Conduct of Business Risk – KID-ology | KPMG | IM

Conduct of Business Risk – KID-ology

Conduct of Business Risk – KID-ology

It is clear from the financial pages of most respected newspapers over the past few years that, across the whole spectrum of financial services, allegations of “misconduct” by regulators or customers are an increasing trend. For insurance companies, this is often focused around how financial advisers are paid, transparency of the ongoing charges, and the quality of ongoing administration of the policy once in-force.

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Senior Manager: Consulting

KPMG in the Isle of Man

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It is clear from the financial pages of most respected newspapers over the past few years that, across the whole spectrum of financial services, allegations of “misconduct” by regulators or customers are an increasing trend. For insurance companies, this is often focused around how financial advisers are paid, transparency of the ongoing charges, and the quality of ongoing administration of the policy once in-force. 

Up-front (or “indemnity”) commissions paid to the salesforce, early surrender penalties, and annual management charges would have featured in most insurers’ pricing models for decades. That said, most people’s financial literacy is not geared up to assess the appropriateness of these at the pre-sale stage, or indeed compare them against other product providers, so the recent concerted effort from insurance supervisors globally should be welcomed by all consumers.

That drive is certainly not restricted by borders. The International Association of Insurance Supervisors (IAIS), the European Insurance and Occupation Pension Authority (EIOPA), the UK and the Isle of Man have all made advances over the last few years to ensure that controlling the risk of misconduct in the selling of insurance products is considered as important as the prudential risk of the insurers themselves going bust.

 

IAIS and Conduct Risk

The IAIS focus their efforts on principles, standards and guidelines to encourage the Isle of Man (and the rest of its 150+ countries in their membership) to meet minimum expectations in their conduct of business regarding;

  • Fair treatment of customers;
  • Pre-sales requirements; and,
  • Ongoing contract servicing post-sale

The expectation set by the IAIS is that fair treatment of customers should be “an integral part of their business culture” and that clear information should be available to customers “before, during and after the point of sale”. Perfectly fair, and actually hard to imagine it could be the case otherwise!

Isle of Man - Conduct of Business

The Manx offshore life assurance industry is unique with regards to conduct of business, given the global nature of distribution to customers, usually through unrelated third parties (banks, wealth managers and financial advisors), who normally provide the point of contact for ongoing policy servicing. Unlike larger and more conventional markets, most customers are relatively wealthy individuals, who as well as being advised, are also financially literate themselves.

The Isle of Man Financial Services Authority (FSA) released a Discussion Paper on Conduct of Business in 2014 which explored these characteristics. A formal Consultation Paper following in July 2015, which proposed addressing the IAIS ICP requirements in a Conduct of Business Code, which will be applicable for life assurers as binding guidance. This code will establish minimum expectations around:

  • The fair treatment of customers; 
  • How products should be developed and marketed;
  • Standards for issuing terms of business to third parties, and monitoring their conduct on an ongoing basis;
  • Cancellation rights; and,
  • Post-sale disclosures. 

The code also includes a requirement to provide pre-sale Key Information Documents (KIDs) to prospective customers, which detail simplified information relating to surrenders, withdrawals, cancellation rights and charges in three sides of A4 paper. Summary Information Documents (SIDs) will also be compelled for products which only pay out on death or disability.

The results of this consultation were published in July 2016, with little ground conceded by the FSA from their original position, conscious of the global direction of travel relating to how financial services firms conduct themselves. That said, some allowances are clearly planned regarding sales into jurisdictions with “equivalent” standards which may avoid administrative duplication, and there is no ambition for the code to be applied retrospectively.

Isle of Man - Conflicts of Interest

A particularly commercially sensitive topic has proven to be the payment of indemnity commission, and the conflict of interest it poses to financial advisers between a policyholder’s best interests and maximising profit from a sale. Markets such as the UK, Australia and the Netherlands have already banned or phased out indemnity commission, with New Zealand potentially to follow.

A separate FSA consultation on the management of Conflicts of Interest in the sales process, which centres on this specific matter, was therefore conducted over the summer. The FSA’s proposal was that indemnity commission, as well as ongoing (or “trail”) commission, is disclosed at the point of sale in the Key Information Document, rather than banned as a distribution tactic.

While this may avoid a market shock such as that experienced in Hong Kong, which saw a marked decline in new business sales in 2014 immediately following the prohibition of upfront commissions for unit-linked life assurance products similar to those sold from the Isle of Man, some competing jurisdictions, such as Guernsey, have yet to reveal their hand on this matter. The idea of a transitional period was therefore raised and is currently under consideration.

The next steps

The formalities of this consultation notwithstanding, the island’s life assurers are preparing well for a world where demonstrably looking out for the best interests of prospective and existing policyholders is embedded in the culture of the business.

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