By Stephen Netherway, Partner at CMS Cameron McKenna
The first half of 2013 has heralded a number of important changes to the regulatory and legal framework for UK insurance brokers. Whilst the full implications of these changes on brokers’ businesses are not yet clear, the second half of the year is likely to pose a number of challenges as brokers must adapt to a changing legal and regulatory environment.
The Consumer Insurance (Disclosure and Representations) Act 2012
Coming into force on 6 April 2013 and replacing the consumer’s duty to disclose material facts with a duty to ‘take reasonable care not to make a misrepresentation to the insurer’. Consumer insureds are no longer required to volunteer information to their insurer when applying or renewing insurance. Insurers must ask clear and relevant questions and the consumer must answer only those questions that are posed by the insurer honestly and reasonably.
The Act’s clear intention is to see an increase in the number of claims being paid, which should, in theory, lead to a corresponding reduction in broker exposure. However there are concerns that the Act will in fact expose brokers to greater liability if the underwriting information they gather is incorrect and this leads to a claim being refused.
Brokers will need to ensure that they obtain the necessary information from an insured by asking the right questions during the sales process. Those brokers holding a delegated authority will also need to be mindful to elicit clear instructions from insurers on what information they need from the insured and how they are to gather this information.
Brokers will also need to be mindful that underwriters for whom they run consumer/personal lines books may not appreciate that an increase in the number of claims is due to the Act’s operation as opposed to a deterioration in the quality of the risk base.
Whilst the Consumer Act only applies to consumers, the Law Commission and the Scottish Law Commission have made proposals for reforms to the duty of disclosure for business insurance. The Law Commissions have proposed a reciprocal disclosure process under which the insured should make a fair presentation of the risk which will put an insured on enquiry to ask the appropriate questions.
According to the Law Commission, these proposals are intended to encourage agreed information protocols on what information needs to be disclosed for different areas of business. It is also intended to give greater confidence to insureds that they have disclosed all the required information to insurers.
The proposals also include the introduction of proportionate remedies where misrepresentation or non-disclosure for business insurance is not deliberate or reckless. This reform received strong support during the consultation process, and would mean that the remedies available would reflect what the insurer would have done if the policyholder had fulfilled its duties of disclosure.
It is anticipated that the Law Commissions will produce final reports and a draft Bill by either the end of 2013 or early 2014. However it remains to be seen whether there will be sufficient parliamentary time for the Bill to be passed before the next general election or, indeed, whether the English Law Commission will seek to use its special procedure in 2014 to avoid clashing with the next general election. This is likely to focus the Law Commissions’ efforts on passing into law the proposals that have widespread market support at the expense of the more contentious areas of reform.
The transition to the new UK regulatory regime completed on 1 April 2013, when the Financial Services Authority (FSA) was replaced by the Financial Conduct Authority (FCA). The FCA will regulate and watch over insurers’ dealings with policyholders and its principle focus will be on the conduct and culture of firms, with Treating Customers Fairly being a key priority.
Insurance Industry Commentators have suggested that the FCA’s attention is likely to focus on insurers, particularly in relation to the design of their products. The FCA has recently announced that it is launching a thematic review into how UK insurance brokers manage conflicts of interest.
Simon Green, Head of General Insurance and Protection at the FCA, stated in a speech that ‘Insurance brokers’ business models have changed radically over the last 20 years. Some brokers have shifted from being ‘vanilla’ product distributors to product designers, underwriters and claims handlers through delegated underwriting and claims authorities.’ Whilst this review will focus particularly on SME and microbusiness customers, it would be sensible for all brokers to take this opportunity to review their conflict management procedures. The FCA expects to deliver their findings and final recommendations by the last quarter of this year. This gives an early indication that the FCA intends to shine a brighter light on brokers.
In December 2012, the FSA announced a study into general insurance products sold as add-ons with a view to identifying any common features of the add-on market that weaken competition and drive poor consumer outcomes. The FSA is aiming to complete the assessment by the third quarter of 2013. Any subsequent proposals for implementation would be subject to the FCA’s standard procedures, including statutory consultation for any new rules.
There have been reports that a number of firms have already been contacted by the FCA in relation to the sale of add-ons. Brokers will need to ensure that they explain clearly and fully to customers at the point of sale that add-ons are optional products. A failure to do this may see broker firms subject to increased scrutiny and penalties.
Following the FSA’s consultation on the client money rules for intermediaries, which completed in November 2012, it is anticipated that the final rules will be published by the FCA during the second quarter of this year with the rules being implemented from 2014. Amongst the concerns raised are inappropriate controls of non-statutory trusts that enable brokers to extend ‘credit’ to insurers/insureds from the client money trust account, in addition to ineffective risk transfer documentation that results in contracts either lacking in clarity or falling away if a broker becomes insolvent. The FSA proposed a prohibition on conditional risk transfer between insurers and brokers, which, if implemented by the FCA, would result in brokers having to review every terms of business agreement with their insurers to ensure that they comply.
Infrequent client money calculations and client money held by third parties are also topics likely to be addressed in the new rules, which will be implemented by way of a new Client Money Rule (CASS) 5A chapter to replace CASS 5.
The existing rules have been said to be unnecessarily complex and hard to apply and it is hoped that reform in this area will enable brokers to comply with the regulations with greater ease. However, it is likely that any changes will have significant time and cost implications in the immediate aftermath of their introduction and brokers will need to ensure that they fully understand how these changes will affect their business.
The UK insurance broking marketplace continues to see regulatory and legislative changes and there is no sign of any stability on the horizon – indeed, far from it, more change could be afoot in the next 12-18 months.