UK Parliament publishes Financial Services Bill

On 27 January 2012, the UK Parliament published the text of the Financial Services Bill, together with explanatory notes. In addition, HM Treasury published A new approach to financial regulation: securing stability, protecting consumers. The document summarises the key policy decisions taken on the new regulatory structure and sets down the Government’s response to recent reports by both the Joint Committee and Treasury Select Committee. It also includes the proposed Memorandums of Understanding on crisis management and international organisations. The following issues will be of particular interest to insurers and intermediaries:

The PRA’s insurance objective

The HM Treasury paper confirms that the insurance objective of the Prudential Regulation Authority (PRA) was supported by a range of respondents to the June 2011 consultation, including insurance companies and their representatives. In relation to with-profits policies, the draft Bill supplemented the insurance objective to confirm that the PRA will be responsible for ensuring that the reasonable expectations of policyholders are protected. According to the paper, this provision was also broadly welcomed.

However, the Joint Committee suggested that the phrase “reasonable expectations” of policyholders should be replaced (for further information, please refer to Insurance updater 22 December 2011). The Government has now amended the Bill to focus on “decisions by insurers relating to the making of payments under with-profits policies at the discretion of the insurer (including decisions affecting the amount, timing or distribution of such payments or the entitlement to future payments)”. In addition, the Bill now requires the Financial Conduct Authority (FCA) and the PRA to enter into, and maintain, arrangements for the FCA to provide the PRA with information and advice in connection with the regulation of with-profits policies.

It should be noted that a number of respondents to the June 2011 consultation questioned whether the reference to protecting “future policyholders” in the PRA’s insurance objective could prove to be ambiguous. Respondents also queried whether the insurance objective would be consistent with the full implementation of Solvency II.

Influencing EU and international decisions

In response to the Government’s proposals, many have expressed concern that the European Supervisory Authority’s regulatory responsibilities are divided based upon subject area, whereas the new UK regulatory bodies will be split into prudential and conduct regulation across all subject areas. This means that the PRA will hold the UK’s voting seat in the European Insurance and Occupational Pensions Authority (EIOPA). Additionally, the PRA will represent the UK in the International Association of Insurance Supervisors (IAIS).

This creates the risk of the UK not speaking with one voice on the international stage and one body may have to represent the UK’s position on a subject where it is not the national expert. The Memorandum of Understanding on international organisations sets out a framework for consultation and cooperation amongst the relevant authorities in order to ensure that the UK takes a coherent position internationally and a consistent line in discussions with its international partners. Amongst other things, the Memorandum of Understanding confirms that where not all the UK authorities are represented in international organisations and bodies, the UK authorities that are represented shall, in a timely manner, consult with and keep the other UK authorities informed in relation to any matter of common interest. It also provides for the establishment of an International Coordination Committee, which will be responsible for ensuring that the UK authorities act in accordance with the principles set out in the Memorandum of Understanding.

Early publication of disciplinary action

As previously reported, the Bill will amend the Financial Services and Markets Act 2000 (FSMA) to relax the general prohibition against the publication of warning notices. In its recent report (published on 19 December 2011), the Joint Commission argued that the requirement to consult the firm or individual subject to the notice ahead of disclosure should be removed. Conversely, industry respondents were either opposed to the power in principle or called for it to be subject to additional safeguards.

The Government believes that the proposal detailed in the June 2011 consultation strikes the right balance between making the power useable and providing appropriate safeguards for those affected. The Government has, therefore, not made any changes to this power.

Next steps

The Financial Services Bill had its second reading in the House of Commons on 30 January 2012. It will now make its way through Parliament, and the Government has confirmed that it is firmly committed to securing passage of the Bill by the end of 2012, so that the changes can be implemented in 2013.

For further information:

Financial Services Bill

Financial Services Bill - Explanatory Notes

A new approach to financial regulation: securing stability, protecting consumers

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FOS publishes letters on disputes regarding the sale of PPI

On 27 January 2012, the Financial Ombudsman Service (FOS) published two separate letters, addressed to financial services practitioners and claims-management companies. Both letters consider cases where a dispute arises as to whether or not a Payment Protection Insurance (PPI) policy was sold to a consumer. The letters explain that these disputes tend to arise when a consumer says that they are concerned that they may have been mis-sold a PPI policy in connection with a credit agreement, but cannot recall the precise details of the transaction.

The letters suggest that it is in everyone’s interest to ensure that unnecessary enquiries and disputes are minimised. To this end, the FOS expects both the financial business involved and the consumer (and any representative) to be open and cooperative in helping each other uncover the facts of the situation whenever there is genuine uncertainty as to whether a PPI policy has been sold.

The FOS recently hosted an event for representatives of financial businesses and claims-management companies, at which they jointly identified practical steps designed to improve the position for consumers and to avoid unnecessary complaints and delays. The letters build upon the outcomes of the event and set out the observations of the FOS on the steps it would be reasonable to expect parties to take.

Financial businesses

Financial businesses cannot expect a consumer to recall all the details of a transaction (or necessarily to have retained paperwork from that time). However, evidence available to the FOS suggests that in some cases financial businesses have not exercised reasonable diligence in responding to enquires about whether or not a PPI policy was sold. The letters explain that, before a complaint is referred to the FOS, it expects to see evidence that the financial business has taken the following steps:

• Carried out a reasonable search of its systems (including archive systems) to trace the consumer and to identify whether there is (or was) a PPI policy.
• Reviewed all available information about the consumer, including any details that may have changed since the time of sale.
• Taken account of the fact that consumers may not know the exact date that a policy was taken out.
• Asked for further information (if needed) to help trace the consumer.
• Clearly set out in its final response the level of investigation that has been carried out.

Where the FOS considers that the business has acted reasonably in taking the above steps, it confirms that it is unlikely to charge a case fee.

Claims-management companies

The FOS has also suggested a number of steps that claims-management companies can take to help financial businesses respond to queries openly and effectively. In the view of the FOS, a simple general statement that a consumer was, or may be, a client of a lender (without at least some supporting information) does not represent appropriate claims-management activity, nor a matter that would warrant investigation. Therefore, before a complaint is referred to the FOS, it expects to see evidence that the claims-management company has taken the following steps:

• Obtained relevant paperwork from the consumer where this is available (and carried out a preliminary check of credit card statements or loan documentation, to attempt to establish whether a PPI policy exists).
• Provided enough information to enable the business to carry out a search of its systems.
• Completed the PPI consumer questionnaire as fully as possible and sent it to the financial business to help it assess the complaint.
• Provided any additional information reasonably requested by the financial business.
• Considered carefully the explanation and evidence given by the financial business.

To help the parties involved, the FOS has also produced a number of case studies. These cover a range of situations where parties have been in dispute about whether a consumer had a PPI policy or not and include examples of how the actions of claims-management companies and businesses alike can affect the efficient handling of a complaint.

For further information:

Financial services practitioner letter

Claims management company letter

Online PPI resource - How does the ombudsman approach redress where a PPI policy has been mis-sold?

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Case notes

The following case summaries have been written by Professor Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.

Links have been provided to copies of the judgments on Bailii wherever possible.

Sealion Shipping Ltd v Valiant Insurance Company [2012] EWHC 50 (Comm)

The defendant insurer issued a Loss of Hire marine policy to the claimants on the vessel Toisa Pisces, for the year commencing 20 May 2008. The daily sum insured was US$70,000, limited to 30 days, and the excess clause stated “14 days any one occurrence, 21 days in respect of Machinery claims”. The policy incorporated the terms of the Institute Time Clauses – Hulls 1983, covering loss or damage caused by negligence of master, officers, crew, pilots, repairers or charterers “Provided such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers”. The assured suffered a propulsion breakdown on 25 February 2009, and claimed for US$2,100,000, the equivalent of 30 days' offhire. The insurers were held liable to make payment.

1. The policy could not be avoided for non-disclosure or misrepresentation.

(a) The statements that there had been one hull claim when there had been two, and that the vessel had not been offhire when it had been offhire for 10 days in 2004, were not material.
(b) The statement by the broker that there had been “no major business interruption” was true, and the statement that there had been an “excellent hull record” was a statement of the brokers' opinion under s 20(5) of the Marine Insurance Act 1906 and it was made in good faith.
(c) The allegation that the claimants had failed to disclose design defects would be rejected on the ground that the claimants were unaware of them.

2. There was no want of due diligence by the claimants. The test for due diligence was reasonableness, but the inspection of the vessel carried out in 2006 by experts had not been negligent and the claimants were in any event entitled to rely upon what they had been told by the experts.

3. There was only one occurrence and only one deductible. Although there had been three breakdowns, in February, March and April, these were not three separate occurrences for the purposes of the deductible because one thing had led to another.

For further information: Sealion Shipping Ltd & Anor v Valiant Insurance Company [2012] EWHC 50 (Comm) (20 January 2012)

International Energy Group Ltd v Zurich Insurance Plc UK [2012] EWHC 69 (Comm)

The assured employer exposed an employee to asbestos for a period of 27 years. In that period the defendant insurers were on risk as employers’ liability insurers for six years. The employee contracted mesothelioma, and judgment was obtained against the employer in the sum of £278,451.60. The claim was governed by the law of Guernsey. The employer claimed the full sum from the insurers.  

Cooke J held that, because the claim was governed by the law of Guernsey, the Compensation Act 2006 was not applicable. That meant that the claim had to be apportioned to each exposure, with the result that – assuming regularity of exposure – the assured was in the period of insurance liable for only 6/27ths of the loss. That meant that the insurers were liable for only 6/27ths of the liability. Had the employee’s claim been governed by English law, the Compensation Act 2006 would have applied and the employer would have been 100 per cent liable for each exposure, so that the insurers would equally have been 100 per cent liable (subject to the right to claim contribution from other insurers on risk in the period of exposure).

For further information: International Energy Group Ltd v Zurich Insurance Plc UK [2012] EWHC 69 (Comm) (24 January 2012)

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