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    FCA Compliance News – October 19

    Published on 28 Oct 2019 by Sharon Williams

    This month's FS round-up includes fines for Prudential & Tullett Prebon, travel insurers warned over high commissions, FCA review of unit-linked trusts, new overdraft pricing rules and more...

    Our pick of the biggest compliance news in FS this month

    Prudential fined £24m over non-advised annuities sales

    The Financial Conduct Authority (FCA) has fined Prudential £23,875,000 for failures related to non-advised sales of annuities.

    Between July 2008 and September 2017, Prudential’s non-advised annuity business focused on selling annuities directly to existing Prudential pension holders. The FCA found that Prudential’s business model for annuities included using telephone calls to maximise sales to existing pension customers. However, Prudential failed to ensure that the documentation used by its call handlers was appropriate, and it failed to monitor the calls with customers adequately. Firms are required to explain to customers that they may get a better rate if they shop around on the open market and Prudential failed to ensure that customers were consistently informed of this.  

    Prior to 1 January 2013, Prudential also used large, sales-linked incentive schemes for call handlers and managers which increased the risk of inappropriate customer outcomes.

    The FCA concluded that these weaknesses in Prudential’s systems and controls, combined with the complex nature of annuities, and the potential vulnerability of customers, led to some customers being treated unfairly and created a significant risk of consumer detriment. More detail about the FCA’s findings can be found in the final notice issued to Prudential.

    Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said: “Prudential failed to treat some of its customers, who could have secured a better deal on the open market, fairly. These are very serious breaches that caused harm to those customers. Prudential is now rightly focussed on redress and today’s financial penalty reinforces the cardinal obligation of fairness that firms owe to customers.”

    Prudential voluntarily agreed to conduct a past business review of non-advised annuity sales to identify any customers who may be entitled to redress as a result of the firm’s failures. As of 19 September 2019, Prudential had offered approximately £110 million in redress to 17,240 customers.

    Key takeaways

    • Consider your firm’s tone from the top– does it place sufficient emphasis on Treating Customers Fairly or does it prioritise profit?
    • Monitor call handlers and carry out quality assurance –are call handlers consistently treating customers fairly or could they be putting profits before customer interests?
    • Review remuneration practices – could your firm’s remuneration arrangements be incentivising staff to make inappropriate sales?
    • Examine policies and procedures - are you confident that customers are being treated fairly and do policies encourage staff to consistently act in their best interests?

    Read our vulnerable customers checklist

    FCA fines Tullett Prebon £15.4 million

    The Financial Conduct Authority (FCA) has fined the broker Tullett Prebon £15.4 million for failing to have ineffective controls around broker conduct.

    Tullett Prebon is an electronic and voice inter-dealer broker, acting for institutional clients transacting in the wholesale financial markets, typically investment banks. The Rates Division of the broker carried out ‘name passing’ broking, employing many brokers and generating significant revenues for the firm. Following an FCA investigation, the FCA found that, between 2008 and 2010, the firm’s Rates Division had ineffective controls around broker conduct.

    Lavish entertainment and a lack of effective controls allowed improper trading to take place, including ‘wash’ trades (a ‘wash’ trade involves no change in beneficial ownership and has no legitimate underlying commercial purpose) which generated unwarranted and unusually high amounts of brokerage for the firm.

    The firm’s senior management mistakenly believed sufficient systems and controls were in place, when in fact, systems and controls were not used or directed effectively. Obvious red flags of broker misconduct and opportunities to probe were missed. For example, when the firm made inquiries of one broker about the basis for inordinately high brokerage on one trade the broker responsible said 'you don’t want to know' and no steps were taken to identify the reasons, let alone whether they were appropriate.

    Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said: “The market performs important public functions and is not a private game of self-enrichment. While these trades did not mislead the market, nor amount to market abuse, the wash trades were entirely improper, undermining the proper function of the market. Senior management and compliance were cocooned from seeing the misconduct, and systems and controls failed to probe broker conduct, even when warning signs were visible.”

    The FCA confirmed that Tullett Prebon also breached Principle 11 of the FCA’s Principles for Businesses by failing to be open and cooperative with the regulator. In August 2011 the FCA asked Tullett Prebon for broker audio tapes. Although Tullett Prebon had the majority of the audio that the FCA required, they failed to produce the audio to the FCA until 2014.

    Further details about the FCA findings can be seen in the final notice issued to Tullett Prebon.

    Key takeaways

    • Don’t ignore red flags – The FCA found that in this case obvious red flags of broker misconduct and opportunities to probe were missed. For example, when the firm made inquiries of one broker about the basis for inordinately high brokerage on one trade the broker responsible said 'you don’t want to know' and no steps were taken to identify the reasons, let alone whether they were appropriate.
    • Monitor procedures to assess whether they are working effectively – In this case senior management mistakenly believed sufficient systems and controls were in place, when in fact, systems and controls were not used or directed effectively. Your firm may have excellent procedures in place but this will not help you if the policies are not being adhered to.
    • Co-operate with the regulator - failing to speedily acknowledge issues and to co-operate with the regulator should problems come to light will only complicate matters further and will add a breach of Principle 11 to any problems uncovered. In this instance the FCA asked the firm for broker audio tapes in August 2011 but the firm failed to produce these 2014.

    EIOPA warns insurers and intermediaries to tackle high commissions for travel insurance products

    The European Insurance and Occupational Pensions Authority (EIOPA) has warned insurers and insurance intermediaries to take action to ensure travel insurance products offer good value to customers.

    The warning follows a recent thematic review of consumer protection issues in travel insurance. The EIOPA identified problematic business models with remuneration structures based on extremely high commission levels and business models that combine high commission with low claims ratios, offering poor value for money to consumers.

    The EIOPA has warned the insurance industry that it considers that such business models are not consistent with fundamental regulatory principles set out in the European Insurance Distribution Directive (IDD). IDD principles include the requirement to always act in the best interests of the customer and obligations on product oversight and governance, which aim to ensure financial products and services are compatible with the needs, characteristics and objectives of the customers belonging to the target market, so as to ensure good consumer outcomes including from a value perspective.

    Key findings from EIOPA’s thematic review

    • Strong potential of poor value for money for consumers due to high commissions payable to distributors. In one case, the insurer paid 5.5 times more in commissions to distributors than consumers received back in claims, with commission level of 77% of the premium paid by consumers.
    • Strong potential of poor value for money for consumers due to very wide variations in claims ratio.
    • Increased conduct risks due to new market players entering the market and selling travel insurance products online as an ancillary activity (airline and ferry companies, price comparison websites, aggregators, banks and supermarkets).
    • Potential risks of low quality products and services for consumers due to newly established partnerships with distributors via international tenders. In some cases, these partnerships are based solely on commissions paid to the distributors.
    • High degree of consumer detriment due to the potential high degree of dismissed claims through no pre-contractual medical screening and around 70% of insurers excluding pre-existing medical conditions from the coverage of travel insurance products.
    • Potential increased costs for consumers as in most cases assessment of overlaps in cover are only conducted at the claim stage and not during the sales process.

    The EIOPA has reminded all market participants to comply fully with the IDD. Firms should assess their product offering and approval process, including their identification of target markets, to ensure that their products offer fair value to customers and are fully capable of meeting the needs of their customers.

    Six million General Insurance Customers are impacted by ‘loyalty penalty’

    An FCA market study into the pricing of home and motor insurance has found that six million general insurance policyholders have been impacted by the so called ‘loyalty penalty’.

    The ‘loyalty penalty’ is the term adopted for general insurance premium pricing, in which consumers who do not switch or negotiate with their provider can pay high prices for their insurance.

    The FCA study has found that:

    • Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
    • Longstanding customers pay more on average, but even some who switch pay higher prices.
    • 1 in 3 consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes.
    • People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
    • Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. This is not made clear to the customer.
    • Firms engage in a range of practices to raise barriers to switching.
    • Many consumers who switch or negotiate their premium can get a good deal.

    The FCA is undertaking a range of activities to address the problems it has identified including to ensure firms improve the governance, control and oversight of pricing practices; deliver the changes required from firms following implementation of the Insurance Distribution Directive (IDD) and continue improving transparency and engagement at insurance renewal.

    The regulator is considering further remedies to:

    • Tackle high premiums for consumers – this could include banning or restricting practices like raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals.
    • Stop practices that could discourage switching – including restricting the way that firms use automatic renewal.
    • Make firms be clear and transparent in their dealings with consumers - including improvements to the way firms communicate with their customers.
    • Require firms to publish information about price differentials between their customers.

    The FCA intends to publish a final report and consultation on remedies regarding this market study in the first quarter of 2020.

    FCA review of unit-linked funds finds limited consideration of unit holders’ interest

    A multi-firm review of firms’ governance practices has found limited consideration of whether unit-linked funds provide good value for their investors.

    The review, carried out by the FCA, follows the regulator’s Asset Management Market Study (AMMS), published in June 2017, which found that authorised fund managers generally did not consider robustly whether they were delivering good value. Later this year the FCA is introducing a package of remedies to address the findings of the AMMS, but the remedies will not apply to unit-linked funds.

    The recent multi-firm review of unit-linked funds, suggests similarities between the governance practices for unit-linked funds to those found for managers of authorised funds in the FCA’s Asset Management Market Study.

    Key findings

    • Some firms only consider performance net of fees and charges, with limited assessment of how active the manager of a unit-linked fund had been in achieving the net performance.
    • Firms typically do not compare the fees and charges of different funds within their unit-linked fund ranges, even where funds have similar mandates. Firms were generally unable to provide reasons for significant disparities in fees and charges among otherwise similar funds, beyond describing market pricing practices when the unit-linked products offering these funds were sold.
    • Where firms appoint asset managers within the same corporate group to manage unit-linked funds, there tended to be less-extensive efforts to negotiate savings in asset management fees as the funds grew in size, relative to where firms appoint external managers. These firms were also typically less likely to address a fund’s under-performance with timely and meaningful measures, such as changing the fund’s manager.
    • Where firms identify scale economies and other opportunities to achieve efficiency gains, they often only pass benefits on to unit holders through reduced fees where they are contractually obliged to do so. This can lead to a firm treating groups of funds quite differently depending on how terms and conditions vary between its unit-linked funds.
    • The impact of Independent Governance Committees (IGCs) Governance Advisory Arrangements (GAAs) has been positive, but limited. IGCs and GAAs have a remit to oversee unit-linked fund performance but only to the extent that funds are used as investment vehicles for workplace pensions. Their oversight does not extend to other products that invest using unit-linked funds, including non-workplace pensions and investment bonds.

    The FCA will assess the findings from its review alongside those from its continuing work on non-workplace pensions, the governance of unit-linked mirror funds and the effectiveness and scope of IGCs. It will consider whether it needs to implement enhanced regulatory requirements.

    New rules aim to improve transparency in overdraft pricing

    The FCA has published new rules to help make overdraft pricing simpler, fairer and easier to manage.

    The new requirements, which are detailed in Policy Statement PS19/25, require firms to publish a range of overdraft pricing details. This information will highlight to consumers and third parties, including price comparison services and the media, the interest rates and the refused payment fees consumers are being charged on a product. The information will be published in the quarterly information on current account services.

    The regulator previously announced, as part of its wide-ranging high-cost credit review that it was overhauling the way providers can charge for overdrafts. In June 2019, the FCA published rule to change the way banks and building societies charge for overdrafts.

    The overall package of overdraft remedies will be in force by 6 April 2020. The FCA expects that the changes will result in a fairer distribution of charges, particularly benefiting vulnerable consumers, who are disproportionately hit by high unarranged overdraft charges.

    The FCA has advised that it will carry out a post-implementation evaluation of the new overdraft requirements. It does not expect to start the evaluation until at least 12 months after implementing the full package of remedies, which will be from April 2021.

    Online gambling operator to pay £322,000 for money laundering failures

    Petfre Gibraltar Limited, trading as Betfred, has been ordered to pay £322,000 after the UK Gambling Commission found the bookmaker had failed to carry out adequate anti-money laundering checks.

    An investigation by the Gambling Commission revealed that Petfre failed to carry out adequate source of funds checks on a customer who deposited £210,000, and lost £140,000, of stolen money in a 12-day period in November 2017.

    Petfre have agreed to return £140,000 to the identified victim and make a £182,000 payment in lieu of a financial penalty which will be spent accelerating delivery of the National Strategy to Reduce Gambling Harms.

    A customer being able to deposit and lose such significant amounts in such a short period of time clearly indicated failings in the effectiveness of Petfre’s anti-money laundering policies and procedures.

    A statement published by the Gambling Commission comments: “Petfre has acknowledged and accepted that there were shortcomings in the application of its AML controls and its policies and procedures, and has accepted that it failed to act in accordance with the Licence Conditions and Codes of Practice (LCCP), and the Commissions advice to operators (excluding casino operators) titled Duties and Responsibilities under the Proceeds of Crime Act 2002.”

    7 Ways to Protect Your Firm From Money Laundering

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