £8.4m) includes redress to all arrears customers - even those with no loss - “to avoid lengthy delays and uncertainty” (c) Paginator Limited 2014

32. This leaves us with the “Biggies” • Consumer Credit • The HomeServe Enforcement • The Add-on Insurance Market Study – Preliminary Findings (c) Paginator Limited 2014

33. Consumer Credit • Regulated by FCA from the end of the month – a massive cultural change for any previously unregulated firm • FCA:- • produced the final rules just one month ahead of regulation! • is pretty overwhelmed by the process - leading to neglect of other areas • admitted, in Risk Committee, that it doesn’t understand the market because it has no information gathering powers yet!! • There are particular issues for those firms which carry an FCA authorisation for insurance mediation but only undertake “low risk” consumer credit • I have produced an entry level “Desk Top Guide” to the regime (c) Paginator Limited 2014

34. And now – how not to be fined £30,647,400 £30,647,400 (c) Paginator Limited 2014

35. The HomeServe Enforcement • When FCA says it hopes that all it has to do in 2014 is “to bed in regulatory change and move things forward” - it assumes that nothing similar to what happened at HomeServe will ever happen again • I think there are risks that it will (c) Paginator Limited 2014

36. What went wrong at HomeServe • “HomeServe failed to ensure that its senior management undertook adequate regulatory training, which led to a lack of regulatory knowledge and a failure adequately to identify and address issues that created a risk that customers may not be treated fairly and contributed to a culture that placed more importance on generating profits” • Cost cutting led to the redundancy of the Compliance Director! • HomeServe also “failed to identify and address inappropriate bias within the remuneration structure for the sales teams, which incentivised staff to increase the volume of products sold, irrespective of the customer’s need for the product”. (c) Paginator Limited 2014

37. What I think • Most senior management remain either uninformed or unengaged with what FCA now assumes to be expectations bedded into firm cultures • Senior management roles remain to maintain a culture that places “more importance on generating profits” • That is a huge gap between regulatory expectation and capitalist reality • Failure to close that gap (by both FCA and senior management teams) can only lead to increasing fines and departures from the market (c) Paginator Limited 2014

38. What is needed (c) Paginator Limited 2014

39. Incentives • Hot on the heels of the HomeServe enforcement came TR14/4 – FCA’s update on the thematic work on incentives • FCA underlines a “lack of awareness” of the issues especially within smaller firms • Most firms are small firms!! • Even where firms are aware, and have removed or reduced sales incentives, FCA underlines the tension between compliance and profit by saying:- “There is a question about whether the many new schemes that have eliminated or significantly reduced the amount of bonus driven by sales will last, for example if there appears to be a negative impact on profits”. (c) Paginator Limited 2014

40. That is a regulator asking . . . • If staff or firms are not incentivised to sell financial services – will they continue to bother to do so? • This raises the key issue . . • If firms don’t sell insurance - will customers bother to buy it? (c) Paginator Limited 2014

41. Which brings me neatly to . . (c) Paginator Limited 2014

42. Remember what he said . . • That conduct of business expectations are now fully in place • They will simply be vigorously enforced • He said that FCA would now concentrate on “moving things forward” • Moving what forward? • To understand this we need to look at FCA’s objectives . . . (c) Paginator Limited 2014

43. FCA’s three operational objectives • Delivering consumer protection - securing an appropriate degree of protection for consumers • Enhancing market integrity − protecting and enhancing the integrity of the UK financial system • Building competitive markets − promoting effective competition in the interests of consumers (c) Paginator Limited 2014

44. The Competition Objective is nothing to do with . . . • Meeting Rules • Running a Principled Business • Good Product Design • Excellent Claims Service • It is in fact nothing to do with what any individual firm does (c) Paginator Limited 2014

45. It is simply market economics • It means FCA trying to establish:- • how a competitive market is built; and • how effective competition can be generated in the interests of consumers • FCA have no more idea than you or I how this can be done – but they have a legal objective to find out • They have chosen the add-on insurance market as their first go at this (c) Paginator Limited 2014

46. If FCA don’t know how to do it – who does? PSYCHOLOGISTS ECONOMISTS (c) Paginator Limited 2014

47. When I say who “knows” – I mean who “has a theory” • “I predict that the economy will grow by 3%” • “I may well be proved wrong in a year’s time” (c) Paginator Limited 2014

48. And when you apply behavioural science to commercial markets It gives a whole new meaning to the word “Shrink”!!! (c) Paginator Limited 2014

49. So when you read the Add-on Market Provisional Findings . . . • It is nothing to do with your conduct of business; • The theories which are applied are not necessarily correct; • Not all necessary evidence may have been put into the equation • The findings are odd, and currently (save for GAP) pretty limited (but more to come) • But – unless you have the services of . . . (c) Paginator Limited 2014

50. Some of these . . . you will struggle to argue with them (c) Paginator Limited 2014