Responsibilities of regulated firms

    Approved persons

    Authorised firms are responsible for the conduct of all their employees, agents and ARs. The firm must ensure that those for whom it is responsible (a product provider is not responsible for the acts or omissions of an intermediary) comply with all requirements of the FSMA and the rules made under it. A regulated firm must not use the services of an individual prohibited by the PRA/FCA.

    Authorised firms must have systems in place to manage the risks they are subject to. These vary according to the type of business but include the Capital Adequacy rules. Firms have to keep abreast of all relevant changes to the business environment and do their best to reduce and/or control the risks these present. For insurance companies, this includes maintaining an adequate solvency margin and reassurance arrangements. It should be understood, however, that some things are beyond any firm’s control (e.g. tax law changes) and it is not possible for a business to guarantee it will always survive no matter what occurs.

    An authorised firm must ensure that all of its individuals carrying out controlled functions are approved. However, in order to cover for illness and holidays, an individual can perform significant influence functions on a temporary basis for up to twelve weeks in a year without approval.

    An authorised firm is responsible for any advice given by its representatives. If such advice is in breach of the FSMA or FCA rules, the authorised firm is liable to compensate the client for any loss sustained as a result of the advice. However, the mere fact that an investment has lost value does not give rise to any duty to compensate as this may be due to factors unconnected with the quality of the advice (for example, a stock market crash).

    If a firm gives improper advice that will usually be a breach of FCA rules. If the client complains, the firm will have to make appropriate restitution or pay compensation. If they do not, the client could complain to the Financial Ombudsman Service which can force the firm to make restitution or pay compensation. The complaint could also lead to disciplinary action from the FCA, particularly if it was part of a pattern of similar cases rather than an isolated error.

    All authorised investment firms will have a nominated Compliance Officer, usually assisted by a Compliance Department, in order to ensure that all the myriad rules are complied with. Larger home finance and general insurance intermediaries are likely to have similar, although neither has a formal compliance officer controlled function yet.

    Approved persons and controlled functions

    The approved person’s regime is a very important aspect of the regulatory scheme introduced by the FSMA. It is important to remember the following distinction:

    • The authorised person: the business that carries on regulated activities such as providing investment advice. The authorised person could be a company, partnership or sole trader.
    • The approved person: the individual who has been approved to carry out one or more of the controlled functions within the business, either as a senior person or as someone who advises customers on investments.

    Individuals undertaking a `controlled function’ within an authorised firm must be individually approved and registered. Controlled functions are those which involve:

    • a significant influence on the conduct of an authorised person’s affairs;
    • dealing with customers in connection with regulated activities; and/or
    • dealing with the property of customers in connection with regulated activities.

    You need to be an approved person to perform a significant influence function. The significant influence functions are divided into the following types by the FCA:

    • governing functions;
    • required functions;
    • systems and controls functions;
    • significant management functions;
    • customer dealing function.

    The main FCA controlled functions used are:

    TypeNo. Function
    Governing functions 1Director
     2Non-executive director
     3Chief executive
     4Partner
     5Director of unincorporated association
     6Small friendly society
    Required functions 8Apportionment and oversight
     10Compliance oversight
     10ACASS operational oversight
     11Money laundering reporting
     40Benchmark submission
     50Benchmark administration
    Systems and controls functions 28Systems and Controls
    Significant management functions 29Significant management
    Customer dealing function 30Customer

     

    The PRA has three controlled function types for its authorised firms:

     

    Type No. Function
    Governing functions 1Director
     2Non-executive director
     3Chief executive
     4Partner
     5Director of unincorporated association
     6Small friendly society
    Required functions 12Actuarial function
     12AWith-profits actuary
     12BLloyd’s actuary
    Systems and controls functions 28Systems and Controls

    Therefore, individual registration may be necessary, depending upon the type of firm involved, for:

    • directors and chief executives
    • actuaries of insurance companies
    • money laundering reporting officers
    • heads of compliance
    • heads of internal audit
    • senior managers
    • customer investment advisers and traders
    • discretionary investment managers

     

    Features of Common Short Term Protection Policies

    Short Term Protection Policies

    Personal accident and sickness insurance (PAS)

    • PAS benefits are paid out if the insured suffers an accident or is off work due to sickness.
    • Most contracts are annual but can be taken for shorter periods, e.g. to cover a business trip or a holiday.
    • All PAS policies generally cover: death, permanent disablement, loss of an eye, loss of a leg, foot or toe, loss of an arm, hand, finger or thumb.
    • Two other benefits can be added: medical expenses and weekly sickness benefit.
    • Group PAS policies cover members of a group such as a firm’s employees or members of a social club.

    Private medical insurance (PMI)

    • PMI provides cover against the cost of private medical treatment.
    • PMI is primarily aimed at acute, not chronic, conditions.
    • Accident & Emergency is not usually covered, partly because few private hospitals are geared up for such treatment.
    • Types of PMI:
      • budget plans— premiums can be reduced if the insured pays the first part of any claim. There may be restrictions to the limits on the cost of treatment. Home nursing and private ambulances are not covered;
      • standard plans — provide a wider cover than budget plans. More choice of hospitals together with higher limits on costs of treatment compared to basic plans;
      • comprehensive plans — claim periods can be longer with higher limits and there is often a wider choice of hospitals. Services such as home nursing and private ambulances are covered.
    • Taxation of PMI:
      • individual policies — claim payments are tax free and there is no tax relief on premiums;
      • group policies —the employee will be liable to benefit-in-kind tax if the employer pays the premiums. Such premium payments are also subject to employer’s NICs. However, the premiums are a deductible business expense for the employer’s corporation tax.
    • Some PMI policies operate on an Open Referral system where the insurer appoints the specialist and hospital often in conjunction with the patient.

    Mortgage payment protection insurance (MPPI)

    • MPPI aims to provide the ability to maintain mortgage payments and costs for up to a normal maximum of twelve months or two years, depending on the policy.
    • Maximum monthly benefit of up to 125% of the mortgage payments, which include associated mortgage costs. Alternatively, it can be a percentage of the client’s income – eg 6% of income up to a maximum of £1,500 per month.
    • Benefits are paid after a deferred period which is typically 30 or 60 days. It might be different for accident and sickness as opposed to unemployment.
    • For unemployment insurance, a self-employed person may only be able to benefit if the business goes into voluntary liquidation. If they simply cease trading – eg because orders have dried up – the policy won’t pay out.
    • Benefits are usually payable for 12, 18 or 24 months only.
    • The cover is not tied to a specific mortgage and can be portable to a new mortgage. Policies may no longer be sold at the same time as a loan. Instead there must be a gap, which can leave borrowers uninsured.
    • Any income (eg from other insurance policies) will affect how much can be claimed.
    • The policy can be cancelled or withdrawn by the insurer at a minimum of 90 days’ notice or amended with at least 30 days’ notice.
    • The cost of MPPI tends to be high compared to the level of benefit.
    • Benefits are paid tax free and there is no tax relief on premiums.

    Accident, sickness and unemployment insurance (ASU)

    • ASU or STIP (short term income protection) policies are very similar to MPPI but the insured benefit is not limited to mortgage payments.
    • Monthly benefit can be linked to earnings, e.g. 75% or a set amount, e.g. £2,500.
    • Benefits are payable for a maximum period of two years after a deferred period which is similar to MPPI.
    • A lump sum can be payable subject to conditions, e.g. loss of limb or sight.
    • Group ASU is sometimes limited to incidents occurring at work.
    • Taxation of ASU:
      • individual policies — benefits are paid tax free and there is no tax relief on premiums;
      • group policies — benefits are paid tax free, but premiums paid by the employer are taxable on the employee as a benefit in kind.

    Health cash plans and dental plans

    • These are simple and relatively low-cost healthcare plans that pay up to 100% of the cost of treatment up to a pre-set annual limit or towards specified treatments, including optical and dental services.
    • There is often a waiting period of up to six months before claims can be made, and pre-existing conditions are usually excluded.
    • A dental capitation scheme are, in effect, a way of budgeting for expected dental costs rather than a true insurance against incurring dental costs.
    • Many dental plans pay a maximum benefit that may be below the charge made by the dentist, particularly where the patient elects to have more expensive treatment.

    Payment protection insurance

    • PPI is similar to MPPI in terms of its structure and purpose, but may be taken out in conjunction with non-mortgage credit agreements such as unsecured car loans or other non-specific loan.
    • On 6 April 2012 new rules for PPI sales came into force which prevent PPI from being sold in the vast majority of cases until the later of seven days after the loan sale, or the point at which a personalised illustration is provided.

    Policy considerations

    • Annually renewable and the premiums are subject to insurance premium tax.

    Critical Illness Insurance (CIC)

    Critical Illness Insurance

    Background to critical illness insurance

    • When the first critical illness policies came onto the market, the differences between providers were extremely marked, with some policies covering a number of conditions while others relatively few.
    • Consistency was improved with the introduction of an ABI statement of best practice including, among other things, a standardised set of definitions for ‘core conditions’ that all policies should cover. The ABI Statement of Best Practice on Critical Illness best practice sets out:
      • A common format for the way CIC is described to potential buyers at the point of purchase
      • The use of common generic terms
      • The use of model wordings for critical illness and exclusions that meet appropriate minimum standards

    Policy types and uses

    • These policies can be guaranteed or reviewable, often written as a unit-linked plan.
    • Because of the much higher risk to the life office, premiums are higher than those for basic life cover and underwriting may be stricter.
    • A critical illness policy can be added to a life policy, which means an accelerated death payment can be made during the life as an alternative, not in addition, to the death sum assured.
    • A few offices have policies that pay regular instalments of capital rather than a lump sum (similar to a family income bond). This is often cheaper than a lump sum contract.

    Policy options and variations

    • There are five possible definitions for total and permanent disability:
    1. Unable to do one’s own occupation ever again
    2. Unable to do a suited occupation ever again
    3. Unable to do any occupation ever again
    4. Unable to do 3 specified work tasks ever again. These are: walking, climbing, lifting, bending, getting in and out of a car, writing.
    5. Unable to look after one-self again. This is defined as failure to do 3 of: washing, getting dressed and undressed, feeding oneself, maintaining personal hygiene, getting between rooms, getting in and out of bed.
    • Survival period — CIC is designed to pay out on the diagnosis and survival of a critical illness. Unless attached to life cover, the condition resulting in the immediate death of the insured (e.g. a heart attack) will not result in the policy paying out.
    • Where a policy is attached to life cover and a CIC pay out is made, there will not be a further payment on subsequent death.
    • Total and permanent disability — This is effectively a catch-all for a condition where, although not specifically covered by the policy conditions, the standard of the insured’s life is so poor that they are unable to ever live a `normal life’ again.
    • Life cover buy-back options allow for a restricted from of life cover to be taken out without the need for further medical underwriting.

    Conditions covered and excluded

    • Each policy will specify exactly what illnesses are covered.
    • There is a trend towards giving increasingly wide cover, led by newer entrants into this market.
    • A few offices have a menu-style contract that enables clients to choose from a list of conditions for which they would like cover.

    Premiums and underwriting

    • Critical illness underwriting is based on the morbidity risks relating to the illnesses covered.
    • Once a policy is issued, its illness definition will continue for the life of that policy.
    • The most important factors for the underwriter are: age, medical history of the life assured, medical history of the life assured’s family, and lifestyle factors such as smoking and alcohol consumption.
    • Since Dec 2012, men and women pay the same on individual policies.

    Claims

    • The policy pays out a lump sum when a critical illness is diagnosed.
    • Terminal illness is not usually paid out in the last 18 months of a policy.
    • The onus is on the policyholder to prove the claim. The appropriate medical evidence will be required and, depending on the policy terms, may be at the policyholder’s expense.
    • Where there is no life cover, most offices require the life assured to survive diagnosis by, say, 14, 28 or 30 days before the claim is payable.

    Group schemes

    • Cover will cease on leaving service with the employer or retirement.
    • Benefits are paid tax-free.
    • The employee is liable to benefit-in-kind tax if the employer pays the premiums.

    Taxation

    • There is no income tax liability on payment of the sum assured.
    • Policies are not subject to capital gains tax.

    Policy considerations

    • IPI covers significantly more conditions than CIC – notably mental illnesses and conditions that can debilitate an individual (eg back trouble) without being considered a ‘serious’ illness under a CIC policy. On that basis, IPI is likely to be a higher priority than CIC.
    • It is important to ensure that CIC is appropriate for the risk to be insured rather than, for instance, IPI.
    • It may also be relevant to look at the claim-paying history of the insurer in question.

    Market developments

    • Medical developments are having a serious impact on CIC rates and product design.
    • Under severity-based cover, a proportion of the sum insured is paid out on diagnosis, but as the illness progresses further proportionate claims can be made.
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