Regulatory Compliance: Hot topics

1. Regulatory Compliance: Hot topics Iain Stephen Compliancy Services Ltd. (Associate members NACHO)

2. Current Focus • FSA - Principles based regulation - Treating Customers Fairly - Approved Persons - Recent action taken • DCA / MOJ - the claims market - problem areas - authorised firms

3. Principles based regulation Future Regulation increasingly based on • Principles / outcomes rather than focused rules • Increased flexibility on how to deliver • Reduced interference onactual measures • Address Treating Customer Fairly outcomes

4. The FSA Statutory Objectives reduce the scope for financial crime Anti-Money Laundering controls secure appropriate degree of protection for customers Correct/appropriate information and right of redress promote public understanding of the financial system Standards of clarity, integrity and fairness declarations prior to customer involvement maintain confidence in the financial system Mistakes and inappropriate behaviour rectified by law

5. FSA Key principles Operate with efficiency & economy Place responsibility on Senior management in delivering regulatory responsibilities Have proper regard to Impact of regulation Be proportionate Not stifle innovation

6. Principles for Business 1. Integrity 2. Skill ,care and diligence 11. Relationship with the regulators 10. Client Assets 3. Management and Control Principles for Business 9. Relationships of trust with Customers 4. Financial Prudence 8. Conflicts of Interest 5. Market Conduct 7. Communication With Clients 6. Customers Interests

7. Treating Customers Fairly TCF

8. TCF • Embedded in firm’s DNA • Covers whole aspect of product / service proposition • Customer centric • 6 Required outcomes

9. Outcomes 1. Customers confident dealing with firms where fair treatment is central to corporate culture Typical solutions - mission statements - visual displays of commitment to customers - driver / welcome packs - business ethos - appropriate disclosures - testimonials

10. Outcomes 2. Products / Services marketed and sold in retail marketplace are designed to meet needs of identified consumer groups and targeted accordingly Typical solutions - statistics of customer profiles - focus on credit hire / credit repair through introductory sources - like for like replacement objectives - vehicle delivery / end of hire surveys - BTE / ATE policies available for protection

11. Outcomes 3. Consumers are provided clear information and kept appropriately informed before, during and after sale Typical solutions - demands and needs analysis - summary of cover for fleet insurance deals - initial disclosure document - mitigation data / tracking - regular customer contact

12. Outcomes 4. Where advice given it is suitable and takes account of circumstances Typical solutions - scripted new claims screens - demonstrable training and competence data - call monitoring / recording - pro active quality control

13. Outcomes 5) Products / Services perform to acceptable standard as led to be expected Typical solutions - service level agreements with introducers - satisfaction surveys - recommendations - delivery monitoring

14. Outcomes 6. Consumers do not face unacceptable post sale barriers to change product, provider, submit a claim or make complaint Typical solutions - Group Fleet insurance policy describes - complaints contact action - explanation of claim procedure for accident to hire vehicle - Complaints procedure on web site

15. Objectives All senior management and staff must • Understand the role of TCF within the FSA’s regulations • Be familiar with the 6 customer outcomes resulting from TCF • Know how your firm is implementing TCF • Understand how TCF affects your role on a daily basis

16. Credit Hire businesses -Typical areas impacted • Application of CDW • Provision and understanding of relevant information • ATE / BTE policies • Consistency of acceptance criteria • Complaints handling

17. Measuring TCF • Measuring success at implementation • Fairness not simply the same as measuring customer satisfaction • Typical measurements of TCF: • Customer Complaints - No per month - Average resolution time - Trends • Proactive Quality Control (sampling the degree to which you provide appropriate information) • Employee Training and Competence • Customer Satisfaction • Vehicle delivery expectations

18. Approved Persons and the Prudential Requirements (APER) The fundamental obligations of approved persons and minimum standards of prudence

19. Approved Persons • Approved Persons are obliged to observe 7 Statements of Principle • act with integrity • operate with skill, care and diligence • observe proper standards of market conduct • must deal with regulators in an open and honest way and disclose any information the FSA should reasonably know • must take reasonable steps to ensure the business of the firm for which he/she is responsible in his/her controlled function is organised and effectively controlled • when carrying out a significant influence function, he/she must act with integrity, skill, care and diligence for that function over which he/she has control • when performing a significant influence function must take reasonable steps to ensure the firm complies with the relevant requirements and standards of the regulatory system

20. Small Firms – NOT below FSA radar 22nd May 2007 • The Financial Services Authority (FSA) today dismissed the 'folklore' that small retail firms are under the regulatory radar. Stephen Bland Director for Small Firms: • "We are sending a very clear message that small retail firms are not under the radar. Our regulatory approach is based on giving help to firms who run their businesses while Treating Customers Fairly and endeavouring to do the right thing – but coming down hard on those who don't.” • RMAR returns used to maintain up date on small firms

21. Disciplinary Action – Approved Persons • Grounds - failure to comply with a statement of principle - knowingly concerned in a contravention • Sanctions - public statement of misconduct - financial penalty - withdrawal of approval - prohibition - imprisonment

22. Disciplinary Action:High profile company examples Bank of Scotland £1.25m(AML breaches) Abbey Bank £ 2.3m(AML) Deliotte & Touche WM £795k (serious non-compliance) Allied Dunbar £725k (mishandling complaints) Morgan Grenfell £190k (conflicts of interest) Bradford & Bingley £650k (improper advice/records) AXA Sun Life £600k (serious breaches) Bank of Ireland £500k (mishandling complaints) Shell £ 17m(market abuse) Abbey (the Abbey habit) £ 800k (mishandling complaints) BP Insure Ltd Closed down bank accounts Citigroup £13.9m(trading strategy)

23. 2007 • 5 Major motor retailers fined - selling PPI - treating customers fairly - complaints handling - inadequate controls / procedures • 3 Major Finance houses - inadequate information selling PPI - training and competence

24. Closer to home 2007 • Jan - GE Capital Bank £ 691,000 (inadequate systems for selling insurances / TCF) • Feb - Nationwide £ 908,000 (ineffective systems & controls / employee lost data taken home laptop) • Feb - Capital One £ 175,000 (inadequate systems & controls for selling PPI) • Cathedral Motors Warwickpublic censure (mis-selling PPI / breaches of ICOB 4 / T & C) 2006 • Eastern Western Motor Group public censure ( ineffective control and implementation of applying ICOB rules)

25. Disciplinary Action – Approved Persons • Jan 2007 - David Whistance - ex FD - W Deb MVL plc (security brokers / fund managers) fined £80k (reduced to £30k early settlement) as firm unable to monitor financial position and comply with regulatory reporting) breach of APER 6 (manage with due skill, care and diligence Company fined £560,000 breaches of PRIN (in liquidation April 2007) • April 2007 - Alan Dennis - Director Chapel Finance Ltd. prohibited from regulated activities management failures / lack of skill, care diligence breached Principles of Business • April 2007 Philip Corrigan – Director A-T Motor Services (Co Durham) withdrawn Part IV permission failed to comply with business standards

26. Disciplinary Action • June 07 – Kilminster £42,000 - Complaints handling - Monitoring of staff Kilminster did not implement systems to ensure that its customers were treated fairly and we found a number of failings which contributed to poor quality service. Margaret Cole FSA • June 07 - Dragon Leasing -Cancelled Authorisation - failure to deliver proper standards - deliver Threshold Conditions 6 (suitability) - consistently late RMAR returns

27. Questions for you • Are your systems and controls compliant ? • Do you have a documented compliance monitoring programme • Have you reviewed your compliant status since authorisation? • Can you evidentially demonstrate controls • TCF - is your strategy documented? - can you measure it? • Do your staff practice TCF • Is TCF part of your firm’s DNA

28. Not FSA authorised? • No worries then?

29. If you think you don’t do any of these: Advising customers on non-investment insurance contracts This includes recommending a specific insurance policy to a customer. Arranging (bringing about) deals in non-investment insurance contracts This covers a range of activities, for example, introducing a customer to an insurer or insurance broker, helping someone fill in an application form and sending a customer's application to an insurer. Making arrangements with a view to transactions in non-investment insurance contracts Examples include helping a potential policyholder to fill in a proposal form or introducing a customer to another intermediary, either for advice or to help arrange an insurance policy.

30. If you think you don’t do any of these: Dealing as agent in non-investment insurance contracts This includes entering into a contract of insurance with a customer on behalf of the insurer (for example, if you issue cover notes). Assisting in the administration and performance of a non-investment insurance contract This includes FNOL of an insurance claim to 3rd party insurer and negotiating settlement on behalf of the customer. (Where you are only handling claims on behalf of the insurer and not the customer, this will not be a regulated activity. Nor is simply providing information to a claimant or insurer in connection with the assessment of a claim a regulated activity).

31. You may say: “I do not need to be authorised by FSA” You may say that - I couldn’t possibly comment……….

32. Department for Constitutional Affairs(DCA) Now Ministry of Justice (MOJ)

33. The claims regulation sector Sector No of businesses T/O in year to intending to operate September 2006 Personal Injury 1128 £ 164m Criminal Injury 340 £ 1m Industrial Injury 165 £ 1m Financial 176 £ 76m Employment 138 £ 2m Housing disrepair 65 £ 1m Total £ 245m

34. MOJ • 1353 authorised (01.08.07) - 1468 personal / criminal injury market • 6 times level anticipated • Focus on applications • PLUS looking at businesses that SHOULD be regulated

35. Objectives • To tackle practices that have led to misconceptions and false expectations of compensation claims • Improve efficiency / effectiveness of system for valid claims • Different strategies for different markets, principally - financial services - personal injury

36. Authorisation process • Worked well overall • Made significant progress towards objectives • Many applications of poor quality

37. Problem areas 5 main problem areas • Misleading advertising • Improper acquisition of business • Opaque contracts • Cases run for benefit of intermediary not claimant • Fraud

38. Problem areas • Web site content - “no win no fee” - “approved” / “recognised” by DCA - success rate of claims - compensation amount for types of injury • Vigorous action against unauthorised hospital activity • Contrived accidents – false claims £200m p.a. • Other criminal activity • Co-operation with - SRA - Insurance Fraud Bureau - Insurance Fraud Investigators Group - City of London Police

39. Ongoing activity • Web site surveillance • Elimination of Cold calling in person • Implementing short term strategy for contrived accidents • Checking Exempt Introducers monitoring • Ensure close down and re-open business with new name is eliminated • Reduction of burden on small businesses

40. Rules of Conduct • Require exemption control • Monitoring adherence to rules • Complaints monitoring • Appropriate documentation • Information disclosure - contractual - non-contractual basis

41. Coming soon • Monitoring gathering momentum • PII • Training & Competence • Enforcement action

42. Regulation • Not going away • Questions