Posted: 4th May 2015
In April, general insurance broker Moorhouse Group Limited (Moorhouse), was fined £159,300 for failures relating to the oversight and control of its telephone sales.
In particular, the sale of commercial vehicle (CV) add-on insurance to small and medium enterprises (SMEs) including very small businesses known as micro-SMEs.
In the words of Georgina Phillippou, acting director of enforcement and market oversight at the FCA:
“Moorhouse had a responsibility to treat its customers fairly and this is true whether they are individuals or small businesses”.
What’s interesting about this is that although the majority of Moorhouse customers would be classified as ‘commercial’ rather than ‘retail’, micro-SME customers are less likely to be ‘sophisticated’ customers. Many will exhibit similar knowledge and experience to that of a retail customer. This sends a clear message that firms need to provide non-sophisticated commercial customers with sufficient information to enable them to make informed decisions, prior to purchasing a product. This is no different to the FCA’s expectations when dealing with a retail customer.
Moorhouse breached Principle 3 (management and control), failing to take reasonable care to organise and control its compliance systems and controls between January and December 2012.
The firm also breached Principle 7 (communications with clients), by not paying due regard to the information needs of its customers. It failed to disclose appropriate information about product limitations and exclusions prior to purchase. The FCA concluded that the omission of these limitations and exclusions from the telephone sales process could inhibit the customer’s ability to make an informed decision at the point of sale, as well as potentially restricting their ability to make a subsequent claim.
The FCA appointed a Skilled Person in May 2013 to review the telephone sales of add-on products. They found inadequacies in the following areas:
- Compliance systems and controls
- Data discrepancies
- Governance and compliance oversight
We’ll examine each one in turn…
COMPLIANCE SYSTEMS AND CONTROLS
The firm’s small compliance team conducted quality monitoring (QM) from 1 January 2012 to 31 March 2012 (the Relevant Period). In this time, QM of sales calls only occurred for five weeks and didn’t include monitoring sales in the commercial vehicle business.
In April 2012, six performance leaders took over QM from the compliance team, but they still did not include monitoring of sales in the commercial vehicle business. They also had no compliance training, and their primary focus was on sales performance and development rather than on regulatory compliance. This meant they did not provide objective independence in the QA process.
Consider the following questions:
- Do you undertake sufficient independent risk-based QA across your business?
- Are appropriately qualified resources allocated to this task?
- Do you undertake outcomes testing to assess the quality of customer outcomes at each stage of the customer journey?
- Do the outputs from outcomes focused QA form a component part of your firm’s ‘customer treatment’ management information (MI)?
- Do your QA function(s) have adequate escalation routes to the Board and senior management?
- Do you undertake timely remedial activity when unfair customer outcomes are identified?
- Does your QA form an integral part of your firm’s Training and Competency (T&C) arrangements, including feedback loops back into product and process design?
GOVERNANCE AND COMPLIANCE OVERSIGHT
Moorhouse was unable to demonstrate sufficiently robust governance. The Board and senior management were not provided with sufficient compliance MI from the QA process. There was also insufficient evidence that the MI that was available, was subjected to the appropriate consideration, challenge and action by the Board and senior management
Consider the following questions:
- When was the last time you reviewed your MI to check its relevance and assurance value?
- How confident are you that it is actually fit for purpose?
- Does your MI provide the Board and senior management with sufficient oversight of the risks inherent in your firm?
The FCA expects firms to have effective governance systems which can evidence adequate focus on compliance and the management of risk. There were regular informal discussions between the management team (who were in close proximity to each other) about the operation of the telephone sales environment but such discussions were not evidenced.
Neither was there any evidence of review, or challenge by the Board or senior management of the compliance MI or of any remedial action Moorhouse took relating to the deficiencies identified. Several reports during the Relevant Period raised concerns about the telephone sales environment. However, Moorhouse did not take adequate steps to ensure that it had documented its discussion, review or challenge of compliance MI.
Consider the following questions
- Is your business’ governance arrangements clearly documented?
- Are you confident that you are able to identify, monitor and report the risks that your firm might be exposed to?
- How confident are you that issues, once identified, are appropriately escalated, monitored and recorded until they are closed?
- Do you have documentary evidence to demonstrate that your firm, at Board or management level, reviews and challenges common issues and trends in order to identify and mitigate potential risks?
- Can your firm demonstrate how the Board and senior management play an active part in the management of customer detriment risk?
The FCA continues to cite the sale of general insurance add-ons as a risk. Indeed the FCA’s general insurance add-on market study warned that firms might incentivise staff to pressure sell or to automatically include the add-on without explaining the cover properly or that it is optional.
The issues raised by the FCA in this final notice highlights the need for firms to proactively consider the information needs of both retail and commercial customers when selling general insurance add-ons. This includes how Boards and senior management teams gain assurance that they are delivering fair outcomes for customers.
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