The FCA’s 2020/2021 Perimeter Report sets out a wide range of issues and planned initiatives across a variety of industry sectors. Some of these (highlighted in Section 5 of the Report) may be of particular interest to UKGI clients.
Appointed Representatives (ARs)
Although the AR commentary in the FCA’s 2021/22 Business Plan (page 38) referenced a focus on ARs as a specific part of the FCA;s focus on wholesale markets, the Perimeter Report references the 2016 general insurance thematic project (TR16/6: Principals and their appointed representatives in the general insurance sector).
The Report confirms that the FCA will be using the £250 fee per AR (£75 per IAR) to carry out targeted and proactive supervision of those aspects of ARs’ interactions with consumers, and principals’ oversight of their ARs, or sectors or groups of firms where the FCA consider that use of the AR regime is a particular driver of harm (the fact that the FCA has referenced the 2016 Thematic Review report above could indicate a focus on ARs in the general insurance sector, which as more ARs than any other sector).
The FCA will work with HM Treasury on potential legislative changes, which plans to issue a Call for Evidence on the AR regime.
As part of a pilot on being “tougher at the gateway”, 50% of firms intending to appoint ARs have either withdrawn their applications for authorisation or the FCA has decided to refuse them.
Outsourcing and third-party service providers
Although the FCA does not regulate them there is a section on outsourcing and third-party service providers (page 19) with the FCA relating this to its work on operational resilience with the regulated firms being responsible.
This is to ensure firms work effectively with third party providers where they are providing important business services and to make sure the way these services are provided is mapped and tested so that firms can identify and address vulnerabilities.
There may be increased oversight of some insurance distribution firms (MGAs, holders of delegate authorities etc.) from insurers having to comply with PRA operational resilience requirements.
Business interruption insurance
Perhaps included in the Perimeter Report (page 38) because the FCA is linking this issue to SME lending during the pandemic, the FCA highlights the lack of certainty regarding what is covered by a BI policy, both at the point of purchase and when the customer needs to make a claim.
The FCA says it will be considering this issue over the coming year, including through some work with the PRA.
This is perhaps a wider contract certainty issue than just being about BI cover.
This work may include cyber risks covers, which has been on the PRA’s radar for some time, from a ‘do insurers know what they are covering and not covering’ perspective and whether there may be, in effect, ‘silent’ cyber covers where customers may be able to claim through loose wording on other policies.
The issue of ambiguous contract terms was also highlighted in the recent Lloyd’s and London Market Insurers portfolio letter.
The general insurance perimeter
In relation to the general insurance perimeter (page 23), and whilst acknowledging that there is not a complete definition of insurance and it would be up to a court to decide on particular contracts, the Report highlights two areas where the FCA has concerns that firms may have structured their products to try and take them ‘outside’ the perimeter. This was an item covered in the first FCA Perimeter Report for 2018/2019 (page 19 – “The insurance perimeter”).
Firstly, where firms have absolute discretion not to pay out (so the contract is deemed not to be a contract of insurance – recognised in case law and covered in the FCA’s Perimeter Guidance Manual at PERG 6.6.1 G), the FCA may argue that this is an unfair term or the provider would never exercise this absolute discretion and therefore it is more like a contract of insurance than not.
Secondly, in relation to warranties that are set up as service contracts, the FCA believes that many of these contracts artificially describe the repair services and, on more detailed analysis, are really contracts of insurance.
In terms of action that the FCA is considering, it will consider amending its long-standing perimeter guidance on these issues and consider action to ensure that individual firms are not acting illegally by providing insurance contracts without appropriate authorisation.
Alongside all the above, and more widely where regulated firms also conduct unregulated activities (especially those activities that might closely resemble regulated activities), the FCA is concerned that customers may be misled and harmed by the “halo effect” from a regulated entity and/or similar regulated products, in that the customer may assume that the unregulated products will benefit from the same FOS and FSCS protections as the regulated products that such firms offer.
Firms which have Appointed Representatives or Introducer Appointed Representatives, firms which use outsourced / third-party service providers and general insurance firms which accept business from unauthorised introducers should review these elements of the Report.