Welcome to the UKGI weekly regulation update service for Aviva ABC brokers

Context

The FCA has published a press release and a Final Notice outlining action taken against Leigh Mackey, former Director of Inspire Insurance Services Ltd (“Inspire”).  Inspire was placed into liquidation by Mr Mackey on 6^th November 2020 (following intervention action by the FCA) and remains in liquidation as of the date of this Final Notice.  The FCA has banned Mr Mackey from working in financial services and fined him £1.1m for misleading the FCA and misusing funds due to insurers.  Between 12^th September 2011 and 8^th December 2019, Mr Mackey had sole management control of Inspire, an insurance broker for the construction sector.

Key points to note and next actions

The FCA believes that Mr Mackey is not a fit and proper person as he lacks honesty and integrity and poses a risk to consumers and to the integrity of the UK financial system. The Authority has made an order prohibiting Mr Mackey from performing any function in relation to any regulated activities carried on or by any authorised or exempt person or exempt professional firm.

• Mr Mackey used funds due to insurers to support Inspire’s operating costs and to pay for personal living expenses (such as employee wages and expensive company cars, and Mr Mackey’s remuneration) via payments from Inspire’s holding company (which received dividends from Inspire paid using premiums) and direct money transfers from Inspire’s bank accounts.
• In addition, a large number of other fund transfers were made by Inspire to Mr Mackey, or for Mr Mackey’s benefit (sometimes directly and sometimes via Inspire’s holding company), which were only made possible by Mr Mackey’s use of insurer premiums to artificially enhance the revenue of Inspire.
• Mr Mackey referred to this practice as the taking of ‘advance commission’, and he admitted to the FCA that the practice (i.e. taking funds from net monies due to insurers) took place over a period of several years. Mr Mackey has also admitted to the FCA that he was aware for three years that there was a shortfall in funds due to insurers and that this shortfall constituted a significant amount.
• By his own admission, Mr Mackey accepts that, due to his actions, Inspire owes insurers over £660,000. Estimates by Inspire’s liquidator are significantly higher, suggesting a shortfall of over £2.2m.
• Mr Mackey was not truthful with the FCA. Inspire submitted regulatory reports over 4 years stating it had carried out required client asset audits. Mr Mackey admits it failed to carry these out.

Context

The FCA has published a First Supervisory Notice sent to MRA Property Investments Limited.  The FCA considers that the firm is failing, or likely to fail, to meet the Appropriate Resources, the Suitability and the Effective Supervision Threshold Conditions.  As a result of the issues outlined in the Notice, the FCA considers that the firm cannot be effectively supervised, nor can the Authority be satisfied that it has appropriate financial resources or is suitable.

Key points to note and next actions

• The FCA has serious concerns that monies invested via the firm, from its customers, may not be being used for their intended purpose. The FCA has sought an explanation from the firm about this matter and in relation to transactions between the Firm’s bank accounts and what appear to be accounts belonging to the firm’s sole director and senior management function holder.
• The firm has repeatedly failed to respond to requests for information relating to these matters, despite them being evidently material to the Authority and to the Firm’s customers.
• The firm has repeatedly failed to respond to requests for information from the FCA, including failing to respond to an information requirement issued under section 165 of the Act.
• The FCA is not satisfied that the firm is being managed in a way that ensures that its affairs are conducted in a sound and prudent manner and has serious concerns as to whether the firm is a ‘fit and proper person’.
• The FCA is concerned that the Firm does not have the appropriate non-financial resources on the basis that its Director is not responding to requests for information by the FCA and others.

Context

Following a review, the FCA has made a number of changes to, and has improved, its disclosure processes in regulatory enforcement cases.  In the case of Seiler and others v FCA [2023] UKUT 00133, the Upper Tribunal recommended that the FCA should review certain elements of its disclosure process in regulatory enforcement cases. This relates to disclosure of evidence as part of any regulatory case.

Key points to note and next actions

Going forward, the FCA is required to disclose all documents on which it relies to build regulatory enforcement cases, as well as any other material which in its opinion might undermine its decision to take action.

Under a new broader approach, the FCA will disclose all material that is relevant to the facts of the matter, save where it is disproportionate, not in the public interest, or otherwise inappropriate to do so. This will include all material that is potentially undermining as well as supportive material.

Disclosure reviews will be aimed at identifying all the relevant material and will not be focused on only looking for potentially undermining material. This will reduce the risk that we mistakenly fail to disclose a document.

Most significantly, the FCA is:

• taking a broader approach to disclosure which will mean its review of documents is not focused only on identifying potentially undermining material;
• enhancing its existing training on disclosure to include additional specialist training for those managing and overseeing disclosure exercises;
• providing additional training for staff and more detailed guidance on quality assurance;
• clarifying the roles and responsibilities of staff and managers involved in disclosure; and
• giving greater emphasis to the importance of disclosure in measuring and rewarding staff performance.

Overall, the aim of the changes is to improve the quality of FCA disclosure by providing greater support for case teams.  The FCA will closely monitor the effectiveness of the changes it is making, and will conduct a further review in approximately 12 months’ time to assess whether it should take further steps to improve its processes.

Context

The FCA has fined Metro Bank £16m for failing to have the right systems and controls in place to adequately monitor over 60m transactions, with a value of over £51bn, for money laundering risks between June 2016 and December 2020.  The failings were borne out of systems inadequacies which, although identified, were not corrected.  Metro agreed to resolve this matter, thereby being allowed a ‘discount’ on the fine (which would otherwise have been just over £23.8m).

Key points to note and next actions

• Metro automated the monitoring of customer transactions for potential financial crime in June 2016, but an error in how data was fed into the system meant transactions taking place on the same day an account was opened, and any further transactions until the account record was updated, were not monitored.  
• Junior staff did raise concerns about some transaction data not being monitored in 2017 and 2018, but these did not result in the issue being identified and fixed.
• Even once a fix had been put in place in July 2019, Metro did not have a mechanism to consistently check that all relevant transactions were being fed into the monitoring system until December 2020, over 4 and a half years after the system was implemented.

The message for firms is that new systems implementations should be fully tested and all issues understood and rectified prior to implementation.  Real end-user acceptance testing (so testing involving the staff actually using the system at the ‘sharp end’) is key.

Context

The FCA will consult on extending the time firms have to respond to consumer complaints about motor finance where a non-discretionary commission was involved, and for consumers to refer them to the Financial Ombudsman Service.

The FCA’s decision, which in itself has no direct impact on insurance distribution firms, follows the Court of Appeal’s 25^th October judgment in Hopcraft v Close Brothers Ltd, Johnson v Firstrand Bank Ltd, and Wrench v Firstrand Bank Ltd.  Since that judgment, the FCA has undertaken ‘extensive industry engagement’ and has, in an unusual step, published a transcript of a telephone conversation between Nikhil Rathi (FCA CEO) and motor finance market analysts.  Matt Brewis, the FCA’s Head of Insurance, was also on the call.

Key points to note and next actions

The announcement contains a useful brief summary of the main reasons behind the Court of Appeal’s judgement:

• The Court of Appeal decided it was unlawful for the brokers (car dealers) to receive a commission from the lender providing motor finance without obtaining the customer’s informed consent to the payment.
• This required the consumer to be told all material facts, including the amount of the commission and how it was to be calculated.
• The judgment related to fixed commission in motor finance agreements as well as discretionary commission arrangements (DCAs), which were banned by the FCA in 2021.
• The focus of the Court of Appeal decision is common law, rather than FCA rules or principles. Firms authorised by the FCA must meet wider legal requirements as well as regulatory rules. The interpretation of common law is rightly for the courts.

Although not directly impacting insurance distributors, there is a clear similarity between the finance commissions which were the subject of the Court of Appeal’s decision and the interest rate overriders commonplace in the premium finance market.  The FCA’s planned premium finance market study will clearly be informed by at least the Court of Appeal’s judgement, and it was interesting that Matt Brewis has been involved in the FCA’s market engagement.

Context

The FCA has published its Authorisations division data-led operating service metrics for Q2 2024/25 (so July to September 2024).

Key points to note and next actions

• Although the data for the most recent quarter shows stability or improvement in all but one of the metrics, the statistics are based on data which is quantitative.
• There is no assessment of the quality of the work completed or the quality of the case handling.

Context

The FCA has announced that the FCA, the PRA and the Bank of England (BoE) (collectively the ‘regulators’) have published a joint Policy Statement (PS) 24/16 ‘Operational Resilience: Critical Third Parties to the UK Financial Sector’ containing the final rules, expectations and guidance under a new oversight regime for CTPs to the financial services sector.  The Policy Statement and final rules have taken into account industry feedback to Consultation Paper (CP) 26/23.and follow the UK Parliament’s adoption of the Financial Services and Markets Act 2023 (FSMA 2023), which provides the statutory framework for the new CTP regime.

The new regime will aim to strengthen the resilience of the services that CTPs provide to UK-regulated financial services firms and ‘financial market infrastructure entities’ (‘FMIs’).  The new regime does not replace the responsibility authorised firms and FMIs have in continuing to meet the FCA’s operational resilience requirements. They will continue to be accountable for managing the risks in their own outsourcing and third-party arrangements.

Key points to note and next actions

Note: The third-party providers which will be CTPs have not yet been decided. HM Treasury will decide which third-party providers will fall under the new regime based on input from regulators.

The regulators’ approach to the oversight of CTPs (see pages 9 to 12) sets out how the regulators will identify potential CTPs for recommendation to HMT to consider for designation.  Having reviewed the commentary in relation to the criteria, in our opinion it is possible that the FCA might view the larger and more established insurance broker software systems providers as CTPs.

The regulators have also published the following supporting documents:  

• A Supervisory Statement, along with an overview, which sets out the regulators’ expectations of how CTPs should interpret and comply with the rules.
• The regulators’ approach to the oversight of Critical Third Parties as guidance, along with an overview, which sets out how the regulators will carry out their regulatory oversight and is designed to help CTPs understand the oversight approach.
• A Memorandum of Understanding, along with an overview, that sets out how the FCA will work together with the Bank and PRA to oversee CTPs.

Context

The ABI has published the latest data from its Motor Insurance Premium Tracker for the period July to September 2024, which shows that the average motor insurance premium fell by 2%. This the second consecutive quarter the price of premiums has fallen, following a 2% drop in Q2 2024.

Key points to note and next actions

The ABI’s latest claims data shows:

• Insurers paid out £2.9 billion in motor insurance claims (14% higher than the same reporting period in 2023).
• While the average claim paid remained stable from Q2 2024 to Q3 2024 at a value of £4.8k, it was 8% higher than Q3 2023.
• Repair costs totalled £2 billion for Q3 (26% higher than Q3 2023).
• The average claim for theft of a vehicle dropped in Q3 2024 by 7% compared to Q3 2023. However, the average cost of vehicle theft has increased by 17% to £3k.

2023 was a difficult year for motor insurance margins, with EY estimating that for every £1 collected in premiums, the industry paid out £1.13 in claims and expenses.  Over the long term and in real terms, the average premium is 4% cheaper compared to peak prices, while the average cost of a settled claim is 21% more expensive.