Insurance OutlookPinsent Masons’ Insurance Legal Update

Spring/Summer 2015

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Pinsent Masons is proud to be to be sponsoring the ABI Biennial Conference on 3 November 2015The 2015 ABI Biennial Conference - Agenda 2020 – will be the largest and most significant gathering of insurers and stakeholders following the 2015 General Election, bringing together industry leaders, leading politicians and regulators to debate the major issues affecting the industry.

We are delighted to announce that David Heffron (Head of Financial Services Regulatory, Pinsent Masons) will be on the panel for the Conduct Regulation breakout session.

Other ABI Biennial Conference speakers include:

• Sharon Bowles, Former Chair of the European Parliament’s Economic and Monetary Affairs Committee

• David Bresch, Global Head, Sustainability, Swiss Re

• Andy Briggs, Chief Executive Officer of Aviva UK & Ireland Life

• Louise Colley, Managing Director Protection, Aviva

• Paul Evans, Group Chief Executive, AXA UK

• Huw Evans, Director General, ABI

• Paul Geddes, Chief Executive, Direct Line Group

• Simon Green, Director of General Insurance and Protection, FCA

• David Heffron, Head of Financial Services Regulatory, Pinsent Masons

• Steve Hughes, Head of Economics and Social Policy, Policy Exchange

• Laura Kuenssberg, Chief Correspondent and Presenter, BBC

• Anne Leslie-Bini, Director, International Development Leader, Invoke Software

• Steve Lewis, CEO UK and Western Europe, RSA

• Andy Masters, Insurance Advisory Partner, KPMG

• Caroline Rookes, Chief Executive, Money Advice Service

• Nick Robinson, Political Editor, BBC

• Alister Scott, Head of Health, Deputy Chief Medical Officer, BT Group

• Martin Wheatley, Chief Executive, FCA

• Jon Williams, Partner, Sustainability & Climate Change, PwC

• Sam Woods, Executive Director, Insurance Supervision, PRA

• Andy Watson, Chief Executive Officer, Ageas (UK).

A brief agenda for the event can be found below.

Plenary panel sessions1. A new landscape for insurers – what do the next five years

look like?

2. The changing insurance market – how do insurers respond to changes in society, technology and consumer behaviour?

Breakout SessionsMorning sessionsA. Prudential Regulation – SII and the growing global agenda

B. Motor and liability – supporting claimants and reducing costs

C. The pensions revolution: what’s next?

Afternoon sessionsD: Conduct Regulation – what have we learnt and what is next?

E: Crunch Time on Climate Change

F: Protection and health – the solution to the UK’s welfare challenge?

For further details and to register for this event, please go to:

https://www.abi.org.uk/Events/2015/ABI-Biennial-Conference-2015

Pinsent Masons | Insurance Legal Update – Spring/Summer 2015

Introduction

Our FirmWith over 1,500 partners and lawyers worldwide, we are the fourth largest law firm (by number of lawyers) in the UK. We have over 230 independently recognised experts across 130 practice areas, and we hold the record for the independent rankings in the leading legal directory, Chambers & Partners.

Our TeamPinsent Masons’ Insurance & Wealth Management team is recognised as market leading. The team advises many of the leading global insurance groups. Our expertise covers Europe, the Gulf and the Asia Pacific Region. We are experts in each of the core sectors within the market, including General Insurance, Life & Pensions, Health and Savings & Investments.

We offer expertise in both contentious and non-contentious (re)insurance matters, from lawyers that know and understand the London and international markets. In addition to advising on claims and disputes, we offer the full range of non-contentious services to (re)insurers, including advising on distribution arrangements, product wordings and development, acquisition and disposal of books of insurance business and regulation. We advise on exit strategies and legacy business issues.

Our core insurance team works closely with our wider Insurance & Wealth Management Sector team of data protection, IT, e-commerce, employment, corporate, intellectual property, tax, competition, pensions, FS regulatory, restructuring and finance lawyers. The Insurance & Wealth Management Sector is central to Pinsent Masons’ business. Our success is based upon the ability of our sector specialists to appreciate the commercial requirements and realities of our clients and respond accordingly to their needs.

We hope you enjoy this issue of Insurance Outlook. If you have any comments or would like additional information on any of the topics covered please contact Alexis Roberts.

Nick BradleyPartnerHead of InsuranceT: (0)20 7667 0026E: nick.bradley@pinsentmasons.com

Alexis RobertsPartnerInsuranceT: (0)20 7667 0259E: alexis.roberts@pinsentmasons.com

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Contents

Round-ups:

1 Regulatory Round-up: FCA

2 Regulatory Round-up: PRA

3 Legislative Round-Up

4 Regulatory Round-Up: Europe & Beyond

5 Enforcements Round-Up: FCA

6 Disputes, claims & coverage Round-Up

7 Case Summaries

Focus-on:

8 FCA Business Plan 2015 focus Part 1: Embedding cultural change Part 2: Increased focus on Financial Crime

9 Delegated Authority: Outsourcing in the general insurance market

10 Reflections on the Prudential Regulation Authority’s new Statement of Policy on insurance business transfers

11 The illegality defence revisited: the doors were closed by Safeway v Twigger... have they now been left ajar by Jetivia v Bilta?

12 Product Liability: a potentially defective decision or a very real liability?

13 Focus on Cyber Part 1: CEOs have a false perception of the extent of their cyber risk cover Part 2: US ruling highlights potential gaps in GI cover for cyber risks

14 Dealing with Financial Services Customers in a Digital Environment

15 UK businesses must prepare for online dispute resolution

16 Reinsurance: Today’s reinsurance firms should not forget mistakes of the past

17 Competition: Consumer Rights Act - Further Encouragement for Private Damages Actions in Competition Law

18 Competition: New rules for add-on Guaranteed Asset Protection (GAP) insurance

19 Pensions: Secondary Annuities Market

20 Tax: New criminal offence proposed: corporate failure to prevent tax evasion

21 Employment: Northern Ireland Court of Appeal rules voluntary overtime can be included in calculating holiday pay

22 Middle East: Civil and commercial arbitration law due soon in Qatar

23 Looking Ahead

Pinsent Masons | Insurance Legal Update – Spring/Summer 2015

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1. Regulatory Round-up: FCAIn this section and the next, we look – in chronological order - at some of the key developments from the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) affecting the insurance sector since our last update at the beginning of March.

Publication of the FCA Business Plan 2015 (March 2015): On 24 March, the FCA Business Plan 2015/2016 was published and is a good place to start for an update on what is on the horizon as far as the FCA is concerned. The Business Plan is published by the FCA on an annual basis and sets out the FCA’s plan on how it intends to pursue its objectives, its work priorities and manage its business over the year ahead. It is usually accompanied by a Risk Outlook however this year the Business Plan and Risk Outlook documents have been rolled into one. The Business Plan identifies seven forward-looking areas that the FCA will be focusing on this year (the first four of which were also areas of focus in 2014/2015) details of which are included below:

• Technology

• Poor culture and control

• Large back-books

• Pensions

• Poor culture and practice in consumer credit

• Unfair contract terms

• Financial crime

In addition to those forward-looking areas, the Business Plan identifies the FCA’s key priorities and its market-focused work programme.

On 12 May, the Pinsent Masons’ Insurance & Wealth Management sector team held a webinar titled ‘The FCA Business Plan: what is on the agenda and implications for firms’ examining four specific areas from the Business Plan. Click here to listen to the webinar. Read more about the FCA focus on poor culture and controls in Section 8.

FCA publishes its final report on its retirement income market study (March 2015): On 26 March, the FCA published the final findings of its retirement income market study and its proposed remedies. The final findings of the market study set out the regulator’s conclusions on the effectiveness of competition in the retirement income market and set out remedies which the regulator expects will make competition work better for consumers. Click here to access the market study.

FCA finalises amendments to financial crime guide (April 2015): On 27 April, the FCA published finalised guidance (FG 15/7) ‘Guidance on Financial Crime Systems and Controls’ which was a summary of feedback received following a guidance consultation which was published in November 2014 (Proposed Guidance on Financial Crime Systems and Controls (GC 14/7)). Click here to read the summary of feedback.

As a result of the feedback received, the FCA has made a number of changes to its official regulatory guidance ‘Financial Crime, a guide for firms’ by means of an FCA instrument - Financial Crime Guide (Amendment No 3) Instrument 2015.

Publication of FCA thematic review on provision of premium finance to retail general insurance (GI) customers (May 2015): On 11 May, the FCA published its thematic review ‘Provision of premium finance to retail general insurance customers (TR 15/5)’ which looked into whether GI intermediaries and insurers provide timely and appropriate information to their customers, when arranging or providing premium finance. Amongst other things, the regulator found failings in the way some insurers and insurance intermediaries, including price comparison websites, are displaying information about the cost of home and car insurance to online consumers. In particular, it said consumers are not always provided with “clear and appropriate information on payment options and the different costs associated with these choices”. The regulator warned that it could take enforcement action against businesses that do not improve their practices. The FCA also identified shortcomings with the information that insurers and insurance intermediaries provided about the option of paying for home and motor insurance products in installments. Click here to read more on Out-Law. Click here to read the FCA thematic review.

FCA says that firms with consumer credit authorisation may still benefit from ‘connected contracts’ exclusion (May 2015): In May, the FCA updated its frequently asked questions page on consumer credit regulation in response to queries from businesses currently operating under an interim permission to carry out their consumer credit activities. Businesses are concerned that as they become authorised by the FCA to carry out their consumer credit activities, they will no longer be able to take advantage of a statutory exclusion from the regulatory regime for certain insurance mediation activities. On its frequently asked questions webpage, the FCA confirmed that the exclusion “can apply while a firm has interim permission but may cease to apply following it becoming fully authorised”.

The FCA took over responsibility for the consumer credit regime from the now-defunct OFT in April 2014, backed with stronger powers to clamp down on poor practice. Transitional rules run until April 2016 for firms that had previously been licensed by the OFT to provide consumer credit services, allowing them to operate under an interim permission.

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Commenting on this issue in an article on Out-Law, insurance law expert Iain Sawers of Pinsent Masons, said that the wording used by the FCA still leaves businesses with uncertainty on this point: “The guidance clarifies the position while the transitional arrangements are in place but there is still a degree of uncertainty surrounding how the ‘connected contracts’ exclusion will apply to firms once they become authorised under the FCA’s ne w credit regime from April 2016 or before. This will require firms to consider whether the consumer credit activity is a main focus of their business and whether it is carried on in a way that is incidental and complementary to that main business. If most or a significant proportion of the goods or services are financed by credit, arranged by the firm, the FCA’s view is that these consumer credit activities are unlikely to be ‘incidental’.” Click here to read more on Out-Law.

Publication of FCA thematic review on insurance claims handling for SMEs (May 2015): On 22 May, the FCA published its thematic review ‘Handling of Insurance Claims for Small and Medium-sized enterprises (TR 15/6)’ which looked into the handling of claims from SMEs. The FCA said its review of the SME insurance claims market revealed SMEs have “an overall poor perception” of “the claims experience”. Some SMEs that have been through the insurance claims process felt “they had not been treated fairly”, according to the regulator’s report. Linda Woodall, acting director of supervision at the FCA, said: “In an area where any delay could have a serious impact on a business or someone’s livelihood, it is vital that claims are taken seriously and processed promptly - that means putting customers at the very heart of the process. We expect all firms to carefully analyse the findings of the review and make any necessary changes to their approach to ensure that SME claimants are treated fairly.” Faults identified with the claims process included a lack of clarity over who was responsible for delivering claims outcomes, and poor communication between the different businesses involved in handling claims and with the SMEs themselves. Click here to read more on Out-Law. Click here to read the thematic review.

Publication of FCA thematic review of delegated authority arrangements in the general insurance market (June 2015): On 2 June, the FCA published its thematic review ‘Delegated Authority: Outsourcing in the general insurance market (TR 15/7)’ that looked at delegated authority arrangements in the general insurance market. The review focused on concerns over firms’ oversight of outsourced arrangements and the potential impacts any shortcomings could have upon the delivery of products and related services to customers. The FCA said its review highlighted that some insurers are failing to “demonstrate clear arrangements for assessing conduct risks associated with delegating authority”.

Commenting on the thematic review in an article on Out-Law, Alexis Roberts, Head of Pinsent Masons’ Insurance & Wealth Management sector said: “An important element of this from the FCA’s perspective is customer outcomes. ‘Customer centricity’ has always been a key element of the FCA’s agenda. This review emphasises that insurers should not regard customer outcomes as the responsibility of the distributor. This relates not just to the product itself but also to the way in which it is distributed under the delegated authority. Particularly in an extended distribution chain this can pose a real challenge for insurers, but the FCA’s review is clear that the insurer will nonetheless

have responsibility in these cases as well.” Click here to read more on Out-law. We look at this topic in more detail in Section 10.

Final rules for add-on Guaranteed Asset Protection (GAP) insurance published (June 2015): On 10 June, the FCA published its policy statement ‘Guaranteed Asset Protection Insurance: a competition remedy (PS 15/13)’ with new rules designed to encourage consumers to shop around before purchasing ‘add-on’ guaranteed asset protection (GAP) insurance with a car or other vehicle. The new rules will come into force on 1 September 2015. From this date, firms distributing add-on GAP insurance in connection with the sale of a motor vehicle will be obliged: (i) to provide customers with prescribed information designed to encourage them to consider the full range of options available to them; and (ii) to implement a mandatory “deferral period” that will prevent firms from introducing GAP insurance and concluding the sale on the same day.

The new rules have been put in place following the FCA’s 2014 general insurance market study, which was the first study carried out under its mandate to “promote effective competition in the interests of consumers.” In a report published last July, the FCA concluded that the “add-on” sale of insurance products had a “clear impact” on consumer behaviour; weakening engagement and reducing the likelihood that consumers would shop around. The FCA also noted that the “add-on” sale of insurance afforded providers significant point-of-sale advantages leading to poor customer outcomes through the purchase of poor value, unnecessary products, and for significantly higher prices than customers would have obtained by shopping around for a standalone policy.

The FCA has just finished consulting on two other rule changes that would apply to the sale of add-on products more generally: (i) a ban on “opt-out” sales, such as through the use of pre-ticked boxes; and (ii) requirements for firms to provide more “appropriate and timely” information about add-on products. A discussion paper on the possible imposition of a requirement to publish claims ratios will be published later this year. Click here to read the FCA policy statement and final rules (PS 15/13). Click here to read more on Out-Law. We discuss this topic in more detail in Section 18.

FCA Call for Input: Regulatory barriers to innovation in digital and mobile solutions (June 2015): On 17 June, the FCA published a ‘Call for Input’ seeking views about specific rules and policies that are restricting innovation or that should be introduced to facilitate innovation in digital and mobile solutions. On its website, the FCA noted that the paper will be of particular interest to businesses looking to use digital or mobile solutions for providing financial services including innovator firms (both authorised firms and new entrants), accelerators, businesses in the telecoms industry, software firms and technology companies.

Interestingly, the burden of regulation on insurance businesses, as both a commercial challenge and a barrier to innovation, was one of the repeated themes to emerge from a survey conducted by the Pinsent Masons’ Insurance & Wealth Management sector team, at an industry forum on the future of general insurance distribution held at our Crown Place offices last March. This reflected the

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Pinsent Masons | Insurance Legal Update – Spring/Summer 2015

perceived volume of regulatory activity affecting insurers. A number of firms also told us that burdensome regulation was detracting from their ability to provide the innovation that consumers want. This Call for Input from the FCA should be a welcome development for insurers.

With its new ‘Project Innovate’ hub, the FCA is actively encouraging new ideas from both emerging and established providers – albeit subject to strict consumer benefit and ‘significantly different’ criteria. But our research showed that firms are increasingly concerned about the ‘lag’ between technological developments and announcements by the regulators, without which it is difficult to see how product providers and distributors could treat consumers consistently. Keeping up with competitors can be difficult for firms struggling with cumbersome legacy systems that may be too expensive to upgrade, and a lack of staff trained in the necessary technical skills. In addition, traditional regulatory disclosures may be incompatible with the technology hardware increasingly used by consumers, such as tablets and smart phones. Views are sought by the FCA on its Call for Input by 7 September 2015. Click here to read more on the FCA website. Click here to read more on Out-Law.

Publication of a discussion paper on measuring value for general insurance (GI) products (June 2015): On 24 June, the FCA published a discussion paper exploring a range of options for introducing a measure, or measures, of value in GI markets. The FCA says the measures are not intended to give a perfect representation of value, but that they can be used as indicators of value. The regulator says that it is committed to introducing such measures in

order to shine a light on poor value in the market place. The paper suggests three potential methods for calculating the relative value of general add-on insurance products, as a means of addressing its concerns about the lack of competition between providers and poor value for customers. It has suggested the use of the ‘claims ratio’, a figure which shows the proportion of premiums received paid out to settle claims, as a standalone value measure, as included in its original report on potential remedies. Alternatively it suggested the possibility of using a package of data comprising claims frequencies, claims acceptance rates and average claims pay-outs; or a combination of claims ratios and claims acceptance rates. Click here to read more on Out-Law.

Iain SawersPartnerInsuranceT: +44 (0)20 7667 0020M: +44 (0)7717 713841E: iain.sawers@pinsentmasons.com

Alexis RobertsPartnerInsuranceT: (0)20 7667 0259E: alexis.roberts@pinsentmasons.com

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Speaking at an industry forum on the future of general insurance distribution organised by Pinsent Masons, assistant director of the Association of British Insurers (ABI) Jonathan de Beer identified the Solvency II reforms as a particular challenge that UK insurers will need to address. Some would describe the EU’s Solvency II framework as “a monster” and there was a concern it has been “over-engineered”, de Beer said, referring to the length of the new legislation and the fact that it has been approximately 15 years in the making. De Beer said that insurers face extensive questioning by regulators if they fall below their solvency capital limit and possible de-authorisation if they fall below the minimum capital threshold for their company. Click here to read more on Out-Law.

For a round-up of all Solvency II developments over the quarter click here to access the dedicated page on the PRA website.

New PRA webpage and policy statement on strengthening accountability in banks and insurers (March 2015): On 23 March, the PRA published policy statement ‘Strengthening individual accountability in banking and insurance - responses to CP 14/14 and CP 26/14 (PS 3/15)’. The policy statement provides feedback, inter alia, on responses to the PRA’s proposals in CP26/14 ‘Senior insurance managers regime: a new regulatory framework for individuals’ and issues the first set of the final PRA rules to implement the Senior Managers Regime (SMR) and Certification Regime for UK banks, building societies, credit unions and PRA-designated investment firms (known as ‘relevant authorised persons’), and the Senior Insurance Managers Regime (SIMR) for Solvency II insurers. Click here to read the policy statement. Click here to access the PRA’s new ‘strengthening accountability’ webpage.

In a press release accompanying the policy statement, Andrew Bailey, Deputy Governor, Prudential Regulation, Bank of England and CEO of the PRA said: “This paper marks a major milestone in implementing our new accountability regimes for banks and insurers. We believe that individuals in firms should be held accountable if they fail to meet reasonable standards. The new regimes should not deter individuals from performing a senior role; rather they will ensure that people know what they need to do to demonstrate to us that they have assumed the appropriate responsibility to their role and taken all reasonable steps to mitigate or stop failings in their area.” Click here to read the press release.

PRA and FCA set out ‘proportionate’ senior persons rules for Solvency II and non-Solvency II insurers firms (March 2015): On 27 March, the FCA and PRA published a joint consultation paper (CP 13/15) setting out how they will change their existing rules for ‘approved persons’ at firms subject to the Solvency II regime. Click here to read CP 13/15. The new Solvency II ‘fit and proper’ requirements will apply to those persons who will be responsible for key functions from 1 January 2016, according to the joint consultation. The new approved persons’ regime for Solvency II firms would begin on 7 March 2016 at the same time as the SIMR, subject to the relevant provisions of the Banking Reform Act being brought into force.

2. Regulatory Round-up: PRASolvency IIOn 20 March, the Prudential Regulation Authority (PRA) published final rules setting out how it will implement the EU’s new Solvency II regulatory regime warning that large UK insurers should prepare for a “fundamental change” to the way in which they are regulated from next year.

PRA chief executive Andrew Bailey said that publication of the finalised rules would allow firms to finalise their own Solvency II preparations, ahead of the new regime coming into force on 1 January 2016. The PRA has also published an additional consultation paper on the rules governing the application process for the ‘volatility adjustment’, which firms with long-term insurance products such as annuities will be able to apply to use to mitigate the effects of short-term market volatility on the value of their liabilities.

Commenting on the publication of the final rules for an article in Out-Law, insurance regulation expert Rabbani Choudhury of Pinsent Masons, said that the final rules had been substantially updated and reshaped the UK’s first Solvency II implementation proposals, which were published for consultation by the old Financial Services Authority in November 2011.

“The publication of these rules and supervisory statements, which is likely to be the PRA’s most important communication on Solvency II this year, is positive for insurers as they can at least start to have some certainty over the regulator’s requirements and expectations under Solvency II, which will start to apply to them from 1 January 2016. “That said, becoming familiar with and being able to navigate around the minefield of provisions will take firms some time to get used to. Now that the PRA has formally set out its position, the main focus for ‘UK Solvency II firms’ over the coming months will be to ready their Solvency II approval applications and start submitting these to the PRA and to finalise arrangements internally to make the transition to the new regime for when it starts to apply.” he said.

The new Solvency II regime comes into force across the EU on 1 January 2016, and will apply to more than 400 retail and wholesale UK insurance firms and to the Lloyd’s insurance market. The new rules set out broader risk management requirements for European insurers and require firms to hold enough capital to cover all their expected future insurance or reinsurance liabilities. Insurers can apply to the PRA for permission to adjust this capital requirement to reflect the extent to which they are already protected against market volatility. Click here to read more on Outlaw.

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A separate FCA and PRA consultation (CP 12/15), also published on 27 March, then set out proposals for changes to the ‘approved persons’ regime applicable to ‘non-directive firms’ (NDFs). Click here to read CP 12/15. The draft rules propose simplifying the current list of possible controlled functions into a single ‘small insurer senior management’ NDF function, as well as how the fitness and propriety of those individuals would be assessed and conduct standards applied. Individuals that are currently approved to perform controlled functions would be ‘grandfathered’ into the new regime.

According to the PRA, the new regimes are designed to ensure that those who run regulated firms “have clearly defined responsibilities and behave with integrity, honesty and skill”. Commenting on the regimes in an article in Out-Law, Financial regulation expert Michael Ruck of Pinsent Masons, said “Senior management within insurers should carefully consider the requirements to be placed upon them by these new rules. This is a further example of the FCA and PRA seeking to clarify their expectations of senior managers with the almost inevitable conclusion that these rules, along with more detailed statements of responsibility and attestations, will be used to hold senior management to account personally.” Click here to read more on Out-Law.

PRA policy statement on policy holder protection (April 2015): On 1 April, the PRA published PS 5/15 on policy holder protection. The policy statement provides feedback to responses to the related consultation papers issued by the PRA last year (CP21/14 Policyholder Protection, CP20/14 Depositor Protection and CP4/15 Depositor, Dormant Account and Policyholder Protection – amendments). It sets out the proposed rules for the PRA Rulebook, which, the PRA states, are intended to align the existing insurance compensation rules more closely with the PRA’s statutory objectives, and will contribute to the future operational effectiveness of the Financial Services Compensation Scheme (FSCS) in providing continuity of cover, payment of benefits falling due and compensation in the event of the failure of an insurance firm. The policyholder protection rules and statement of policy take effect on and from 3 July 2015. Click here to read the policy statement.

PRA policy statement and consultation paper on PRA Rulebook (April 2015): The PRA is rewriting the PRA Handbook over the coming years to create a PRA Rulebook. On 2 April, the PRA published PS 7/15, a policy statement with its final rules, supervisory statements and a statement of policy on the PRA Rulebook following its consultation in November last year. The policy statement is the second in a series of publications over two years that will redraft the PRA Handbook (which was inherited from the Financial Services Authority). Click here to read the policy statement.

The PRA intends to launch the Rulebook website online this summer. The Rulebook website will replace the existing Handbook

site currently shared with the Financial Conduct Authority. The redesigned site will reshape the PRA’s policy material by improving the online presentation of the PRA’s rules, including style, structure and functionality.

PRA consultation paper on board responsibilities (May 2015): On 21 May, the PRA published a consultation paper seeking views on a draft supervisory statement providing guidance on the PRA’s expectations relating to board responsibilities including: setting strategy, culture, risk appetite and risk management, board composition, the respective roles of executive and non-executive directors, knowledge and experience of non-executive directors, board time and resources, management information and transparency, succession planning, remuneration, subsidiary boards and board committees. The PRA states that the consultation paper is relevant to all PRA-regulated firms and that it complements the individual accountabilities which the PRA is introducing through the Senior Insurance Managers Regime (SIMR). Click here to read the consultation paper.

PRA supports insurer infrastructure investment if adequately capitalised (June 2015): In a speech by Andrew Bulley, PRA Director of Life Insurance, published on 2 June, he said that the PRA was ‘neutral’ on whether insurers should increase their exposure to infrastructure investments so long as they are adequately capitalised. The information and data requirements in Solvency II should help inform an insurer’s decision on whether to invest in infrastructure, Bulley said, and the PRA will continue to review the evidence as the new regime beds down. Click here to read more on Out-Law.

Bruno Geiringer PartnerInsurance T: +44 (0)20 7418 7306M: +44 (0)7810 752568E: bruno.geiringer@pinsentmasons.com

Ben GraySolicitorInsurance T: +44 (0)20 7490 6648E: ben.gray@pinsentmasons.com

Rabbani Choudhury Associate Insurance T: +44 (0)20 7490 9336E: rabbani.choudhury@pinsentmasons.com

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mutual insurers and friendly societies with the opportunity to raise additional working capital for business growth and new products. The next step is for detailed regulations to be prepared by HM Treasury and agreed with the regulators.

Small Business, Enterprise and Employment Act 2015 receives royal assent (March 2015): On 26 March, the Small Business, Enterprise and Employment Act received royal assent. The Small Business, Enterprise and Employment Act 2015 regulates a number of aspects of business, including: appointment and disqualification of directors, insolvency, company filing requirements, aspects of employment law. The broad changes also amend existing legislation such as the Companies Act 2006 and insolvency legislation. For example, section 87 of the Act inserts a new section 156A in the Companies Act 2006 which requires all directors to be natural persons and prohibits the appointment of corporate directors. An appointment made in contravention of this section is void. A new section 156B gives the Secretary of State the power to make regulations setting out the exceptions to the general requirement that directors must be individuals. The transition period (dealt with in a new section 156C of the Companies Act) provides that remaining corporate directors will cease to be directors after one year of the relevant section 156A coming into force (subject to any exceptions set out in regulations made under section 156B).

European Union Referendum Bill 2015 – 2016 (May 2015): The European Union Referendum Bill 2015-2016 was presented to Parliament on 28 May and passed its second reading in the House of Commons on 9 June. The Bill makes provision for the holding of a referendum in the UK and Gibraltar on whether the UK should remain a member of the European Union. The legislation is of great interest and concern to the UK insurance industry given the impact an exit from the European Union would have on the industry. The International Underwriting Association (IUA) is to conduct a detailed survey of its members to assess the views of its members on an exit from the EU. Lloyd’s chief executive, Inga Beale, has also said that an exit from the EU would be “bad for business” for Lloyd’s, as it would be detrimental to free trade and could allow competing international hubs to flourish.

ADR Directive Regulations published: Two sets of regulations, in March and June 2015, were laid in Parliament to implement the European Directive on alternative dispute resolution (ADR) in the UK.

• The Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 were published on 18 March; and

• The Alternative Dispute Resolution for Consumer Disputes (Amendment) Regulations 2015 were published on 23 June.

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3. Legislative Round-UpIn this section, we look at legislative developments during the quarter that are of particular interest to the insurance industry.

Serious Crime Act 2015 receives royal assent / financial services aspects (March 2015): On 3 March, the Serious Crime Act received royal assent. The Act introduces changes to the Computer Misuse Act 1990 (CMA), which has cyber security implications. Under the new rules, a person will be guilty of an offence if they cause, or create a significant risk of, “serious damage of a material kind” in relation to a computer where the activity is unauthorised, where the person knew at the “time of doing the act” that their actions are unauthorised and they either intended to cause serious damage of a material kind or is “reckless as to whether such damage is caused”. Individuals convicted of breaching the new Computer Misuse Act rules will generally face up to 14 years in jail and/or a fine, but that penalty could be more severe in certain circumstances. If individuals’ actions cause or create a significant risk of loss to human life or illness or injury, or serious damage to national security they could be sentenced to life imprisonment. Click here to read more on Out-Law.

Consumer Rights Act 2015 receives royal assent (March 2015): On 26 March, the Consumer Rights Act received royal assent. The Consumer Rights Act aims to rectify the traditional complexities of UK consumer law by consolidating eight pieces of separate legislation in this area into a single piece of legislation. The Act is split into three parts. Part 1 deals with consumer contracts for goods, digital content and services; Part 2 covers unfair terms; and Part 3 contains miscellaneous and general provisions. For the most part, the law set out in the Act is similar to existing UK laws, although there have been some changes particularly in relation to services and unfair terms. The Act also introduces significant changes to private actions in competition law; including expanding the jurisdiction of the Competition Appeal Tribunal, the introduction of opt-out collective actions and the establishment of voluntary redress schemes. Click here to read a guide to the Act on Out-Law.

Mutual Deferred Shares Act 2015 receives royal assent (March 2015): On 26 March, the Mutual Deferred Shares Act received royal assent. Notably, it is the first legislation dedicated exclusively to mutual insurers for 20 years, and it started off as a private members’ bill in the House of Lords in 2013 backed by Lord Naseby and completed in the Commons by Conservative MP Jonathan Evans. The act permits the creation of member investment shares for the first time in insurance mutuals. Up to now, these firms can only raise capital through retained earnings and debt. Shares will qualify as restricted tier one capital for regulatory purposes and provide

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Pinsent Masons | Insurance Legal Update – Spring/Summer 2015

The ADR Directive was required to be transposed into UK law by 9 July. The government website publishing the regulations provides the following information. These regulations, bar the business information requirement, come into force on 9 July 2015. The business information requirement takes effect from 1 October 2015. The regulations:

• place an information requirement on businesses selling to consumers

• establish competent authorities to certify ADR schemes

• set the standards that ADR scheme applicants must meet in order to achieve certification

• The regulations do not make participation in ADR schemes mandatory for traders. The regulations do require almost all businesses which sell directly to consumers to point the consumer to a certified ADR scheme – where they cannot resolve a dispute in-house – and declare whether or not they intend to use that scheme

• The regulations also require that ADR providers wishing to gain certification must meet certain standards with regard to independence, impartiality, and quality of expertise.

The regulations also implement the provisions of the European Directive on online dispute resolution for consumer disputes (ODR Regulation) that need to be transposed into domestic law. Those regulations do not come into force until 9 January 2016. We look at the impact of the ODR Regulation in more detail in Section 15.

Manoj VaghelaPartnerInsurance T: +44 (0)20 7490 6985M: +44 (0)7887 833214E: manoj.vaghela@pinsentmasons.com

Jonathan CavillAssociateInsurance T: +44 (0)20 7418 7014M: +44 (0)7775 546063E: jonathan.cavill@pinsentmasons.com

Rebecca Ransome-LewisSenior AssociateInsuranceLondonT: +44 (0)20 7418 9521M: +44 (0)7795 043214E: rebecca.ransome-lewis@pinsentmasons.com

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On 16 June, the European Securities and Markets Authority (ESMA) published a statement by Steven Maijoor, ESMA Chair, to the European Parliament’s Committee on Economic and Monetary Affairs (ECON) on its work on implementing measures under MiFID II and the Markets in Financial Instruments Regulation (MiFIR)). The statement notes that the following three areas of work are receiving the most attention from stakeholders and are also technically complex: Non-equity transparency, Position limits, and Ancillary activity. Click here to read the statement.

Council of EU mandate to negotiate agreement with US on reinsurance (April 2015): On 21 April, the Council of the European Union issued a mandate to the European Commission to negotiate an agreement with the United States on reinsurance. The mandate consists of a decision authorising the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on behalf of the EU, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament. Commenting on the development in an article on Out-Law, expert in insurance and reinsurance regulation Colin Read of Pinsent Masons, said: “Any measures to build confidence in international reinsurance are welcome. The US is the biggest global market for insurance and reinsurance with the UK alone the third largest. Regulation and supervisory challenge has the potential to inhibit reinsurance trade between the US and EU bloc. Greater clarity around both should make doing business easier. The time taken to get this far remains a concern; trade bodies need to continue to keep these issues on the agenda in order that this particular agreement can be reached and brought on stream before the end of the decade.” Click here to read more on Out-Law.

Financial integration improves across the EU (April 2015): On 27 April, the European Central Bank (ECB) published its annual report on financial integration in Europe. Click here to read the report. Financial integration in Europe has recovered to a level close to where it was before the Eurozone financial crisis began. The recovery in integration is largely due to the establishment of a Banking Union by the ECB, particularly the outright monetary transaction framework brought in in 2012, the single supervisory mechanism, plus comprehensive assessment of banks and other “unconventional” monetary policy actions taken by the ECB, it said. Click here to read more on Out-Law.

EU laws on fraud could be updated to reflect new payment technologies (April 2015): On 28 April, the European Commission published a report ‘The European Agenda on Security’ which includes plans to tackle cyber crime. As part of the report, the Commission said it intends to review EU legislation from 2001 which prohibits fraud and counterfeiting activities relevant to non-cash payment instruments. Those rules only apply to physical non-cash payment methods, such as credit cards and cheques. It said it could bring forward proposals to update those rules in 2016 to take account of newer forms of crime and counterfeiting in financial instruments. Under the section dealing with cybercrime, the report states, inter alia: “Citizens are concerned about issues like payment fraud. However, the 2001 framework decision combating fraud and counterfeiting of non-cash means of payments

4. Regulatory Round-Up: Europe & BeyondWe look - in chronological order - at recent and forthcoming legal developments coming from Europe and beyond that will be of interest to the insurance industry.

Infrastructure investments for insurers (March 2015): On 27 March, the European Insurance and Occupational Pensions Authority (EIOPA) published a discussion paper on insurer infrastructure investments. The discussion paper sets out topics including: a definition of infrastructure investments that offer predictable long-term cash-flows and whose risks can be properly identified, managed and monitored by insurers; and the effectiveness of the current Solvency II risk management requirements in ensuring that the risks of this new asset class are properly managed. The public consultation period for responding to the paper ended on 26 April 2015. The next step is for EIOPA to prepare technical advice to the European Commission.

In a speech by Andrew Bulley, PRA Director of Life Insurance, published on 2 June, he said that the PRA was ‘neutral’ on whether insurers should increase their exposure to infrastructure investments so long as they are adequately capitalised. The information and data requirements in Solvency II should help inform an insurer’s decision on whether to invest in infrastructure, Bulley said, and the PRA will continue to review the evidence as the new regime beds down. Click here to read more on Out-Law.

Recently, on 2 July, EIOPA published a consultation paper seeking feedback on its advice on infrastructure investment risk categories. The consultation will end on 9 August, and EIOPA aims to publish its final advice in September. Click here to read more on Out-Law.

MiFID II Directive: HM Treasury and the FCA consult on its transposition into national law (March 2015): On 26 March, the FCA published a discussion paper ‘Developing our approach to implementing MiFID II conduct of business and organisational requirements (DP 15/3)’. The FCA is seeking views on a range of implementation issues mainly relating to the retail conduct parts of the revised Markets in Financial Instruments Directive (MiFID II). It plans to gather feedback and develop policy options before it consults formally later in 2015 on all of the changes to be introduced through MiFID II. Separately, on 27 March, HM Treasury published its consultation paper ‘Transposition of the Markets in Financial Instruments Directive’ which discusses specific issues, and asks for feedback, on certain policy decisions and contains, in the annexes to the paper, the technical drafting of the secondary legislation required to implement the Directive. The UK is required to transpose MiFID II by July 2016 and its provisions will take effect on 3 January 2017. Click here to read the FCA discussion paper. Click here to read the HM Treasury consultation paper.

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no longer reflects today’s realities and new challenges such as virtual currencies and mobile payment”. The Commission will assess the level of implementation of the current legislation, consult relevant stakeholders and assess the need for further measures. Click here to read the report. Click here to read more on Out-Law.

The Joint Committee of the ESAs – main risks to EU financial market stability has intensified (May 2015): On 5 May, the Joint Committee of the European Supervisory Authorities (ESAs) published its Fifth Report on Risks and Vulnerabilities in the EU Financial System. Overall, the report found that in the past six months, risks affecting the EU financial system have not changed in substance, but have further intensified. A summary of the report noted that: “The EU’s economic performance improved slightly in early 2015, however the financials sector in general continues to be affected by a combination of factors such as low investment demand, economic uncertainty in the Eurozone and its neighboring countries, a global economic slow-down and a low-interest rate environment, The main risks affecting the financial system remain broadly unchanged from those identified in the report’s previous edition, but have become more entrenched. The major risks include: (i) low growth, low inflation, volatile asset prices and their consequences for financial entities; (ii) search for yield behaviour exacerbated by potential rebounds, (iii) deterioration in the conduct of business, and (iv) increased concern about IT risks and cyber-attacks.” Click here to read the report.

Capital Markets Union (CMU) Green Paper ‘Building a Capital Markets Union’ – Insurance Europe response published (May 2015): On 13 May, Insurance Europe, the European insurance and reinsurance federation, published its response to the CMU Green Paper, noting that the availability of attractive long-term assets, and the removal of barriers for insurers investing in them, is crucial to further develop insurers’ positive role as Europe’s largest institutional investors. Click here to read the Insurance Europe response.

The stated aim of the CMU is to break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance. The European Commission said that the current environment is tough for businesses that remain heavily reliant on banks and relatively less on capital markets. The consultation period for responding to the Green Paper has now closed. Click here to read the CMU Green Paper. Click here to read more on Out-Law about the CMU.

On 27 May, the FCA published its response to the Green Paper. Click here to read the response. In a speech called ‘Capital Market’s Union – a regulator’s perspective’ by David Lawton, the FCA’s Director of Markets, Policy and International delivered at the Deutsche Borse Group ‘Blueprint for a European Capital Markets Union’ event on 27 May in London, he said “CMU represents a potentially massively important initiative for Europe. The programme needs to recognise the macroeconomic context, and the work that is already in place or impending to embed a single capital market. Measures need to lock together the supply of finance,

efficient, transparent and competitive intermediation, and ease of access by corporates and other users. Investor protection will be key to underpinning a greater supply of finance. And competition will be key to transparent and cost-effective intermediation. CMU is geared to realise our markets’ full potential. It will be a long-term project. The FCA stands ready to help the EU authorities with this important work.” Click here to read Mr Lawton’s speech in full.

EIOPA updates on main risks to financial stability (June 2015): On 1 June, EIOPA published its financial stability report for May 2015 noting, in the press release accompanying the publication that, risks identified in the previous Report (December 2014) remain broadly unchanged: a weak macroeconomic environment, protracted low interest rates and increased credit risks continue to affect the (re)insurance and occupational pension sectors of the European Economic Area. Click here to read the press release and the report.

EIOPA speech on insurance distribution in a challenging environment (June 2015): On 12 June 2015, the European Insurance and Occupational Pensions Authority (EIOPA) published a speech given by Gabriel Bernardino, EIOPA Chairman, at the Annual General Meeting for the European Federation of Insurance Intermediaries (BIPAR) on ‘Insurance Distribution in a Challenging Environment’. Click here to read the speech. Mr Bernardino provided an update on the following key topics for EIOPA:

• Insurance Distribution Directive (IDD)

• Key Information Documents (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs)

• EIOPA’s vision on Conduct of Business Supervision

• Upcoming challenges posed by the digital era.

IAIS publishes draft issues paper on conduct of business in inclusive insurance (June 2015): On 19 June, the International Association of Insurance Supervisors (IAIS) published for consultation two papers: (i) a draft issues paper on Conduct of Business in Inclusive Insurance; and (ii) a draft paper on Issues in Regulation and Supervision in Microtakaful (Islamic Microinsurance). The first paper was prepared by a drafting group of the IAIS’ Financial Inclusion Working Group (FIWG) and was developed “in recognition of the important of the fair treatment of customers in the inclusive insurance markets, as customers in these markets are particularly vulnerable”. The aim of the second paper is to provide an overview of the issues relating to microtakaful and its role in enhancing financial inclusion. Microtakaful is considered a type of insurance that could promote access to insurance in Islamic communities and regions. Comments can be made on the draft issues papers until 6 August 2015. Click here to read more.

Fourth EU Anti-Money Laundering Directive comes into force (June 2015): On 25 June, the Fourth EU Anti-Money Laundering (AML) Directive came into force repealing and replacing the Third EU AML Directive. Member states have until 26 June 2017 to implement the changes within domestic legislation. Money

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laundering describes the process where the proceeds of criminal activity are concealed by using the financial system to disguise the source of the money. Money laundering accounted for 2.7% of global gross domestic product (GDP) in 2009, or $1.6 trillion, according to the UN. The text of the new Directive sets out specific reporting obligations for banks, auditors, lawyers, real estate agents and casinos, among others, on suspicious transactions made by their clients. The Directive requires countries to set up registers of the ultimate ‘beneficial’ owners of corporate and other legal entities including trusts. The registers will be accessible by ‘authorities’ within each country, to ‘obliged entities’ such as banks doing due diligence into customers, and to people such as investigative journalists who can demonstrate a ‘legitimate interest. Click here to read more on Out-Law.

Agreement reached on Insurance Distribution Directive (July 2015): A new Insurance Distribution Directive (IDD) is a step closer to being finalised after EU law makers reached agreement on the planned reforms. Representatives from the European Parliament’s Economic and Monetary (ECON) Committee reached agreement with the Latvian presidency of Council of Ministers on the reforms on Tuesday. The agreement on the legal text follows negotiations between the European Parliament, the Council and the European Commission, the Commission said. The proposed Directive, which seeks to improve the way insurance products are sold, is still subject to “technical finalisation” before a draft can be endorsed by the Council and the ECON Committee, Commission spokeswoman Maud Scelo said. The IDD will only be introduced into law if it is approved in separate votes by the Council and the European Parliament. Click here to read more on Out-Law. Click here to read our Guide to the Insurance Distribution Directive on Out-Law.

Alexis RobertsPartnerInsuranceT: (0)20 7667 0259E: alexis.roberts@pinsentmasons.com

Rachel CussenSolicitorInsurance T: +44 (0)20 7490 6416M: +44 (0)7810 684653E: rachel.cussen@pinsentmasons.com

Chris RiachSolicitorInsurance T: +44 (0)20 7418 9572M: +44 (0)7880 173084E: chris.riach@pinsentmasons.com

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5.Enforcements Round-Up: FCAIn recent months there has been further considerable regulatory enforcement action against banks and non-compliant senior individuals.

Insurance industry related enforcement actionMoorhouse fined for failures in relation to telephone sales (April 2015): On 23 April, the FCA published the final notice it had issued to Moorhouse Group Limited (Moorhouse) imposing a fine of £159,300 for failures in relation to the oversight and control of its telephone sales and in particular the sale of commercial vehicle add-on insurance products during 2012. On its website, the FCA noted that in April 2013, it had conducted a review of telephone sales of commercial vehicle core insurance products and related insurance add-on products by Moorhouse. Moorhouse appeared to provide customers with inadequate information in relation to the sale of add-on products before completion of sale. A subsequent review by a skilled person, an independent third party appointed at the direction of the FCA, found that insufficient details about each product were being provided to customers in good time. Click here to read more on the FCA website.

In an Insurance Times article on 22 May, ‘ Analysis: Moorhouse add-on fine serves as a warning for small brokers’ which looks at the implications of the Moorhouse fine for brokers and the insurance industry, Pinsent Masons’ senior financial services enforcement lawyer Michael Ruck, formerly with the FCA, says brokers should not bury their head in the sand over add-ons compliance. “Insurers and brokers should take note of the content of this final notice, along with the proposed action set out in the FCA’s business plan in relation to insurance add-ons, which, although not new to many, will only serve to aggravate the FCA’s position should it identify similar failings going forward. The FCA’s work on add-ons is also important because it has provided helpful insight into the way the regulator will use behavioural economics as a regulatory tool. In its market report on add-ons, it identified a risk that, because of the way add-ons are often sold after the customer has made a decision to purchase the core product, the customer will not fully focus on whether the add-on product provides proper value. This might be the case even where proper disclosures are made to the customer. This shows that regulated firms must consider customer outcomes as well as whether the product and sales processes comply with the handbook.” Click here to read the article in full.

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Tribunal directs the FCA to ban a former insurance broker (April 2015): On 16 April, the FCA published a final notice and an Upper Tribunal decision in relation to former insurance broker, Stephen Robert Allen. The FCA notice prohibits Mr Allen from performing any function in relation to any regulated activities carried on by any authorised or exempt persons, or exempt professional firm with effect from 14 April 2015. The original enforcement action by the FCA related to fees Mr Allen had allegedly charged improperly to an insurance client. Mr Allen also subsequently was found to have submitted a forged document in evidence and to have knowingly given untrue evidence before the High Court in another matter. Click here to read more on the FCA website.

Non-executive director fine reduced: Angela Burns, a non-executive director at two mutual insurance companies whose failure to declare a conflict of interest led to a fine of £154,800 by the FCA and a ban from acting as an approved person. In a recent decision from the Upper Tribunal, some of the FCA’s allegations were upheld but others were dismissed and it has now decided to reduce the fine to £20,000 and restrict the ban to non-executive roles.

Big Bank and Business fines for misconduct and failingsFCA fines Clydesdale bank £20.6 million for failings in PPI complaints handling (April 2015): On 14 April, the FCA published the final notice it had issued to Clydesdale Bank plc. imposing a fine of £20,678,300 for “serious failings in its Payment Protection Insurance (PPI) complaint handling processes between May 2011 and July 2013” noting that this was the largest ever fine imposed by the FCA for failings relating to PPI. Amongst the failings, the regulator noted that “a team within Clydesdale’s PPI complaint handling operation had altered certain system print outs (in a small number of cases) to make it look as if Clydesdale held no relevant documents and had deleted all PPI information from a separate print out listing the products sold to the customer. These practices were not known to or authorised by Clydesdale’s PPI leadership team or more senior management.” Click here to read more on the FCA website.

FCA fines The Bank of New York Mellon London Branch (BNYMLB) and The Bank of New York Mellon International Limited (BNYMIL) £126 million for failure to comply with custody rules (April 2015): On 14 April, the FCA published the final notice it has issued to BNYMLB and BNYMIL imposing £126 million for failing to comply with the FCA Client Assets Sourcebook (Custody Rules, or CASS), which applies to safe custody assets and to client money. Georgina Philippou, acting director of enforcement and market oversight at the FCA said, inter alia: “The size of the fine today reflects the value of safe custody assets held by the Firms as well as the seriousness of the failings and the fact that these failings were not identified by the

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Firms’ own compliance monitoring. Other firms with responsibility for client assets should take this as a further warning that there is no excuse for failing to safeguard client assets and to ensure their own processes comply with our rules.Client assets protection continues to be a priority for the FCA and firms who hold client assets should review their processes in line with these findings to ensure full compliance with the Custody Rules.” Click here to read more on the FCA website.

FCA fines Deutsch Bank £227 million (April 2015): On 23 April, the FCA published the final notice it had issued to Deutsch Bank imposing a fine of £227 million for LIBOR and EURIBOR failings and for misleading the regulator. On its website, the regulator noted that this was its largest ever fine for LIBOR and EURIBOR-related (collectively known as IBOR) misconduct. Georgina Philippou, acting director of enforcement and market oversight at the FCA, said: “This case stands out for the seriousness and duration of the breaches by Deutsche Bank – something reflected in the size of today’s fine. One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.” Click here to read more on the FCA website.

FCA fines Barclays £284.4 million for Forex failures (May 2015): On 20 May, the FCA published the final notice it had issued to Barclays Bank imposing a financial penalty of £284,432,000 on Barclays Bank Plc (Barclays) for failing to control business practices in its foreign exchange (FX) business in London. The FCA noted that this was the largest financial penalty ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA). On its website, the regulator noticed that “Barclays’ controls over its FX business were inadequate and ineffective. It primarily relied on its front office FX business to identify, assess and manage the relevant risks – however the front office failed to pick up on obvious risks associated with confidentiality, conflicts of interest and trader conduct. Some of those responsible for front office management were aware of and/or at times involved in this misconduct, reflecting a failure to embed the right values and culture in Barclays’ FX business. Barclays’ control and risk functions failed to challenge effectively the management of these risks in the FX business.” The regulator also noted that it had worked closely with other regulators in the US on the case including the Commodities Futures Trading Commission (CFTC), the Federal Reserve Bank of New York, the New York State Department of Financial Services (NYDFS), and the U.S. Department of Justice (DOJ). Click here to read more on the FCA website.

Merrill Lynch fined £13.2 million for transaction reporting failures (April 2015): On 22 April, the FCA published the final notice it had issued to Merrill Lynch International imposing a fine of £13,285,900 for its incorrect reporting of 35,034,810 transactions and its failure to report another 121,387 transactions between November 2007 and November 2014. On its website, the FCA said the fine was the highest imposed for transaction

reporting failures to date and reflected the severity of MLI’s misconduct, failure to adequately address the root causes over several years despite substantial FCA guidance to the industry and a poor history of transaction reporting compliance, consisting of a Private Warning issued in 2002 and a fine of £150,000 in 2006. Click here to read more on the FCA website.

FCA fines Lloyds Banking Group £117 million for failing to handle PPI complaints fairly (June 2015): The FCA issued its largest ever retail fine to Lloyds Bank Plc, Bank of Scotland Plc and Black Horse Ltd (together Lloyds) for failing to treat their customers fairly when handling Payment Protection Insurance (PPI) complaints between March 2012 and May 2013. Click here to read more on the FCA website.

Adam Grimberg Legal ExecutiveInsurance T: +44 (0)20 7490 6643M: +44 (0)7884 277845E: adam.grimberg@pinsentmasons.com

Ravi NayerSenior AssociateInsurance T: +44 (0)20 7490 6972M: +44 (0)7717 347802E: ravi.nayer@pinsentmasons.com

Colin ReadPartnerInsurance T: +44 (0)20 7418 7305M: +44 (0)7824 865913E: colin.read@pinsentmasons.com

Richard Slaven Partner Insurance T: +44 (0)20 7490 6381M: +44 (0)7977 072005E: richard.slaven@pinsentmasons.com

Ben LaurenceAssociateInsurance T: +44 (0)20 7490 6268E: ben.laurence@pinsentmasons.com

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6. Disputes, Claims and Coverage Round-UpWe provide a round-up of recent and forthcoming claims-related legal developments. For recent cases of interest, see Section 7.

Insurance Fraud taskforce publishes its first interim report (March 2015): On 18 March, the Insurance Fraud taskforce which was established in December 2014, published its first interim report. According to the report, the group will focus on “four broad topics” in order to keep its work “focused and manageable”; including preventing the encouragement of fraudulent claims, fraud deterrents in the claims process, policyholder behaviour drivers and the role of fraud data. The Insurance Fraud Taskforce is being chaired by former Law Commissioner, David Hertzell, and is made up of representatives from the ABI, BIBA, Insurance Fraud Bureau, Financial Services Consumer Panel, Citizens Advice and Financial Ombudsman Service. It was set up to investigate the causes of fraudulent behaviour and recommend solutions to reduce the level of insurance fraud, with the ultimate intention of lowering costs and protecting honest consumers’ interests. The Association of British Insurers (ABI) and British Insurance Brokers’ Association (BIBA) have agreed to update existing guidance on the prevention of application fraud by the end of 2015, in response to a single early recommendation to the industry contained in the group’s first report. The taskforce will now “explore the issues in more depth before making final recommendations” later this year. Click here to read more on Out-Law.

New insurance fraud data sharing guidelines issued: In a related development, guidelines aimed at helping insurers comply with UK data protection laws when passing on information to one another to help combat fraud have been issued by the Chartered Insurance Institute (CII) in conjunction with the Insurance Fraud Bureau (IFB). The guidelines are aimed at clarifying how provisions of the Data Protection Act that enable the sharing of personal data to combat fraud work in practice. They are also aimed at improving both the quality of requests for data and responses to those requests made by insurers, and the speed of responses to those requests. Click here to access the guidelines. Click here to read more on Out-Law.

Joint initiative by the government and the insurance sector to tackle cyber risk (March 2015): On 23 March, HM Government and Marsh, published a report called ‘UK cyber security: the role of insurance in managing and mitigating the risk’. The report highlighted a discrepancy between the cover that chief executives believe their companies have for cyber risk and the reality of the insurance protection their businesses have purchased. According to the report, just 2% of large businesses in the UK have “explicit cyber cover” and approximately half of the businesses the

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government liaised with for the report said they were not aware “that cyber risks can even be insured”. Click here to access the report. We look at this topic in more detail in Section 13.

FCA complaints data for the second-half of 2014 (March 2015): On 30 March, the FCA published complaints data for the months between July and December 2014, a summary of which is included in the table below (as adapted from the FCA webpage). Click here to access the FCA summary.

FCA Complaints Data July – December 2014

2,183,540 Total new complaints opened against financial services firms between July and December 2014

7% Decrease on the 2,358,732 complaints between January and July 2014

1,058,918 New complaints about payment protection insurance. A 14% decrease on complaints between January and July 2014

£2.44bn Total redress paid in the second half of 2014

FCA focus on personal accountability driving increase in financial firm whistleblowing (March 2015): A significant increase in the number of whistleblowing cases opened by the FCA over the course of the last year shows that the regulator’s increased focus on personal accountability is changing employee behaviour in the financial services industry. Click here to read more on Out-Law.

Incoming president of APIL says public-facing businesses need compulsory public liability insurance (April 2015): In a speech delivered on 23 April, the incoming president of the Association of Personal Injury Lawyers (APIL), Jonathan Wheeler, said that companies that deal with the public should be required to take out public liability insurance, so that customers and members of the public that are injured on business premises through no fault of their own would always be fairly compensated. Click here to read the speech. Click here to read more on Out-Law.

Financial Services Compensation Scheme (FSCS) anticipating a further increase in claims related to self-invested personal pensions (SIPPs) (April 2015): According to the latest issue of its ‘Outlook’ publication, the FSCS began to receive claims from retail consumers with “very limited investment experience” whose savings had been transferred to SIPPs in 2014. Click here to read the FSCS Outlook publication. FSCS chief executive Mark Neale said that the scheme was now compensating investment losses in many SIPP-related cases, and was also seeing “higher volumes” of these claims the total compensation paid out in relation to SIPPs could ultimately go over that £100m, with knock-on implications for retail life and pensions firms due to the way in which the compensation fund is funded and structured. Click here to read more on Out-Law.

Insurance Act 2015 – BILA mock trial (May 2015): BILA, the British Insurance Law Association, hosted a mock trial on 20 May 2015 to explore some of the legal and practical issues that could arise out of the coming into force of the Insurance Act 2015 on 12 August 2016. Ben Gray, solicitor in Pinsent Masons’ Insurance Wealth Management team, attended the mock trial and reports back. The trial, presided over by the Right Honourable Lord Mance, concerned a hypothetical case in which an insured claimed for loss caused by hacking of its IT system. The focus of the dispute centred on issues regarding fair presentation of risk and breaches of warranties, both areas of the law subject to change in the new Act.

The insured failed to disclose the presence of a virus in its IT system. Although the insured did not know of the virus, its external IT consultant did. Lord Mance stated that the insured had breached its duty to make a fair presentation of the risk as a reasonable search had not been conducted and the representation made was not substantially correct. The insured ought to have known that its IT systems were infected with a virus, as this was known by its IT consultant, and informed the insurer of this. He added that the insured had not committed a reckless breach of this duty.

The hack suffered by the insured had nothing to do with the presence of a virus. However, the insurer denied cover as the insured had failed to carry out monthly searches of its IT system for viruses that were required by a warranty. Lord Mance stated that a breach of this warranty could not have increased the risk of loss occurring due to hacking by means unrelated to a virus. Therefore, the insurer could not deny cover due to this breach. He noted that this was a difficult area and that he expects to see litigation arise out of the new warranties provision in section 11 of the new Act. Click here to read our comprehensive guide on practical changes for insurers from the Insurance Act 2015 on Out-Law.

On 11 June, the Lloyd’s Market Association (LMA) and International Underwriting Association (IUA) published a joint guide to the Insurance Act 2015. Click here to access the guide on the Lloyd’s/LMA website.

Publication of the Financial Ombudsman Service (FOS) Annual Review (May 2015): On 19 May, the FOS published its Annual Review for 2014/2015 containing facts, figures and information about the work the FOS has done, and the trends it has seen, over the last financial year. In its key figures section of the Annual Review, it is noted that:

• The FOS answered 1,786,973 enquiries from consumers – around 5,000 each working day

• The FOS took on one in five of these initial enquiries for a more detailed investigation – a total of 329,509 new complaints

• 63% of new complaints were about the sale of payment protection insurance (PPI) – 204,943 complaints overall

Click here to read the Annual Review.

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Publication of FCA thematic review on insurance claims handling for SMEs (May 2015): On 22 May, the FCA published its thematic review ‘Handling of Insurance Claims for Small and Medium-sized enterprises (TR 15/6)’ presenting its findings from its thematic review which looked into the handling of claims from SMEs. The FCA said its review of the SME insurance claims market revealed SMEs have “an overall poor perception” of “the claims experience”. Some SMEs that have been through the insurance claims process felt “they had not been treated fairly”, according to the regulator’s report. Linda Woodall, acting director of supervision at the FCA, said: “In an area where any delay could have a serious impact on a business or someone’s livelihood, it is vital that claims are taken seriously and processed promptly - that means putting customers at the very heart of the process. We expect all firms to carefully analyse the findings of the review and make any necessary changes to their approach to ensure that SME claimants are treated fairly.” Faults identified with the claims process included a lack of clarity over who was responsible for delivering claims outcomes, and poor communication between the different businesses involved in handling claims and with the SMEs themselves. Click here to read more on Out-Law. Click here to read the thematic review.

Pool Re confirms upcoming changes to its UK terrorism risk reinsurance programme (May 2015): From October, Pool Re, the UK government-backed terrorist risk reinsurance scheme, will introduce a “bespoke SME proposition” offering a 40% discount to those with an insured material damage sum less than £2 million. It will also consider discounts on locations where insured values are at least 20% more than the limit, where loss limits are greater than £500 million, and allow discounts for insured parties that agree to cover a ‘deductible’ between £500,000 and £1 million before making a claim on the fund. Separately, Pool Re announced that it had partnered with the National Counter Terrorism Security Office (NaCTSO) to offer a potential 2.5% premium reduction to insured entities that signed up to NaCTSO’s new ‘Crowded Places’ risk management programme. The joint initiative will open for applications in October. Click here to read more on Out-Law.

FCA statement on Plevin v Paragon Personal Finance Ltd (May 2015): On 27 May, the FCA issued a statement notifying firms that, following the Supreme Court decision in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61, it is considering whether additional rules and/or guidance are required to deal with the impact of the decision on complaints about payment protection insurance (PPI). The regulator is currently conducting a review of existing PPI complaints handling processes, and is due to announce the results and any changes needed to “secure appropriate protection for consumers” in the summer. Insurance expert Colin Read of Pinsent Masons, said the Plevin decision “could mean a new avenue for consumers to seek redress for PPI they purchased”. Click here to read more on Out-Law.

The start date for the Flood Reinsurance Scheme (Flood Re) has been delayed (June 2015): The government has confirmed that the Flood Re Scheme will “go live” next April. The Scheme had been originally planned to go live this summer. The not-for-profit Scheme was proposed by the Association of British Insurers (ABI) and the UK government in July 2014 to address the availability and affordability of flood insurance for domestic property owners whose homes are considered to be at a high risk of flooding. The Scheme will involve the provision of a fund for those at high flood risk who may be challenged in securing affordable flood insurance. The Water Act, passed earlier this year, sets out the legal framework and parameters within which Flood Re will operate as well as the broad scope of regulation making powers (click here to read the Act).

Brendan McCafferty, chief executive of Flood Re, is quoted in recent media reports regarding the delayed start of the Scheme as saying: “We are planning to go live with [Flood Re] in April 2016. The permanent executive team which was appointed last September has never commented publicly about when Flood Re will launch. Flood Re is a complex scheme which needs to be tested thoroughly if we are to get it right first time for UK home insurance customers. Building Flood Re’s systems and infrastructure is on track and will be established in the summer as previously indicated. However, being ready to launch for consumers requires extensive testing that needs to be done with 300-400 insurers. That is a complex and lengthy process which requires a realistic timeframe.”

Colin ReadPartnerInsurance T: +44 (0)20 7418 7305M: +44 (0)7824 865913E: colin.read@pinsentmasons.com

Nick BradleyPartnerHead of InsuranceT: (0)20 7667 0026E: nick.bradley@pinsentmasons.com

Stephen Kilner Senior AssociateInsurance T: +44 (0)20 7490 6432M: +44 (0)7557 287888E: stephen.kilner@pinsentmasons.com

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7. Case SummariesWe review some recent cases of interest to insurers.

New right of recoupment for insurers in landmark ruling from the Supreme Court: The decision of the Supreme Court in Zurich Insurance PLC UK Branch (Appellant) v International Energy Group Limited (Respondent) [2015] UKSC 33, on 20 May 2015, concerned fundamental issues regarding the insurance of mesothelioma claims. It will be of particular interest to insurers and reinsurers involved in employers’ liability insurance. Of significance, the underlying claim in the proceedings was from Guernsey.

BackgroundThe respondent, International Energy Group Limited (IEGL), had been the employer of an individual, Mr Carre, for twenty-seven years. During that time Mr Carre was exposed to asbestos dust. He contracted mesothelioma from which he later died. Prior to his death, Mr Carre had made a claim for compensation against IEGL. Following settlement of the claim, IEGL approached its insurer, Zurich, for payment of its losses. Zurich however had only provided employers’ liability insurance to IEGL during six of the twenty-seven years Mr Carre had been exposed to asbestos dust. In addition, for nineteen of the years of exposure, IEGL was unable to identify another relevant insurance policy.

DisputeProceedings were issued by IEGL who argued that Zurich was liable to indemnify it in full for its payment to the claimant, Mr Carre, and for its costs. IEGL’s argument was supported, inter alia, by the special rule in Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL22 – in short, a person contracting mesothelioma after being exposed to asbestos dust by different employers, can sue any employer who was responsible for the exposure, even in the absence of proving causation. Conversely, Zurich argued that it should only be liable to pay a proportion of IEGL’s losses on a pro-rata basis based on the number of years it had provided insurance. Zurich relied, inter alia, on the common law rule in Barker v Corus UK Ltd [2006] UKHL 20 – in short, that an employer’s liability for asbestos exposure of an employee should be proportionate to the length of its contribution to the exposure. Although, the common law rule in Barker had been overtaken in the UK by the passing of the Compensation Act 2006, Zurich pointed out that no equivalent of the Act had been passed in Guernsey and therefore Barker should still have effect.

DecisionThe Supreme Court agreed with Zurich that the common law rule in Barker continued to apply in Guernsey however the Court was restricted, inter alia, by the application of the Fairchild decision and by a later decision in BAI (Run Off) Limited (In Scheme of Arrangement) v Durham (the “Trigger” litigation), the effect of which the court found was that Zurich was liable to pay the entire

claim. In a landmark ruling, the Court therefore decided that an equitable and sensible overall result, for both insurers and victims of mesothelioma, could only be achieved if an insurer in a situation such as Zurich could have a right of recoupment from any co-insurers, and the insured as a self-insurer, for periods of exposure outside that for which the insurer was directly liable.

This decision is particularly significant because it is the first time an equitable right of recoupment for insurers, from either co-insurers or the insured itself, has been recognised.

No cover available for an insured because of a recklessly made representation which constituted a fraudulent device: The decision of the Court of Appeal in Versloot Dredging BV and Another v HDI-Gerling Industrie Versicherung AG and Others [2015] Lloyd’s Rep. IR 115, on 16 October 2014, concerned an appeal from a judgment of Popplewell J. which held that, while the insurance policy in question did respond to the insured loss, the defendant insurers were not liable by reason of a fraudulent claim.

The insureds were ship-owners whose vessel’s engine became damaged beyond repair while at sea. The damage was caused, inter alia, by the crew’s failure to drain water from an emergency fire hose. The water froze within the hose and expanded causing damage. Subsequently when the iced water melted, it leaked from cracks and flooded the vessel’s engine room. The ship-owners made a claim on their insurance policy for the resultant loss of, in excess of, 3 million euros.

During the claim investigation process, the general manager for the vessel made a written representation that an alarm on the vessel had sounded prior to the flooding of the engine room but had been ignored by the crew because they had attributed it to the rolling of the vessel in heavy weather. At the trial, it transpired that this representation was false and that it was made to support the claim and to reduce the possibility of any finding of wrongdoing by the owners of the vessel.

In upholding the decision of the Court at first instance, and dismissing the appeal, the Court of Appeal found, inter alia, that the representation made by the general manager’s letter was sufficient to establish fraud (it was a “fraudulent device” under the test set out in Agapitos & Anor v Agnew & Ors (The Aegeon) [2002] 2 Lloyd’s Rep 42), that the judge had correctly applied the law on fraudulent claims, and that there was no proportionality requirement. In making the false representation, the insured had forfeited the entire claim.

Important decision from the Supreme Court of New Zealand (NZ) where losses are suffered across multiple events: The decision of the New Zealand Supreme Court in Ridgecrest New Zealand Ltd v IAG New Zealand Ltd [2015] Lloyd’s Rep. IR 34, on 27 August 2014, concerned, inter alia, property insurance; buildings damaged by successive earthquakes; and measure of recovery.

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The insured, Ridgecrest New Zealand Ltd, owned a building in Christchurch which was affected by four separate earthquakes occurring on 4 September 2010, 26 December 2010, 22 February 2011 (earlier earthquakes) and 13 June 2011 (final earthquake) respectively. Although the precise timing was unclear, it was agreed that the building was beyond repair by the time of the final earthquake. The insured held an insurance policy with IAG New Zealand Ltd (IAG) which provided cover for loss or damage to the building, as well as replacement cover for loss or damage that was restored or replaced. The policy included a maximum liability limit of NZ$1,984,000 for each “happening” under the policy.

Ridgecrest claimed that it was entitled to its full policy limit in respect of the final earthquake, and to the amount of its losses incurred as a result of each of the earlier earthquakes. IAG argued that its liability in respect of the earlier earthquakes was limited to the cost of repairs actually undertaken (although repairs to the building had been commissioned, these had never been completed).

Ruling on this preliminary question, the Supreme Court of NZ held that under a proper construction of the policy wording, in addition to payment of its loss caused by the final earthquake (subject to the policy limit), the insured was entitled to payment of the amount of its losses (or the estimated amount noting that earlier repairs had never been carried out) caused by each of the earlier earthquakes (subject to the policy limit in respect of each earthquake or “happening”).

The ascertainment of liability for the purpose of an indemnity depends on when funds are drawn down from an escrow account: In Teal Assurance Co Ltd v W R Berkley Insurance (Europe) Ltd and Aspen Insurance UK Ltd the Commercial Court held that the time at which an insured’s liability is ascertained for the purpose of an indemnity provided by a reinsurer to an insured’s insurer is the moment when the funds are drawn down from an escrow account by a third party claimant. This is distinguished from the moment when funds are paid into an escrow account. In a separate but related decision the Supreme Court held that neither insureds, nor insurers, can select the order in which third party liabilities are ascertained by determining the order in which payments are made under the relevant policies.

Black and Veatch Corp (BV), a Delaware incorporated firm of engineers and architects, had the benefit of a programme of professional indemnity insurance and reinsurance consisting of five layers totalling $60million of cover (the ‘Insurance Tower’).

The primary layer of the Insurance Tower was underwritten by Lexington Insurance Corporation. The following three layers were underwritten by the Teal Assurance Co Ltd (Teal). A final ‘drop and top’ layer was underwritten by Teal and reinsured by W R Berkley Insurance (Europe) Ltd and Aspen Insurance UK Ltd (the Reinsurers) in equal proportions. Each layer of insurance covered, amongst other jurisdictions, North American claims, except for the final ‘drop and top’ layer, and its reinsurance, which excluded claims from North America.

BV was notified of four claims over $1 million, two of which were claims from outside North America. Teal intended for the two North American claims to be underwritten as part of the primary layer and the three subsequent layers. This approach would exhaust the initial layers but enable the two claims from outside North America to fall within the ‘top and drop’ layer completing coverage. Any other configuration would have meant that the claims from outside North America would not be covered.

Pursuant to an Escrow Agreement in relation to the claims, BV deposited funds into an escrow account which were subsequently drawn down by a third party which had made one of the claims against BV. The Commercial Court considered whether, for the purpose of Teal’s benefit of an indemnity from the Reinsurers, BV’s liability was ascertained when funds were paid into an escrow account or when those funds were drawn down.

In the earlier decision by the Supreme Court, it was held that the policies comprising the Insurance Tower responded by reference to the order and timing of the establishment and ascertainment of liability (as opposed to when a payment was made under the relevant policy). Teal put to the Commercial Court that the ascertainment of BV’s liability under the Escrow Agreement did not arise when the funds were paid into the escrow account but rather when they were drawn down. Teal argued that liability was only ascertained when:

1.1 the insured was held liable by agreement, judgment or award;

1.2 the insured’s liability was quantified by judgment, award or agreement; and

1.3 the time for payment of the ascertained amount to the liability claimant had arisen.

In the circumstances described above, Teal argued that BV’s payment of the money into the escrow account did not satisfy these requirements because:

1.4 the payment into escrow was not a payment to the third party making a claim against the insured;

1.5 the money in escrow might never be paid if certain conditions were not met by the third party making a claim against the insured; and

1.6 the Escrow Agreement did not determine BV’s liability to the third party making a claim against it.

The Reinsurers disagreed with Teal, proposing that liability was ascertained when the money was paid into the escrow account. This argument effectively excluded liability due to the claims emanating from North America not being fully covered by the relevant layer of insurance in the Insurance Tower.

The Commercial Court agreed that BV did not suffer a loss, and so was not liable to make payments to the third party, unless and until certain conditions were satisfied and the third party drew down funds from the escrow account. It was at this point that Teal had the benefit of the indemnity from the Reinsurers.

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The Reinsurers also tried to rely on Cox v Bankside Members Agency Ltd, in two respects, both of which were rejected by the Court.

The Commercial Court held that there was a material difference between an interim payment order, as in Cox, and the Escrow Agreement on the basis that an interim payment order required the Court to make a determination that a party was liable to pay damages and a likely minimum amount of that liability, whereas the Escrow Agreement did not contain an equivalent assessment of BV’s likely liability.

In addition, the commercial considerations identified in Cox, and relied on by the Reinsurers, did not apply in this instance as BV had voluntarily entered into the settlement agreements, distinguishing this from a Court order compelling payment to third party claimants.

Nick BradleyPartnerHead of InsuranceT: (0)20 7667 0026E: nick.bradley@pinsentmasons.com

Ravi NayerSenior AssociateInsurance T: +44 (0)20 7490 6972M: +44 (0)7717 347802E: ravi.nayer@pinsentmasons.com

Harry RedfordTrainee SolicitorInsurance T: +44 (0)20 7490 9267E: harry.redford@pinsentmasons.com

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8. FCA Business Plan 2015 focusPart 1: UK regulators are challenging insurers to embed cultural change further down chain of command.The Financial Conduct Authority (FCA) has been consistent and forceful in its insistence that financial firm culture must change to avoid another crisis. The challenge for insurers will be ensuring that these changes take effect throughout the business, from the top down.

It is increasingly difficult to miss the FCA’s emphasis on changing the culture in financial firms. Some reference to culture changes appears in almost every market study, thematic review, proposal and piece of guidance emanating from the regulator since its inception.

The FCA has emphasised that the culture of a firm must come from the top, set by the boards and senior management and not just those working in compliance. The regulators will be looking to senior executives to establish the right culture and to lead by example, and to ensure that in all their business decisions and messages the intonation on culture is clear to the rest of the firm.

Cultural change is the motivating force behind a number of regulatory projects, in particular the senior insurance managers’ regime (SIMR). These proposals make it even more obvious that the FCA will pay particular attention to how board executives are dealing with this issue. But, as the recent case involving the Bank of Beirut has shown, there is an ongoing focus by the FCA on individuals at all levels.

Changing culture for the better features high on the FCA’s agenda for 2015/16, as set out in its recent business plan. While this will not be an overnight fix, the FCA will be looking for evidence of continuous improvement and steps being taken to address cultural failings. As such, there are thematic reviews set for the next financial year which will look specifically at cultural change programmes, beginning with retail and wholesale banks.

BackgroundThe FCA itself was established as a reaction to the global financial crisis which threw the financial sector into turmoil, and during which considerable public trust was lost. Many would argue that firm culture played a large part in this; and not only during the global crisis but during what ensued thereafter. The examples are plentiful: from PPI and card protection mis-selling to the LIBOR and forex scandals.

Perhaps the most dramatic example of the regulator’s approach to cultural change came last November, when the FCA issued fines and industry bans against three former senior directors with insurer Swinton after holding them responsible for a sales culture within the company that one year previously had cost it over £7 million in fines. But the big question for insurers is how to change the culture that has been embedded for a number of years into something that, as FCA chief executive Martin Wheatley has said, is “genuinely different from [that] pre-crisis”?

For firms, each decision that is now made must include some form of quality assurance check that considers the impact on firm culture. In other words, is this the right decision to be made, not only because it is within the firm’s remit technically or legally, but is it also morally sound and in the interests of consumers and other market participants? Recently, for example, the FCA found that insurance companies were not being clear enough about the cost of paying premiums in instalments. On the face of it, this might not appear to be a question of culture, but the FCA’s view is that it is in relation to how a product is sold or communicated to the customer.

The desire for transparency and accountability arises from the public’s expectation that individuals should be held accountable for their actions. Since October 2013, the FCA has been able to ‘name and shame’ firms and individuals suspected of misconduct in warning notices – something that the regulator maintains will guarantee enhanced consumer protection and enrich the integrity of the UK financial system.

The senior insurance managers’ regime (SIMR)The SIMR will apply to senior managers in controlled functions or those who have responsibility for certain ‘key’ functions - put simply, those who are running insurance companies. It will require firms to provide a governance map setting out its management and governance arrangements, accompanied by a statement of responsibility for each senior manager. It will also create a new code of conduct with rules built around fitness and propriety, developing the firm’s culture and standards and embedding those standards in the day to day management of the firm.

It has been clear from the outset that the new regime for insurers will not be identical to that for banks. The main differences between the two regimes are interesting and important; there will be no presumption of responsibility or criminal offence of recklessly taking a decision causing an institution to fail for insurers; and no remuneration deferral clawback provisions. However, although these are not currently being proposed, they may well follow after being tested on the banks and the Prudential Regulation Authority (PRA) is looking for suitable alignment of the conduct standards for individuals at both insurers and banks.

Further, whilst there may not be a similar presumption of responsibility for insurers, the regulator will still be likely to start from the position that where an individual takes responsibility for

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an area or an activity then that individual will be the first to face questions in relation to perceived failures in that area. It would not be surprising if the regulators expect a similar standard of proof and onus on senior individuals in insurance to show what steps they have taken in order to rebut their responsibility for those failings, even if the FCA or PRA are not able to prosecute.

An ongoing focus on individualsHowever, this accountability drive is not solely directed at senior management. The recent case involving the Bank of Beirut demonstrated that although the regulator will be sympathetic to those in compliance roles who are largely governed by senior management, compliance officers have their own regulatory obligations to the FCA as ‘approved persons’ and their obligation to report to and cooperate with the regulator overrides any obligations that they have to senior management.

Again, this contributes to the overall culture of the firm, where greater candour and the ability of individuals to raise concerns without fear of reprisal are being encouraged. The challenge for managers will be to make sure that the message is not diluted as it works its way down to the firm’s everyday practices and those that are interacting with customers on a daily basis.

As the FCA has acknowledged, all of this will take some time to properly implement so that insurers are ultimately in the position where cultural change is no longer seen as an additional layer of compliance but rather something that is integrated and embedded into every single decision-making process that the firm undertakes. Until then, we can expect to see the continued use of cultural failings as a contributory and aggravating factor when the regulator comes to decide on cases and sanctions.

Elena EliaAssociateLitigation & Compliance, Litigation & Regulatory T: +44 (0)20 7490 6411M: +44 (0)7825 657822E: elena.elia@pinsentmasons.com

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Part 2: All at sea – Beware: stormy waters lie ahead as the FCA announces increased focus and new measures to help prevent Financial Crime. New offence of failure to prevent fraud also spotted on the horizon.There can be no doubt the FCA has Financial Crime high on its agenda as demonstrated by their Business Plan 2015/16 and their recent guidance published. The FCA 2015/16 business plan includes firms’ financial crime prevention systems and controls as one of its top seven ‘areas of focus’ over the coming financial year for the first time. Further, in April 2015, the FCA published new guidance to firms on steps they can take to reduce their financial crime risk. The combined effect of these measures can only point in one direction; increased enforcement action and criminal prosecution for failures to measure up.

Financial crime: a guide for firmsThe Guide proposes to enhance understanding of FCA expectations and help firms to assess the adequacy of their financial crime systems and controls and remedy deficiencies. It is designed to provide practical assistance and information for firms of all sizes and across all FCA supervised sectors on actions they can take to counter the risk that they might be used to further financial crime.

It follows from previous consultations at the tail end of last year carried out by the FCA on examples of good practice from two thematic reviews that considered small banks’ anti-money laundering and financial sanctions, and small commercial insurance brokers’ anti-bribery and corruption, systems and controls.

Whilst the guidance is not binding and a departure from the guidance does not technically constitute a breach of the FCA rules, with the FCA stating that this is how the guide should be interpreted, firms are well advised to take heed of the guidance and consider adjusting the ways in which they tackle a range of issues, from bribery and corruption through to AML and CFT mechanisms. Although any failure to incorporate the guidance is not a breach any firm which fails to take this guidance into account will face some stern questioning from the FCA. For instance various Enforcement notices refer to previous guidance not being taken into account as an aggravating feature during the sanction stage.

Effective systems and controls will help firms to detect, prevent and deter financial crime and undoubtedly go some way in

assuring the FCA that the firm is taking its regulatory obligations very seriously. The guidance is a very helpful tool and steer on financial crime systems and controls, both generally and in relation to specific risks such as money laundering, bribery and corruption and fraud.

Whilst we do not propose to rehearse the heavy 89 page guidance in scrupulous detail, the following is a selection of the FCA’s main themes which demonstrate the direction the FCA is sailing:

(1) Proportionate and risk–based approachThe FCA wants firms to take a more proportionate and risk-based approach so that certain types of customer or whole sectors are not excluded from financial services. Whilst the FCA has focussed on banks so far (see summary below) one can readily foresee a similar message to insurers that certain types of customer or sector should be excluded from the insurance market.

The regulator said that money transfer services, charities and fintech companies had found it difficult to access financial services because they were seen as being higher risk, while some banks were also pulling out of the ‘correspondent banking’ market, which is associated with foreign exchange and international payment services. The FCA said that banks should use “judgement and common sense” to ensure that their anti-money laundering (AML) compliance procedures did not create consumer protection or competition issues.

“We expect banks to recognise that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately,” the FCA said in its statement.

Although the FCA accepts in its statement that the decision is ultimately a commercial one for each bank, the FCA has made it clear that banks should be able to apply AML systems and controls across the whole of each bank’s activities and that any inability to do so will raise questions at the regulator about each bank’s ability to operate in compliance with regulatory requirements generally.

(2) Information Management Different teams within a firm covering different disciplines (ie from legal to compliance) must work together to address challenges and improve information management with further guidance being provided for:

• Risk assessments

• Enhanced due diligence

• Identification of sources of funds and wealth.

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challenged independently of the business relationship and escalated to senior management or committees

(4) Ensure Senior Management receives sufficient, objective and accurate information and that they commission reports from MLRO at least annually

(5) Identify who has overall responsibility for establishing and maintaining effective AML controls and ensure they are sufficiently senior

(6) Ensure reporting lines are clear so issues are escalated where warranted

(7) Ensure a UK branch or subsidiary using group policies are fully compliant with UK AML legislation and regulatory requirements

(8) Firms must regularly review their risk assessment to ensure it remains current

(9) Identify and use good sources of information on money-laundering risks, such as FATF mutual evaluations and typology reports, NEA alerts, press reports, court judgments, reports by non-governmental organisation and commercial due diligence providers

(10) Ensure firm’s resources in its compliance and AML areas keep pace with the firm’s growth.

A new offence of failing to prevent fraud Embedded within the Business Plan and the Guidance published by the FCA is the increasingly likely prospect of a new offence of failing to prevent fraud. This is also highlighted in the recent Fair and Effective Markets Review and has received cross party support with the Attorney General indicating this will come into force in 2016. The new criminal offence would be based upon the current approach of section 7 of the Bribery Act 2010 which relates to failure to prevent bribery by people working for or on behalf of a business. Although no company has yet been prosecuted for this offence, the law states that a company will be found responsible for bribery carried out by employees or agents unless it can show that it had “adequate procedures” designed to prevent bribery in place. The new offence would be modelled on section 7 and cover firms which failed to prevent fraud, money laundering and other economic crimes unless they can should they had “adequate procedures in place”. When considered in conjunction with the SIMR, increased focus on financial crime, not only by the FCA but also by overseas regulators including the SEC and DoJ, criminal prosecutions for corporates are going to make for increasingly choppy waters for all in the financial services industry.

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(3) Senior Management Senior Managers to be kept fully abreast of matters to enable them to understand the effectiveness of existing systems and controls, risks faced and the nature of new business relationships, including potentially high-risk clients.

This reflects a wider focus encompassed in the new Senior Insurance Managers Regime on senior management becoming more involved, and therefore, of course, more responsible and accountable for decision making and risk management.

Anti-money Laundering systems and controlsAs aforementioned, a thorough understanding of the FCA’s guidance on financial crime risks is key if a firm is to apply proportionate and effective systems and controls. Understandably, there is a heavy focus in the guidance on AML systems and controls and whilst the guidance might be less relevant for those who have more limited AML responsibilities, such as general insurers and general insurance intermediaries, the FCA has strongly hinted that these firms would do well to take heed of this guidance to assist them in establishing and maintaining systems and controls to reduce the risk that they may be used to handle the proceeds from crime and to meet the requirements of the Proceeds of Crime Act 2002 to which they are subject.

Whilst the FCA’s focus on financial crime risks has been recently articulated and channelled through a distinct drive and new measures, the regulator has traditionally taken a tough stance on firms who it has found to have poor AML systems and controls. For instance, the FCA fined Standard Bank PLC (Standard Bank) £7,640,400 for failings relating to its anti-money laundering (AML) policies and procedures over corporate customers connected to politically exposed persons (PEPs) in January 2014. Going forward, this will only get tougher and firms are advised to take adequate steps to defend against financial crime and money laundering by implementing sufficient systems and controls.

We have therefore distilled the FCA’s guidance on AML systems and controls into ten points to flag what firms should be aware of in the first instance.

(1) Systems and Controls must be comprehensive and proportionate to the nature, scale and complexity of the firm’s activities

(2) Policies should be clear to enable identification of risk associated with different types of customer and should inform on level of CDD required

(3) Policies should enable decisions to be made on accepting and maintaining individual business relationships and for high money-laundering risk relationships to be reviewed and

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Conclusion With heightened attention on the prevention of financial crime, we anticipate greater FCA enforcement action, more criminal prosecutions and as our Chancellor confirmed in the Mansion House Speech recently, in case we were still in any doubt;

“…individuals who fraudulently manipulate markets and commit financial crime should be treated like the criminals they are – and they will be”.

Firms and individuals must have life vests and life boats available in the form of appropriate systems and controls to sail these increasingly hazardous waters.

Elena EliaAssociateLitigation & Compliance, Litigation & Regulatory T: +44 (0)20 7490 6411M: +44 (0)7825 657822E: elena.elia@pinsentmasons.com

Michael RuckSenior AssociateLitigation & Regulatory T: +44 (0)20 7490 6970M: +44 (0)7769 932740E: michael.ruck@pinsentmasons.com

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9. Delegated Authority: Outsourcing in the general insurance marketOn 2 June, the FCA released its Thematic Review report Delegated authority: Outsourcing in the general insurance market. Also referred to as the Coverholder and TPA thematic review, this focussed on the potential conduct risks associated with delegating underwriting and claims authority to third parties and the allocation of related functions between those parties. The FCA looked at the activities of insurers, intermediaries (including MGAs) and third party administrators providing insurance products and services to both retail and SME customers in the UK.

ConclusionsThe report concludes that firms do not appear to have adequately considered or recognised their regulatory obligations in connection with these arrangements. The FCA highlights a major cause of this being that some insurers do not treat the delegation of authority as outsourcing. It also notes that in many cases there is insufficient consideration by all parties involved in the product lifecycle of the interests and fair treatment of customers and how this might be impacted by the outsourced arrangements.

This gives clarity that the FCA considers the external delegation of underwriting and other significant functions such as claims and complaints handling to be outsourcing and subject to the relevant requirements of its Handbook. The most relevant of these are within the Threshold Conditions, Principles for Businesses, SYSC, ICOBS and RPPD. The FCA also points firms towards the EIOPA guidelines which will be relevant for outsourcings under Solvency II (effective from 1 January 2016), within which the external delegation of underwriting authority is included. Click here for more detail on Out-Law.

It also reminds firms of its regulatory guide, The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD), which sets out the FCA’s view on what the rules require of providers and distributors who supply products and services to retail customers and, crucially, that it’s not their status as insurer or intermediary that determines these responsibilities but their

function and role throughout the product lifecycle. For example, where an intermediary specifies the criteria for an insurance product, many of the responsibilities fall to the intermediary as ‘retail manufacturer’ rather than to the insurer as ‘pure manufacturer’.

CommentBy drawing this link with outsourcing, the FCA reminds firms of the importance of having the right systems and controls in place to manage delegated authorities. Having clear and comprehensive contracts is an important part of achieving this aim. It also emphasises the importance of managing delegated authorities through other means as well: effective risk-based due diligence of all new opportunities; appropriate monitoring and control of the delegated authority and the product itself throughout the relationship; and effective post-termination rights in respect of the product and policyholders.

An important element of this review from the FCA’s perspective is customer outcomes. ‘Customer centricity’ has always been a key element of the FCA’s agenda; this review emphasises that insurers should not regard customer outcomes as the sole responsibility of the distributor, nor distributors regard it as the sole responsibility of the insurer. This relates not just to the product itself but also to the way in which it is distributed under the delegated authority. Particularly in extended distribution chains, this can pose a real challenge for insurers and wholesale intermediaries, but the FCA’s review is clear that they will nonetheless have responsibility in these cases as well.

For some distribution arrangements this will lead to quite a shift in the relationship between the insurer and its distributors, suggesting that going forward it will sometimes be necessary to have a relationship which is much more akin to partnership – with clearly apportioned responsibilities – in the way in which products are developed, marketed and sold, and also to the way in which claims are handled under delegated authorities.

The increased expectations around oversight and control of delegated authorities will almost certainly give rise to additional costs for insurers and intermediaries. This may well lead to a reduction in the number of delegated authorities in some markets and products and to changes in some insurers’ distribution models.

ExpectationsThe FCA will focus on the issues highlighted in this report in its on-going supervisory work with firms. It expectations for UK firms include that:

• Insurers delegating underwriting or other authority to external parties should recognise that they are outsourcing and consider whether they have effective and risk-based controls (which appropriately consider conduct risks) in place. These controls should address both the initial decision to outsource and the on-

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going monitoring of the performance of the outsourced function and resultant product(s). Insurers should take steps to address any gaps they identify in the control framework and should review their existing outsourcing relationships to identify and remediate any shortcomings in the operation of these arrangements.

• Insurers should assess whether the claims handling approach and processes in place where they have outsourced claims handling are appropriate and will ensure that claims are handled promptly and fairly (particularly where these are inherited as part of an new relationship or involve multiple parties). This assessment should include the consideration of whether any potential conflicts of interest arising from incentive arrangements are appropriately mitigated. Where they identify deficiencies they should ensure that these are addressed and be able to evidence this.

• Insurers should consider forthcoming changes to governance requirements for firms arising from Solvency II to assess how these impact their activities, particularly in relation to outsourcing, and to assess what actions they need to take to ensure that they are able to comply with these requirements.

• Insurers and intermediaries should consider the extent to which each may be performing the functions of a ‘product provider’ and to clearly identify what responsibilities flow from that for each including for product design and the on-going monitoring of the performance of the insurance product for customers. To the extent that the circumstances and regulatory responsibilities allow firms to agree the apportionment of responsibilities, this should be reasonable and clear to both parties. Insurers should in all cases carry out sufficient due diligence and on-going monitoring around the performance of the insurance product for customers to ensure they can demonstrate that these customers are being treated fairly.

• Insurers and intermediaries should review their existing monitoring activity and MI in relation to outsourced arrangements and allocated functions to assess whether this is appropriate and allows them to identify poor customer outcomes and instances where customers are not being treated fairly. Firms should also consider whether this information is reviewed appropriately, shared as necessary and acted upon. This might include receiving data about how and by whom products are sold, levels of cancellations, claims frequency, claims repudiations, claims service standards and complaints volumes, meeting regularly with the intermediary to review this information, conducting root-cause analyses and remediating issues to improve customer outcomes. Where gaps and shortcomings are identified these should be addressed.

• Insurers and intermediaries acting as ‘product provider’ should assess the appropriateness of the existing distribution channel and sales activities, the efficacy of the arrangements and processes in place to mitigate the risks to customers posed by the distribution channel and the adequacy of the on-going oversight and monitoring of the distribution chain (including the MI used to facilitate this). Any gaps or shortcomings identified should be addressed.

• Specifically for incoming firms that passport into the UK on a services basis, the FCA expects they will have to consider whether or not they have established a branch by virtue of the functions they have outsourced to agents in the UK. This consideration will depend on the facts and various factors in line with established case law. The EU Commission has also produced guidance on this issue which can be referred to namely the ‘Commission Interpretative Communication on Freedom to provide services and the general good in the insurance sector (200/C43/03)’. If firms are unsure of the position, the FCA expects that they will obtain appropriate advice. Where firms identify that they have established a branch in the UK they need to act promptly to adjust their permissions accordingly.

• Insurers and intermediaries should note that the recast Insurance Distribution Directive could include measures relating to product oversight and governance. The text of the informally agreed IDD has not yet been made publicly available. Additionally, EIOPA consulted earlier this year on product oversight and governance guidelines in relation to insurance undertakings manufacturing insurance products. These have the potential to strengthen the requirements placed on firms that manufacture insurance products and firms are expected to ensure that their practices are adjusted to meet any new requirements.

Alexis RobertsPartnerInsuranceT: (0)20 7667 0259E: alexis.roberts@pinsentmasons.com

Iain SawersPartnerInsuranceT: +44 (0)20 7667 0020M: +44 (0)7717 713841E: iain.sawers@pinsentmasons.com

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In November 2014 the PRA published a consultation paper (CP25/14) which contained proposals to redraft certain modules of the PRA’s Handbook including the PRA’s now defunct SUP18. Following the closure of this consultation, the PRA published a Statement of Policy on IBTs (SoP) on 1 April 2015 to replace the guidance in SUP18 of the PRA Handbook. SUP18 of the FCA Handbook was unaffected by the PRA’s deletion of SUP18 in its Handbook.

Key points to note from the PRA switching from SUP18 to the SoPThe first thing to note is that the SoP does not represent a policy change; the provisions in the SoP are, essentially, the same as the guidance in the old joint PRA and FCA SUP18. However, the following points are noteworthy:

• The provisions in the SoP provide a more definitive description of the PRA’s role as the lead regulator. The move away from the “appropriate regulator” references and clear statements on how the PRA will lead and manage a single administrative process is a useful clarification for firms.

• SUP18 suggested that scheme promoters should approach the PRA first when considering an IBT, but this has been removed from the SoP which means that firms can initially discuss any plans for IBTs with the FCA or the PRA first. As IBTs involve a mixture of prudential and conduct considerations, where a firm envisages more regulatory input on the conduct side, commencing IBT discussions with the FCA can help make the process move quicker.

• The most profound change is that independent expert nominees may now be assessed against a broader set of criteria than before when it comes to the PRA assessing their suitability. In the defunct SUP18 of the PRA Handbook, the PRA had stated that in determining suitability, it would consider the “general principles set out in SUP 5.4.8G, for suitability of a skilled person”. The SoP takes this further by stating that the more comprehensive principles set out in the PRA’s Supervisory Statement SS7/14 (Reports by Skilled Persons) will apply to assessing the suitability of the independent expert.

• Supplementary reports are now explicitly expected from the independent expert. Whilst this is not new regulatory policy, it is a formalisation of a practice which was taking place even in the FSA’s early days when considering IBTs.

• The PRA’s position in granting a certificate where a transferee is not meeting its solvency margin requirements appears to be more relaxed. In the SoP the PRA states it will not be able to “reply favourably” rather than its previous stance in the defunct SUP18 of its Handbook of not issuing a solvency margin requirement certificate in any circumstances where the transferee was not meeting its solvency margin requirements.

• The PRA has drawn a clear distinction in its role and separate statutory objectives to that of the FCA by not including in the SoP any references to objecting to the scheme if it is “unfair” to a class

10. Reflections on the Prudential Regulation Authority’s new Statement of Policy on insurance business transfersOn 1 April, the Prudential Regulation Authority (PRA) published a Statement of Policy setting out the approach and expectations of the PRA in relation to insurance business transfers (IBTs) under Part VII of the Financial Services and Markets Act 2000 (FSMA) to replace its previous Supervision manual chapter 18 (SUP18) guidance in its regulatory Handbook.

Background IBTs are a regulatory mechanism under sections 104 – 116 in Part VII of FSMA which allows an insurer (including a reinsurer) to transfer portfolios of insurance business from one entity to another subject to the sanction of the court.

Many firms use the statutory IBT procedure to effect group reorganisations, consolidations and for the sale of insurance portfolios. Whilst all of Part VII of FSMA, the Regulations referred to in it, and case law are legally binding, in our experience, the most helpful information for firms, and what the regulators have always pointed out when discussing an IBT, has been the guidance in the regulatory Handbook on IBTs. The guidance was prepared to assist promoters of a scheme with the Part VII process, but does not embody obligatory rules. However, a Part VII FSMA scheme will not receive the court’s sanction if the regulators object, so adherence to their guidance is implicitly a necessary condition of the scheme’s success.

Historically, the guidance in the regulatory Handbook on IBTs was contained in the old Financial Services Authority (FSA) SUP18. In the immediate aftermath of the abolishment of the FSA, much of the content in the FSA Handbook was carried forward with consequential amendments to the FSA’s successor regulators, the Financial Conduct Authority (FCA) and the PRA at legal cutover in April 2013 (LCO). Whilst the content of each successor regulators’ regulatory Handbook contained much of the same material and the SUP18 provisions appeared in identical form in both the FCA and PRA Handbook at LCO, the PRA took a policy decision to move away from the legacy Handbook material towards having its own PRA Rulebook and other appropriate materials.

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of policyholders and not expecting any “further notification” if it is unsatisfied policyholders have not received adequate information. The concepts of “unfairness” and “policyholder disclosure” are strongly embedded in the FCA’s regime.

• Despite “policyholder disclosure” being more synonymous with the FCA regime, the SoP does introduce a new PRA notification expectation where an IBT involves the transfer of business from a branch established in the UK to an organisation outside the UK.

• There are particular PRA policy positions which are not represented in the SoP. For example, in our experience, we have found that the PRA has had consistent policy expectations for firms to provide the credentials of more than a single independent expert from which it could approve one candidate. However, the SoP does not indicate that this is a PRA expectation.

• Whilst the Solvency II Directive is now explicitly referred to in the SoP, it is unusual that the SoP makes no reference to the additional certificate which the PRA will have to issue that certifies that in respect of each contract concluded in an EEA State other than the UK, the authority responsible for supervising persons who effect or carry out contracts of insurance in that EEA State in which that contract was concluded has been notified of the proposed scheme, particularly as the SoP followed after the finalisation and official publication of the Solvency 2 Regulations 2015.

Final thoughtsWhilst we are generally positive about the PRA’s move to having its own SoP which more prominently defines its own role in the IBT process, there still remains scope for regulatory overlap and inconsistency, particularly as the FCA are still relying on a set of standards (the SUP18 provisions in the FCA Handbook) some of which the PRA has deemed defunct or set out a different policy on. The best way to avoid any problems in this regard is to have early discussions with firm supervisors at both regulators and the firms’ advisers and to agree early on the designation of any responsibility which is unclear and a workable timetable which takes into account all parties’ needs and availability.

Bruno Geiringer PartnerInsurance T: +44 (0)20 7418 7306M: +44 (0)7810 752568E: bruno.geiringer@pinsentmasons.com

Rabbani Choudhury Associate Insurance T: +44 (0)20 7490 9336E: rabbani.choudhury@pinsentmasons.com

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transactions designed to avoid its VAT liabilities to HMRC and force it into insolvency.

The directors applied to strike out the claim relying on the illegality defence. The application was dismissed by the High Court and that decision was upheld both by the Court of Appeal and the Supreme Court.

The Supreme Court held that a company was not barred from suing its directors for losses caused by the directors’ breach of fiduciary duty in circumstances where those directors involved the company itself in the fraud. In contrast to the Safeway v Twigger decision the Court held that the illegal conduct could not be attributed to the company in these circumstances.

Whilst the decision was unanimous the Justices disagreed as to the reasons. Lord Toulson and Hodge considered that the illegality defence is a public policy rule and its application would depend on the facts of the particular case. Lord Sumption on the other hand considered that the defence was a rule of law. His view was that the acts of a director should always be attributed to the company expect where there has been a breach of duty owed to the company (such as fraud).

ConclusionThe Supreme Court did not deal conclusively with the illegality defence as the issue in Bilta was not determinative of the case. They did however say that “the proper approach to the defence of illegality needs to be addressed by this court (certainly with a panel of seven and conceivably with a panel of nine justices) as soon as appropriately possible.” In other words, D&O insurers that were resting easy in the knowledge that the door had been shut to these types of claims are now going to have to keep an eye open for developments in this area.

Rebecca Ransome-LewisSenior AssociateLitigation & Compliance, InsuranceLondonT: +44 (0)20 7418 9521M: +44 (0)7795 043214E: rebecca.ransome-lewis@pinsentmasons.com

Manoj VaghelaPartnerInsurance T: +44 (0)20 7490 6985M: +44 (0)7887 833214E: manoj.vaghela@pinsentmasons.com

11. The illegality defence revisited: the doors were closed by Safeway v Twigger... have they now been left ajar by Jetivia v Bilta? Safeway v Twigger Directors and their insurers were able to breathe a sigh of relief as a result of the Court of Appeal’s decision in Safeway v Twigger in 2010. As you will recall, Safeway agreed to pay a fine to the OFT for fixing dairy prices as part of a cartel designed to increase the retail price of dairy products.

Safeway (by then owned by Morrison’s) sued the old board of directors and sought to recover the fine as damages for negligence by the directors in breach of their fiduciary duties to the company. The new board of directors knew there was a directors’ and officers’ policy in place and wanted to access those funds.

The directors applied to have the claim struck out arguing that they could successfully rely on the ex turpi causa defence to defeat the claim. In other words, they argued that the company was not able to pursue a claim which arose in connection with its own illegal conduct. This is also known as the “illegality defence.”

The Court of Appeal held that the claim against the directors should be struck out. Safeway’s participation in the cartel (the illegal conduct) was to be attributed to the company rather than to its directors. In those circumstances, because the company itself was held to have participated in the cartel the directors could successfully rely on the illegality defence to defeat the company’s claim against them.

This case appeared to close the door to the possibility of claims for fines (not covered by D&O policies) being dressed up as claims for damages which would trigger cover under D&O policies. The Supreme Court has however reopened this debate in the recent case of Jetivia v Bilta in April of this year.

Jetivia v BiltaThe liquidators of Bilta brought proceedings against two of its former directors (amongst others) for breaches of their fiduciary duties to the company. The case against them was that the directors caused Bilta to enter into a series of fraudulent

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12. Product Liability: a potentially defective decision or a very real liability?A Court of Justice of the European Union (CJEU) decision on 5 March 2015 in the case of Boston Scientific Medizintechnik GmbH v AOK Sachsen-Anhalt C-503/13, has established that where a product has a potential defect, all products in the same class may, in certain circumstances, be considered defective without having to prove that each product in that class is actually defective.

Boston Scientific Medizintechnik GmbH (Boston Scientific) sells pacemakers and implantable cardioverter defibrillators, imported from the USA, in Germany. Boston Scientific discovered potential defects in their products which, on a worst case scenario, could have led to loss of life. The defects concerned potential battery depletion leading to loss of telemetry in pacemakers and magnetic switches in defibrillators; these components have to work properly if they are to save lives.

Boston Scientific recommended that practising physicians who had used the pacemakers and defibrillators replace and deactivate the products respectively. Despite supplying the replacement pacemakers free of charge, Boston Scientific faced subrogated claims from the compulsory health insurers of the German patients for the costs of the replacement surgery of the potentially defective products.

The CJEU considered whether, under Article 6(1) of the Product Liability Directive, a class of products could be deemed defective where a quality control check carried reveals that there is a potential defect, even though no defect has been specifically detected. In this instance, a defect had not been found in an implanted pacemaker or defibrillator but had appeared during quality control checks. It was on this basis that Boston Scientific recommended their replacement. With regards to Article 1 and Article 9(a) of the Product Liability Directive, the CJEU had to establish whether the manufacturer of a product, or the company which imports it into Europe for its sale, is liable for the personal injury caused by the removal and replacement of a potentially defective product which does not provide the safety which an individual is entitled to expect from it. In this instance, the CJEU found that that Boston Scientific was liable.

The upshot of this decision is that, where the manufacturer of a potentially defective medical device explicitly recommends its removal and replacement, this “constitutes ‘damage caused by death or personal injuries’ for which the producer is liable, if such an operation is necessary to overcome the defect in the product in question”.

The CJEU held that the appropriate compensation is the cost of surgery required to replace the potentially defective devices. However, the CJEU left it open to national courts to decide whether it was always necessary to carry out surgery on the basis that a potential defect could, in some cases, be remedied without it. Ultimately, the vulnerability of the patient and his legitimate expectation for safety is paramount.

The decision is a notable departure from the usual interpretation of product liability law in that now a product can be considered defective if it potentially, rather than actually, compromises the safety that a person is entitled to expect. Consequently, the risks and liabilities associated with a product recall have increased to include potentially defective products. Clearly this has consumer safety and regulatory compliance implications. In light of this, the CJEU’s decision will also increase a manufacturer’s exposure to civil liability for the cost of removal and replacement of potentially defective products.

Any manufacturer faced with claims for the cost of surgery to remedy potentially defective products will look to their product liability insurers for an indemnity. Product Liability Insurers shall therefore face an increased exposure. They are already liable in the UK for the cost of surgery under the NHS Compensation Recovery Unit Scheme, but now they may also face subrogated claims brought by private medical health insurers of patients who have surgery to replace potentially defective devices.

Manoj VaghelaPartnerInsurance T: +44 (0)20 7490 6985M: +44 (0)7887 833214E: manoj.vaghela@pinsentmasons.com

Jonathan CavillAssociateInsurance T: +44 (0)20 7418 7014M: +44 (0)7775 546063E: jonathan.cavill@pinsentmasons.com

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13. Focus on CyberPart 1: CEOS have a false perception of the extent of their cyber risk cover:Many UK businesses mistakenly believe insurance products they have bought cover them against the cost of damage stemming from cyber attacks, according to a new report by the government and insurance broker Marsh.

On 23 March, HM Government and Marsh, published a report called ‘UK cyber security: the role of insurance in managing and mitigating the risk’. The report highlighted a discrepancy between the cover that chief executives believe their companies have for cyber risk and the reality of the insurance protection their businesses have purchased. Click here to access the report.

Notable points made in the report include the following:

• Business Leaders who are aware of insurance solutions for cyber tend to overestimate the extent to which they are covered

• Surveys show that 52% of CEOs believe that they have cyber cover, whereas in fact less than 10% do

• Just 2% of large businesses in the UK have “explicit cyber cover” and approximately half of the businesses the government liaised with for the report said they were not aware that cyber risks could even be insured

• The above discrepancy is likely a result of the complexity of insurance policies with respect to cyber, with cyber sometimes included, sometimes excluded, and sometimes covered as part of an add-on policy

• Insurers can help address the discrepancy by treating cyber risk more consistently

• There are 11 types of damage that a business can experience as a result of a cyber attack, but there is a current focus on data breach risks and cyber insurance products do not always protect companies from other cyber risks such as business interruption, damage to property, and theft of intellectual property

• There is no indication that the government will move to underwrite the cost of cyber cover offered by insurers at this time.

The low uptake to date of cyber insurance policies by UK companies is reflective of the report’s finding of a mismatch of UK business’ cyber exposures and their preparedness for a cyber security breach. Notwithstanding a slow-start, the UK cyber insurance market is well developed with a number of markets offering some sophisticated risk transfer products. Given this unused capacity in the market it would be premature for a taxpayer-backed fund to be set up to compensate companies hit by cyber attacks.

There is a developing acceptance that it is a question of when, rather than if, a business will be breached. The recent examples in the US show that senior management teams within those businesses will be judged on how well they prepare, and how they manage, such events when they occur. Furthermore, it is just as important how a business prepares for a breach. Cyber insurance policies not only offer an indemnity to businesses but, crucially, typically provides access to a panel of experts at preferential rates in the event of an insured event.

In the new report, the government said it wants London to develop into a “global centre for cyber risk management” and outlined plans to promote London’s cyber insurance capabilities. It said that changes to EU data protection laws, which look like raising the maximum potential regulatory fines businesses could be served with for a personal data breach, “is likely to” broaden the “export opportunity” for cyber insurance providers beyond the existing dominant US market.

The government has set up a Cyber Essentials initiative that allows businesses that meet certain standards on cyber security to win accreditation for their cyber resilience. Businesses hoping to win some government contracts must be accredited under the Cyber Essentials scheme. Click here to read more about Cyber Essentials on Out-Law.

To encourage small businesses to improve their cyber security, the report states that, insurers have agreed to include Cyber Essentials certification as part of their small and medium-sized enterprise (SME) cyber risk assessment. It provides the example of Marsh which has developed a cyber insurance product for SMEs that pays for the cost of Cyber Essentials certification to reflect the risk reduction that accreditation represents.

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Part 2: A US ruling highlights potential gaps in general insurance cover for cyber risks:A decision by a US district court has highlighted why businesses should not rely on general insurance policies to provide cover for cyber risks. The decision demonstrates that businesses should take out specific cyber insurance policies if they want to reduce their exposure to cyber risks.

The case of Travelers Property Casualty Company of America et al v. Federal Recovery Services et al, No. 2:2014cv00170 which was heard before a district court in Utah concerned whether an insurer was under a duty to defend legal claims brought against its insured data processing businesses. Click here to read the decision.

A gym company had claimed the data processors had breached an agreement it had with them over the processing of gym members’ account information, among other complaints it had raised.

The data processors argued that the terms of its insurance policy with their insurer meant that the insurer was under a duty to defend the claims brought against them on their behalf. The processors said that the insurers’ duty to defend was triggered because the gym company had raised issue with data processing problems that concerned “an error, omission or negligent act relating to the holding, transferring or storing of data”. The insurer had a duty to defend such claims brought against the data processors under the terms of their insurance policy.

However, the Utah court determined that the gym company’s complaint had not concerned an error, omission or negligent act relating to data processing and that the insurer was therefore not obliged to take up defence of the claims under the insurance policy it provided for the data processing companies.

Although the case did not specifically relate to the issue of cyber risk and insurance, there were lessons businesses could draw from the ruling about the gaps in coverage they could face if seeking to protect themselves from cyber risk through general insurance policies. The case highlights the value of standalone cyber insurance coverage. If insured businesses rely on more general insurance policies to provide them with cover against cyber risks then there is the potential that they could be left exposed to those risks because of the gaps often found in those general policies. This was the case in the dispute before the court in Utah where the data processors tried to rely on a technology errors and omissions policy to pass on legal risk to their insurer.

We can expect to see similar disputes in the UK with businesses seeking to shoehorn cyber exposures into other more general insurance policies. More broadly, the Utah ruling might cause insurers to reconsider whether to write policies on a ‘duty to defend’ basis or revert back to favouring the more traditional ‘duty to pay’ approach in their insurance contracts, or indeed whether a hybrid approach where the insurer has the right but not the obligation to defend claims is more suitable.

Nick BradleyPartnerHead of InsuranceT: (0)20 7667 0026E: nick.bradley@pinsentmasons.com

Manoj VaghelaPartnerInsurance T: +44 (0)20 7490 6985M: +44 (0)7887 833214E: manoj.vaghela@pinsentmasons.com

Marc DautlichPartnerStrategic Business Services, TMTT: +44 (0)20 7490 6533M: +44 (0)7984 405672E: marc.dautlich@pinsentmasons.com

Ian BirdseySenior AssociateStrategic Business Services, TMTT: +44 (0)20 7490 6446M: +44 (0)7584 385496E: ian.birdsey@pinsentmasons.com

These articles were adapted by the editor from content that originally appeared on Out-Law, Pinsent Masons’ web news resource. To access the original content, click here for the first piece, and click here for the second piece.

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Channels“Digital-first”, “digital-led”, “multichannel” and “omnichannel” are now ubiquitous phrases. In one respect they all represent the same thing – that the nature of communication with the customer has changed and the number of channels through which you can reach and service the customer has increased.

Digital devices and channels that are available range from mobile devices and apps, that provide an opportunity to reach customers in an intimate and immediate way, to websites, including aggregator and social media sites, and digital offerings developed by intermediaries. As many of these channels have their own unique features, they will also present unique legal and regulatory challenges. For example:

• How financial promotions and risk warnings are presented across channels needs to be considered specifically for each channel as requirements such as prominence, size and clarity may have a different impact for each. At the same time, the FCA will look to apply its rules consistently, irrespective of the physical restrictions of a particular channel and, for example, will expect “standalone compliance” of messages.

• Social media presents its own risks, however accessed, from the ease of forwarding and re-posting, to communicating in real-time and working within the confines of character limitations, all of which create potential challenges for presenting a clear and comprehensive message to the right audience.

Navigating these challenges successfully requires financial services businesses to keep them in mind continuously, before channels are built, during the development process and after they go live.

Contracting with customersFirms need to understand clearly how the scope and nature of their legal and regulatory relationships with customers may change in a digital environment. The underlying legal and regulatory principles remain essentially the same as in a more traditional environment, but a digital context can have a significant impact on how firms comply with - and are expected to comply with - these principles. For example, how a contractual agreement is formed with a customer, including distance requirements and fairness, clarity and availability of contractual terms, will need to be considered in the particular circumstances. Further, ‘knowing’ customers, verifying them online, securing and authenticating transactions and dealing with anti-money laundering and fraud are all affected by a move to a digital environment.

Gaining explicit customer consent and producing evidence of positive client affirmations are common related challenges. These issues remain despite the European Commission, the Cabinet Office and a number of industry associations investing heavily over a number of years in developing digital identity infrastructures. Consumers are hearing more and more promises of seamless, paperless, cross-border financial products and services. The reality though is that straight-through-digital-only transactions are still only a concept and a useable consistent approach remains some way off.

14. Dealing with Financial Services Customers in a Digital EnvironmentDigital is transforming how the financial services sector conducts business and a well-developed digital strategy is now expected of every forward-looking financial services organisation. There will be many considerations for a firm in developing its digital strategy, particularly in relation to interacting with customers, managing and exploiting data and creating modern technology infrastructure.As technology takes financial services more and more into customers’ everyday lives, we are seeing increasingly that these issues can no longer be considered in separate silos.

In this article, we touch on each of these three areas to provide an overview of the key issues that financial services businesses must grapple with in order to become effective digital businesses; to begin to view themselves as digital leaders, rather than businesses trying to catch up with what everyone else is doing.

The potential prize of convenience for greater numbers of customers at less cost is an attractive one and the Financial Conduct Authority (FCA) has recognised in its 2015 Business Plan and Risk Outlook that effective digital strategy and planning will continue to be key in 2015. But the FCA has also warned in its Business Plan that “technology may outstrip firms’ investment, consumer capabilities and regulatory response”.

A full and accurate understanding of how digital strategy can enable innovation, as well as how legal and regulatory frameworks will impact on a business’s digital plans, is therefore essential before firms make important investment decisions.

Customer InteractionWhen looking to improve customer interaction, firms’ intentions range from enhancing the customer experience through to gaining greater control over the customer relationship, though increased involvement brings new responsibilities. Whatever the motivation, the medium for approaching customers and the ensuing contractual and regulatory relationship are central elements of a digital approach that firms will need to clarify.

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But this is not to say that the regulatory framework in client identification and verification has come to a halt. New and developing European legislation in this area includes the development of an Electronic Identification and Trust Services (eIDAS) Regulation that will come into force next year and new anti-money laundering requirements and rules governing payment initiation and access to accounts under a second Payment Services Directive (PSD2).

Financial services businesses should be concerned with understanding these changes to customer interaction, just as much as they should be thinking through changes to online consumer rights, the regulatory position on unfair terms and varying customer terms in a digital context.

DataBig data, advances in data science, the use of algorithms and analytics are all providing the sector with opportunities that it has never had before. However, the opportunities to maximise value need to be balanced against customers’ rights, effective governance and the need for cyber risk protection frameworks.

As these market issues take shape, data protection and cyber security laws continue to undergo significant reform at EU level. While it was as far back as January 2012 that a draft EU-wide General Data Protection Regulation was first introduced by the European Commission, it was not until March 2014 that the European Parliament voted in favour of an agreed position on legislation’s draft text. With the Council of Ministers, the third necessary body involved in forming EU legislation, also now reaching its own agreed position in June 2015, a “shared ambition” to finalise the legislation by the end of 2015 now looks significantly more achievable.

Uncertainty around the outcome of these negotiations still presents a genuine challenge to forming effective strategy and financial services businesses need to be prepared for change in relation to many aspects relating to how they process data. The proposed changes range from new mandatory data breach notification obligations and new or changed requirements to enable data portability, rectification and erasure, to fines for breach of potentially up to EUR 100 million or up to 5% of the annual worldwide turnover, if the European Parliament’s position were to be accepted.

It is important to have a clear understanding both of current data obligations and how these are likely to change in the future in making decisions to push ahead with long-term innovation, or to change the approach of particular projects if necessary.

Dealing with modern technology infrastructureGovernanceThe right technology infrastructure should provide agility, efficiency and flexibility for a business. At the same time, poorly designed approaches to dealing with legacy technology can prove costly. Maintaining adequate risk profiles and monitoring in an

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effectively with legal teams in times of a crisis. They also need to be fully aware of and committed to organisational and technical measures that are of a standard that regulators would expect. That standard is an ever changing one as the ‘state of the art’ of cyber protection technologies and organisational methods for dealing with risk continue to evolve.

What next for firmsEmbracing the opportunities and challenges of digital inevitably requires significant investment in fundamental change for any financial services business. However, the costs of not embracing digital now could be even greater in a fast-moving environment. We have only been able to highlight the issues briefly here. However, maximising the opportunities, avoiding costly mistakes and being effective in implementing a digital strategy requires an up-to-date understanding of how the legal and regulatory frameworks relating to digital interact with financial services laws and regulation. Firms investing time and effort in planning their digital strategy at the outset will be in a much better place then to manage the known risks and reduce the impact of unexpected developments in future.

The FCA has recently issued a “Call for Input” in relation to regulatory barriers to innovation in digital and mobile solutions. The paper stresses that any perceived barriers, whether in relation to the FCA’s rules, those of the PRA, the Payment Services Regulator or even the EU should be raised by firms, for potential change or influence by the regulator. Responses to the Call for Input are due by 7 September 2015 and firms should consider whether there are issues they are facing in their own digital developments worth bringing to the attention of the FCA.

Tobin AshbyLegal DirectorInsuranceT: +44 (0)20 7490 6482M: +44 (0)7766 808680E: tobin.ashby@pinsentmasons.com

Luke Scanlon Consultant Lawyer (Qualified in Victoria, Australia) T: +44 (0)20 7490 6597M: +44 (0)7887 815950E: luke.scanlon@pinsentmasons.com

environment where technology is increasingly developed by and procured from start ups and SMEs is particularly important. Firms need to ensure that appropriate governance and controls are in place to manage their infrastructure development.

Challenges remain in finding the right mix of personnel and expertise to implement the agreed policy frameworks. At a high level, digital is often on the radar of the board or a key driver for some members of it. But the day to day governance and management of digital can become a battleground between different business and risk teams. It is not always straightforward communicating throughout the business the extent to which moving to a more digital approach can mean fundamental changes to the way the business operates and governs itself.It may also require retraining of individuals and in some cases a new staff profile.

The most effective legal teams will want to act as enablers for proper business decisions, rather than just initiating new policies to govern the risk. A clear understanding of the how the changes to the business will affect its risk profile is essential to providing this kind of practical support.

Risk management frameworks need to be developed to deal with the particular risks of digital transformation. The most obvious of these is cyber risk, which is worth considering further in its own right.

Cyber riskHow effective businesses deal with cyber risk is becoming more of a differentiating factor between businesses both in terms of reducing technology expense and enabling future innovation. Cyber threats range from individual motivated ex-employees looking to steal confidential information through to sophisticated criminal gangs working as part of international syndicates. The reality now is that these threats are always present for every business.

Just as significant as genuine external cyber threats are the costs associated with outages and other network and data related incidents that result from accidental or inadvertent actions of employees and third party outsourced technology suppliers.

Financial services businesses need to plan and be effectively prepared for all kinds of technology risk, which may be through the terms of the contractual arrangements or how they react quickly to cyber threats. Technical teams need to speak a language that the rest of the business can understand and communicate

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the EU and the consumer is an EU resident. The legislation will enable consumers to participate in online ADR, with the intention of providing an appropriate system for redress with EU businesses, thereby avoiding court.

The European Commission is also creating an ODR platform for disputes arising from an online transaction as part of the reforms. The platform will be used to assist with the ADR process, and the UK is obliged to appoint ODR contact points to provide information and help.

Importantly, from January 2016, all businesses which sell goods or services online will be obliged to provide a link to the ODR platform on their website along with further information. There is a question over whether the UK business world is ready for the onslaught of what will be ADR via ODR.

In his speech, Lord Dyson made a number of comments regarding his views about an online dispute resolution system that are worth noting:

• The report published earlier this year by an advisory group within the Civil Justice Council (CJC) on online dispute resolution (ODR) in low value cases “convincingly” demonstrates one of the ways the justice system could be developed to make it more accessible and more efficient, speedy and affordable than it now is. The CJC report said, inter alia, that a new online court could be operational in England and Wales by 2017.

• It may not be long before all claims are filed online; paper bundles and authorities are past history; and the court file is an online file.

• It should be possible for case and costs management to be facilitated through the proper use of technology as the potential savings in terms of costs and time to all involved are obvious

• A new ODR system in England and Wales should link ADR mechanisms with the court system. France has already developed such a system. The system in France encourages more than simply greater efficiency. It allows innovation. One form of innovation has been the creation of a website that provides an e-filing service for litigants-in-person. Individuals are able to attempt to resolve their disputes through an ODR mechanism. If that does not succeed, the website enables the creation of and files electronically the necessary court documents to commence a claim. It is primarily aimed at small ‘everyday’- claims.

• Measures need to be taken to address “systematic delays” and the “excessive costs and procedural complexity” of litigation, but “a rush to justice can be just as dangerous as a leisurely amble”. Efforts must also be made to ensure that the greater use of technology in the court system does not lead to secrecy.

15. UK businesses must prepare for online dispute resolution UK businesses should prepare now for settling disputes with consumers through a system of online mediation and anticipate a further shift towards online dispute resolution in future too.

On 22 April, in a speech at the Law Society’s Magna Carta anniversary event, Master of the Rolls Lord Dyson reinforced his backing for the development of a new online court system and other ways of digitising civil litigation processes. He said that technology can play a role in tackling delays that sometimes arise in court cases and help cut costs for companies in dispute. Click here to read Lord Dyson’s speech.

It was reassuring to see one of the most senior judges in England and Wales focus his attention on the subject of ODR because whilst the topic has developed significantly at an EU and national government level, it remains relatively low-priority within business.

There are three principal aspects to online dispute resolution: using technology to enable accessibility to the justice system, particularly for low-value items, for example by providing online filing systems and case management processes; enabling a form of online alternative dispute resolution (ADR) service, such as online mediation to facilitate settlement; and allowing judgments to be decided based on the review of online papers, possibly with telephone or Skype-style hearings.

It is the online ADR service that may be the most immediately tangible and which will undoubtedly have the most immediate effect on business. New EU legislation on ADR and ODR is due to be implemented into UK law before 9 July this year. In Section 3, we provided details of the recently published ADR Regulations put in place for this purpose. The UK government previously launched a consultation on the plans. Click here to read the consultation.

The legislation imposes an obligation on the UK to ensure the provision of online settlement mechanisms for consumer complaints in all sectors, with a few exceptions including financial services. The legislation applies to all contractual disputes both domestically and cross-border, where the trader is established in

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• There is an obvious tension between the preservation of this fundamental principle and the promotion of virtual, internet-based, systems and processes that enhance efficiency and cost-savings. It is one thing to conduct mediations out of the public gaze. This is already done and there can be no objection to it. But we should not allow advances in technology to lead to secret court determination of disputes. It will be a technical challenge to find a solution to this problem. Technology must be the servant of justice, not its master.”

David McIlwainePartnerStrategic Business Services, TMT LondonT: +44 (0)20 7490 6224M: +44 (0)7956 569887E: david.mcilwaine@pinsentmasons.com

This piece was adapted by the editor from content that originally appeared on Out-Law, Pinsent Masons’ web news resource. To access the original content, click here.

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16. Reinsurance: Today’s reinsurance firms should not forget mistakes of the pastCatastrophe reinsurance is changing, according to a new book that claims to be the first detailed study of the sector. But by distancing reinsurance from the underlying risks, the market could be in danger of repeating the failures of the 1980s and 1990s.

Compared to the banks, the global insurance industry fared surprisingly well during the 2008 financial crisis. Indeed, there have not really been any major market disputes since the Unicover workers’ compensation spiral in the US in the mid-1990s, in which a complicated series of poor value reinsurance contracts left some insurers exposed to huge potential future claims in return for low premiums. One of the reasons often given for this is that the industry learned its lessons from the old London Market of Excess Loss (LMX) spiral of the 1980s, and the near-collapse of Lloyd’s of London.

In their new book Making a Market for Acts of God, academics Paula Jarzabkowski, Rebecca Bednarek and Paul Spee argue that now, with new players and new ways of providing cover for risks coming into the catastrophe reinsurance markets, the industry risks forgetting the mistakes of the past – and the potential for another crisis in the event of a costly catastrophe. The authors liken the current trend towards bundling together policies into ‘catastrophe bonds’ to the packaging and resale of sub-prime mortgage-backed securities that triggered the banking crisis.

There are always potential problems when risks are underwritten that are so remote from the primary insurance risk that is being covered that there is no linkage between them. In this sense, there is a good degree of similarity between what the reinsurance market did in the 1980s which led to the LMX spiral, and the sub-prime crisis and the packaging of mortgage-backed securities. In both cases, an excess of capital and the failure to appreciate accumulation and aggregation risks led to collapse. It is interesting that the authors of this book think that history is repeating itself again.

Reinsurance refers to the practice by insurance companies of insuring the policies that they hold with another insurer or specialist reinsurance firm. A reinsurance agreement between the ‘ceding’ company and its reinsurer sets out the circumstances in which the reinsurer would then pay a share of the claims incurred by the ceding company. By spreading the risks and the costs of insurance claims, reinsurance helps to ensure that insurers remain financially viable - particularly after a major disaster such as a hurricane, an earthquake or a terrorist event.

The authors of the new book claim that insurers have been increasingly reinsuring their risks through complex bundled arrangements, sold on to pension funds and other institutional investors in the form of catastrophe bonds and other insurance-linked securities. The ultimate result of this is the potential spread of mainstream insurance risks to parties that do not necessarily understand them.

These new ILS structures have not really been properly tested yet, but the numbers are large enough that at some point they will be subject to a major challenge. These contracts currently account for around 10% of reinsurance business underwritten globally, so it is unlikely that their failure at the moment would lead to the wholesale collapse of the reinsurance market – but there could be one or two big failures, and some significant fallout.

As the book notes, there is a flood of available capital in the market - bringing with it a heightened danger that those deploying that capital will expose it to investments that are not fully understood. It would be wonderful if the insurance industry was able to find a way to deploy this excess capital in such a way that we saw new, innovative products made available to fill the massive void in the global market that is left due to underinsurance, especially in emerging markets where economies - as the recent earthquake in Nepal has so dramatically illustrated - would benefit from better access to insurance solutions.

Unfortunately, the excess capital is being blamed by the markets for simply driving down rates, which are particularly soft in the reinsurance sector at the moment. With soft rates at one end, and new products that are disconnected from the underlying risk insured at the other, the structure could be vulnerable.

Nick BradleyPartnerHead of InsuranceT: (0)20 7667 0026E: nick.bradley@pinsentmasons.com

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17. Competition: Consumer Rights Act - Further Encouragement for Private Damages Actions in Competition LawOn 26 March 2015, the Consumer Rights Act (CRA) received Royal Assent. It is expected to come into force on 1 October 2015. The reforms under the CRA are likely to greatly increase the number of private actions, and the size of damages awards, in the UK against companies involved or suspected of being involved in breaches of competition law. As a result, the UK is likely to continue to be one of the jurisdictions of choice for claimants seeking to bring these types of claims. All businesses, including insurers, should be aware of the reforms and the resulting “increase in stakes” that they will represent. The key reforms are set out below.

Opt-out collective actions Currently, Which? is the only entity allowed to bring a collective damages action before the specialist court, the Competition Appeal Tribunal (CAT), as the representative of a group of consumers who have been harmed by a breach of competition law. Additionally, under the current rules, the represented group must be made up of only those consumers who have actively signed up or ‘opted in’ to the collective action.

The CRA allows a much broader range of representatives to bring collective private damages actions, both for standalone and follow-on claims, including anyone directly affected by the alleged competition infringement (individuals or businesses) and trade associations, as long as the CAT deems it ‘just and reasonable’ for that applicant to be the representative.

Even more significantly, the representative may ask the CAT to deem the represented group to be all UK customers who might have been affected by the competition law breach, unless such customers actively ask to be excluded or ‘opt-out’ from the action.

This means that under the new rules the number of claimants in any particular damages action will likely increase significantly, as customers are deemed to be part of the action. Non-UK customers who wish to be part of the action must actively opt in.

In an attempt to safeguard against the development of an excessively litigious culture, the CRA prohibits the use of damages based agreements in collective opt out actions (where the law firm receives a percentage of the damages obtained if the claim is successful). Additionally, exemplary damages (akin to the punitive ‘treble damages’ in the United States) will not be available in collective actions.

Increasing liability of defendants in collective actions The new collective actions regime will also have the effect of increasing the amount for which a competition law infringer is liable.

Currently a defendant is only liable for the amount of damages claimed by each (opted-in) claimant, as quantified on an individual basis. However, the CRA will allow the CAT to calculate damages on an aggregated group basis. Any unclaimed portion of the damages awarded would then be allocated to a prescribed charity (currently the Access to Justice Foundation) rather than revert to the defendant. Alternatively, the CAT may order that all or part of the unclaimed portion go towards paying for the claimant group representative’s legal costs.

This means that the damages paid by defendants will, in many cases, represent more (and, potentially, significantly more) than what is actually ultimately claimed as compensation by individual members of the claimant group.

Allowing the CAT to hear standalone cases Currently, the CAT can only adjudicate on follow-on actions, i.e. where the defendant has already been held by a competition authority to have infringed competition law. Under the current rules, a damages action cannot be brought against a defendant before the CAT where there has been no infringement decision by a competition authority against that defendant (so-called ‘stand-alone cases’).

As most claims include stand-alone features, this restriction means that, currently, many private actions are either not brought before the CAT or, if they are, they are subject to lengthy procedural challenges by the defendant on the basis of jurisdiction.

The CRA will enable the CAT to hear stand-alone as well as follow-on actions (and cases with a mixture of both). This will avoid the current procedural difficulties and improve accessibility to the CAT, as well as result in a likely increase in the number of private actions. Consistent with this extension of the CAT’s jurisdiction, the limitation period for claims in the CAT will now mirror that in the High Court.

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Introducing a ‘fast-track’ procedure within the CAT Simpler cases (or those which are likely to be resolved quickly and without the need for substantial amounts of evidence) which are brought before the CAT will be put on a ‘fast-track’, with priority given to actions brought by Small and Medium sized Enterprises (SMEs). Cases on the fast-track will likely be capped both in terms of cost and evidence, so as to encourage SMEs to bring cases in the CAT, especially against larger companies.

Allowing the CAT to grant injunctions In order to protect vulnerable businesses, the CAT will also be able to issue injunctions, requiring an immediate cessation to anti-competitive behaviour. All cases on the fast-track will be considered for injunctive relief very early in the process.

Additionally, for injunctions in fast-track cases, the CAT will have the power to waive the usual requirement for a cross-undertaking as to damages. This will enable a claimant to seek an injunction without having to provide an upfront sum of money by way of security for any harm suffered by the defendant in the event that it ultimately turns out the injunction should not have been granted.

Introducing an opt-out collective settlement procedure The CRA will introduce a procedure by which businesses can settle cases on a collective basis, including in respect of claims where collective proceedings have not yet been brought. The settlement will be negotiated by the representative on behalf of all potential UK members of the claimant group (except for those who opt out) and any non-UK claimants that opt in. The CAT may only approve the settlement if it is satisfied that its terms are just and reasonable. Where collective proceedings have not yet been brought, the CAT must first approve the representative and the suitability of the claims for collective action.

It remains to be seen, however, whether the representative bringing a particular case will nevertheless start proceedings in the CAT in order to try and increase the pressure on the defendants to settle the case.

Introducing a CMA enforced redress scheme The Competition and Markets Authority (CMA) will be given the ability to certify voluntary redress schemes entered into by businesses which are the subject of a competition law infringement finding by the CMA or the EU Commission.

Once certified, the redress scheme becomes enforceable by the CMA. In return for a business entering into such a scheme, the CMA can take this into account when assessing the level of the fine to be imposed on that business for the competition law breach. However, such a scheme does not protect the infringing business from subsequent private actions.

The scheme is available in respect of both UK and EU infringement findings although the potential fine reduction will only be possible where the CMA is the investigating regulator.

Next Steps The CRA reforms will require a number of changes to be made to the CAT’s Rules of Procedure and the UK Government has issued a public consultation on the proposed new draft Rules. A separate public consultation has also been issued on the CMA’s proposed guidance regarding voluntary redress schemes. It is intended that both the new CAT Rules of Procedure and the CMA’s guidance on voluntary redress schemes will be finalised and implemented by 1 October 2015 to coincide with the CRA coming into force.

Conclusion The insurance industry should take note that the CRA will likely increase the level of competition litigation and the size of damages received by claimants. For businesses which have suffered harm from infringements of competition law (especially if they are SMEs), the changes will be positive. For companies found to have engaged in competition law breaches, the changes will increase their financial exposure to private actions for damages in addition to fines.

Jenny BlockPartnerLitigation & Compliance, EU and Competition T: +44 (0)20 7490 9685M: +44 (0)7500 578321E: jenny.block@pinsentmasons.com

Guy LougherPartnerLitigation & Compliance, EU & CompetitionT: +44 (0)20 7490 6102M: +44 (0)7825 160146E: guy.lougher@pinsentmasons.com

Giles WarringtonPartnerLitigation & Compliance, EU & CompetitionT: +44 (0)121 260 4037M: +44 (0)7717 488468E: giles.warrington@pinsentmasons.com

Ben LassersonPartnerLitigation & Compliance, EU and CompetitionT: +44 (0)20 7490 6907M: +44 (0)7468 710901E: ben.lasserson@pinsentmasons.com

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• GAP products also tended to have a low “claims ratio,” with only 10% of the amount collected in premiums paid out in claims.

In view of these issues, the FCA proposed a market-specific remedy (the imposition of an improved information requirement and a requirement for deferred opt-in).

The Policy StatementThe Policy Statement summarises the feedback received from market operators in the course of the consultation, and the FCA’s responses. Some respondents disagreed with the appropriateness of the remedy package generally, and proposed alternative remedies. Several respondents argued that the deferred opt-in remedy would not benefit, or would even inconvenience, consumers. Others suggested that it would amount to an unacceptable restriction of consumer choice. In response the FCA re-affirmed its conclusions from the July 2014 paper. The main alternative remedy suggested was the establishment of a price comparison website for GAP insurance products, which the FCA rejected on the basis that it would not be sufficient to address the issues involved and would likely result in disproportionately high costs to implement.

Extension of the implementation timetable: Most respondents argued that the new rules should come into force on 1 January 2016, particularly since car sales are typically high in September due to the UK car registration timetable. The FCA considered that this reinforced the need to protect consumers by making the rules effective from then.

Shortening of deferral period for firm-initiated sales: Most respondents considered that the compulsory deferral period for firm-initiated sales should be less than four days, citing in particular the potential for negative effects on the used car sales market due to the typically shorter sales process as compared with that in the new car sales market. In response, the FCA stated that creating a separate deferral period for used car sales would risk creating an artificial extra layer of bureaucracy that could make the rules less comprehensible. The FCA also referred to the fact that, under the new rules, there will be a shorter deferral period for customer-initiated add-on GAP sales (that will allow sales to take place the day after the sales process begins).

Ability to waive deferral period: The FCA rejected the suggestion that customers should be entitled to waive the deferral period altogether, noting the potential for distributors to exert undue pressure on consumers to do so in view of their point-of-sale advantage.

Interaction of the remedy with consumer credit rules: The FCA rejected the suggestion that the rules would prevent or constrain customers’ ability to purchase GAP insurance using credit, indicating that it did not consider the remedy to be incompatible with the Consumer Credit Sourcebook or the Consumer Credit Act.

Expanding the list of prescribed information: The new provisions to be inserted into the Insurance: Conduct of Business Sourcebook (ICOBS) stipulate that, prior to the conclusion of a

18. Competition: New rules for add-on Guaranteed Asset Protection insuranceThe FCA has confirmed that new rules designed to encourage consumers to shop around before purchasing “add-on” guaranteed asset protection (GAP) insurance with a car or other vehicle will come into force on 1 September 2015.

From this date, firms distributing add-on GAP insurance in connection with the sale of a motor vehicle will be obliged: (i) to provide customers with prescribed information designed to encourage them to consider the full range of options available to them; and (ii) to implement a mandatory “deferral period” that will prevent firms from introducing GAP insurance and concluding the sale on the same day. In its Final Policy Statement, the FCA stated that it expects the new rules to lead to “better customer outcomes from more informed purchasing decisions and improved competition between add-on and standalone distribution channels”.

BackgroundThe new rules have been put in place following the FCA’s 2014 general insurance market study, which was the first study carried out under its mandate to “promote effective competition in the interests of consumers.” In a report published last July, the FCA concluded that the “add-on” sale of insurance products had a “clear impact” on consumer behaviour; weakening engagement and reducing the likelihood that consumers would shop around. The FCA also noted that the “add-on” sale of insurance afforded providers significant point-of-sale advantages leading to poor customer outcomes through the purchase of poor value, unnecessary products, and for significantly higher prices than customers would have obtained by shopping around for a standalone policy.

The FCA found that the problems were particularly acute in relation to add-on GAP insurance products. According to its research:

• Almost two-thirds of add-on customers reported not having thought about buying GAP insurance until the day they bought it

• Add-on GAP insurance customers had a worse understanding of the product than standalone GAP insurance purchasers

• Almost half of customers were unaware that they could have bought GAP insurance other than at point of sale; and these customers were the least likely to shop around

• Shopping around is likely to be particularly worthwhile, especially since standalone GAP insurance prices tend to be significantly lower than add-on GAP insurance prices

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Pinsent Masons | Insurance Legal Update – Spring/Summer 2015

GAP contract, certain information must be provided (in writing or via another durable medium) to consumers in a clear and accurate manner that underlines the importance of the information. That information is:

• the total premium of the GAP contract, separate from any other prices

• the significant features and benefits, significant and unusual exclusions or limitations, and cross-references to the relevant policy document provisions

• whether or not the GAP contract is sold in connection with vehicle finance, that GAP contracts are sold by other distributors;

• the duration of the policy

• whether the GAP contract is optional or compulsory

• when the GAP contract can be concluded by the firm

• the date that all the information above is provided to the customer.

Some respondents suggested refinements and additions to the list of prescribed information to be provided to consumers. The FCA rejected these, pointing out that the list is not meant to be exhaustive and that there is nothing to prevent additional information being provided.

Concerns about the cost/benefit analysis: Issues were raised on a number of points, particularly the underestimation of implementation costs for firms selling add-on GAP insurance and the overestimation of benefits. Accordingly, the FCA increased its cost estimate from £5m to £20m – a figure which the FCA deems acceptable when balanced against the estimated £31m – £54m annual benefits to consumers.

Going forwardThe FCA has just finished consulting on two other rule changes that would apply to the sale of add-on products more generally: (i) a ban on “opt-out” sales, such as through the use of pre-ticked boxes; and (ii) requirements for firms to provide more “appropriate and timely” information about add-on products. This consultation period ended on 25 June 2015.

A discussion paper on the possible imposition of a requirement to publish claims ratios will be published later this year.

Jenny BlockPartnerEU and Competition T: +44 (0)20 7490 9685M: +44 (0)7500 578321E: jenny.block@pinsentmasons.com

Neale McDonaldSolicitorLitigation & Compliance, EU and CompetitionT: +44 (0)20 7667 0261E: neale.mcdonald@pinsentmasons.com

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19. Pensions: Secondary Annuities Market Pensioners planning to sell on the right to regular annuity payments to a third party could be required to seek independent financial advice before doing so, under plans put forward by the UK government.

A consultation paper published on 18 March alongside this year’s Budget set out further details of the government’s intention to establish a ‘secondary’ market for annuity sales, giving over five million existing pensioners the same right to access their pensions flexibly as will be extended to those reaching retirement from 6 April 2015. The consultation named ‘Creating a secondary annuity market: call for evidence’, which closed on 18 June, sets out further details of how payments could be taxed under the new regime, as well as of the consumer protection mechanisms that could be put in place. Click here to read the consultation paper.

The Treasury said in its consultation paper that: “While those retiring after 6 April 2015 will benefit from these reforms, those who retired before then and bought an annuity with funds from their defined contribution pension scheme remain effectively ‘locked’ into that choice through a tax charge of up to 55% (or 70% in some cases if they were to reassign their annuity)” and “For the vast majority of people, continuing with their existing annuity will be the right choice. Annuities provide a regular guaranteed income for life and many people will continue to value the security they provide. However, there is no reason why the government should impose barriers that prevent individuals from being free to make their own choice about what to do with their annuity rights, purchased with money they have saved throughout their working life.”

An annuity is a policy from an insurance company that converts a pension fund, or part of a pension fund, into a regular pension income. The government plans to remove existing restrictions on buying and selling annuities from April 2016, allowing the annuity holder to sell the right to the income that they receive without unwinding the original annuity contract. The annuity holder would receive a cash sum, which they would be able to take as a lump sum or place into a drawdown product, while the provider would continue to make regular annuity payments to the purchaser.

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According to the consultation paper, the “preferred approach” of the government is to remove barriers to the creation of a secondary market and allow annuity providers and potential buyers to develop the market, rather than to “dictate a rigid mechanism”. It would do so by removing the punitive ‘unauthorised payment’ tax charge preventing individuals from assigning their annuities, and instead taxing individuals at their marginal rate. It would also work with the Financial Conduct Authority (FCA) to ensure that “appropriate consumer protection” was put in place.

Only annuities in the name of the annuity holder and held outside an occupational pension scheme would come within the scope of the proposed new freedoms, according to the consultation paper. For joint annuities, it would be for the provider to decide whether to go ahead and with what confirmation from the secondary beneficiary. Annuity providers would be able to block sales, as the government has no intention of “interfering” with existing contractual agreements, it said.

The consultation confirmed that the government does not intend to allow annuity providers to “buy back” contracts they have entered into with the customers, due to the risks of providers coming under “significant public pressure” to do so with potential repercussions to their solvency. However, it said that it welcomed views on “the potential risks and benefits” of allowing buy back, as it acknowledged that existing providers could be in a position to offer a better price to the consumer than other purchasers.

Possible consumer protection measures could include a requirement for the annuity holder to take regulated advice before selling, similar to the existing requirement that applies to transferring savings from a defined benefit from a defined contribution scheme. The government said that although this advice could be expensive, “recent clarification” by the FCA of rules around simplified advice could potentially create a new

type of advice product. It could also expand the remit of the government-backed Pension Wise independent guidance service to cover annuity re-sales, or including appropriate risk warnings in the information that providers are required to give savers.

Proceeds from the sale of annuities that were taken as cash would be subject to income tax at the marginal rate, while proceeds used to buy flexi-access drawdown funds or flexible annuities would not be subject to income tax on transfer. Instead, income from these products would be taxed at the marginal rate. The £10,000 annual allowance and new tax treatment of annuities on death would apply to those assigning their annuity to a third party, according to the consultation.

The risk that annuity providers will not know when to stop payments to a third party buyer on the annuity holder’s death would have to be addressed, although the government said that it was not inclined to establish a central ‘death register’ to help with this due to the disproportionate costs of this. The FCA would also be expected to monitor charges imposed by annuity providers to ensure that they were not exploiting customers that wished to sell on their annuities, according to the consultation.

Simon TylerLegal Director (PSL)Pensions T: +44 (0)20 7667 0154M: +44 (0)7917 013197E: simon.tyler@pinsentmasons.com

Simon LaightPartnerPensions T: +44 (0)20 7490 6983M: +44 (0)7880 740251E: simon.laight@pinsentmasons.com

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20. Tax: New criminal offence proposed: corporate failure to prevent tax evasion The government intends to create a new offence of “corporate failure to prevent tax evasion or the facilitation of tax evasion”. There is very little detail at present but all businesses need to start considering the implications.

IntroductionThe former Chief Secretary to the Treasury, Danny Alexander, announced following the March Budget that the Government would consult on the new offence, as well as new civil penalties for “enablers of tax evasion”. The Government also proposes to introduce a strict liability offence for those who have not paid the tax due on offshore income and to introduce penalties linked to the tax at stake.

The announcement followed allegations in the BBC’s Panorama programme in February that bank employees in Switzerland were facilitating tax evasion through the use of offshore accounts.

Corporate failure to prevent tax evasion The new criminal offence of “corporate failure to prevent tax evasion or the facilitation of tax evasion” is targeted at businesses. Although the obvious targets are banks, fiduciaries and professional services firms, it looks as if it will apply to all businesses. Going forward businesses will have to pay greater attention to the activities of their employees, contractors, suppliers and customers in relation to tax.

Although the Public Accounts Committee has called for action against those who promote “aggressive tax avoidance”, it appears from the announcement that the proposals will only cover tax evasion.

Will it follow the precedent of the Bribery Act? Under the Bribery Act 2010 broadly speaking there is a strict liability offence of failing to prevent bribery. An organisation is liable for the actions of any person carrying out services for or on behalf of the organisation, in whatever capacity. It can catch any contractors, agents or subsidiary companies. Further, if the organisational failures are with the consent or connivance of

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any senior officers of that organisation, they too could be liable for an offence under the Act. The only defence a commercial organisation has if charged with failure to prevent bribery is the defence of putting in place adequate procedures to prevent it. This means that an organisation can escape liability if it can show that it had sufficient safeguards in place throughout the organisation designed to prevent persons associated with it from bribing.

This element of the bribery legislation has had a huge impact. Commercial organisations now have to consider and implement policies and training on bribery and corruption as well as review their approach to hospitality, gifts and charitable donations. If, as seems likely, the tax offence applies in a similar way, companies and other businesses will also need to have robust procedures in place to prevent their employees, service providers, agents, and associates from engaging in or facilitating tax evasion. Depending on the scope of the offence this could be wide ranging. All business will have to scope how this might apply to them and implement bespoke policies and procedures.

TerritorialityThe territoriality of the offence of failing to prevent tax evasion measure is not yet clear – in particular whether it would apply to activity taking place only in the name of UK businesses. The Bribery Act has extra-territorial reach in that it catches actions of employees of overseas subsidiaries, agents or contractors of a UK company and the corruption itself does not need to take place on UK soil. Overseas companies may also be caught if they have a significant connection with the UK. In view of the fact that the announcement of this offence is a reaction to media attention surrounding Swiss bank accounts, it is likely that the new offence will apply to activities outside of, as well as inside, the UK.

Penalties for enablers of evasionFor individuals evading tax, it is proposed that a new strict liability offence of failure to declare offshore income and gains will be introduced, together with tougher penalties which will be linked not just to the tax at stake, but also to the value of the assets connected to the evasion. The Government is also proposing that tax penalties on third parties who assist others in evasion will be introduced, geared to the penalty paid by the person who evaded the tax. As the Chief Secretary put it, “if you help someone to evade tax of £1m, you can expect to pay a penalty of £1m or more”.

Naming and shamingThird parties committing these new offences will also be subject to “naming and shaming”, whereby their names are published by HMRC. This has been particularly successful for HMRC in relation to the national minimum wage, where some well known companies have suffered adverse publicity as a result of being listed.

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Notifying customersThe Government is also intending to require financial institutions and tax advisers to notify their customers that HMRC is being sent data on offshore accounts, the changes in the penalties for tax evasion and the opportunities to come forward and make voluntary disclosures of past irregularities. Again, it is not clear how wide this provision will be, but it is likely to be mainly aimed at UK banks and trust companies with overseas operations and professional advisers.

Action to be takenWe will need to wait for consultation documents for more detail of all these proposals. We expect to hear more details in the budget on 8 July and for a consultation document to be published soon.

The proposals could have serious implications for all businesses. For those operating outside the banking, fiduciary and tax advice areas, this is likely to mean more due diligence in relation to suppliers, contractors and employees. Businesses will probably have to look much more closely at where and the manner in which payments are made for goods and services, especially if offshore accounts are involved or payments are made in cash.

All businesses should be taking action now to ensure that they are aware of and have control over how their employees, agents or service providers are operating, especially in destinations that might be regarded as tax havens. Even though past conduct should not be covered by the new offence, it could give rise to serious reputational damage, so companies need to be taking action now to establish what risks they may face and what enhanced procedures they may need to put in place.

Heather SelfPartner (non-lawyer)Litigation & Compliance, TaxManchesterT: +44 (0)161 662 8066 M: +44 (0)7919 392006E: heather.self@pinsentmasons.com

Jason CollinsPartnerLitigation & Compliance, Tax T: +44 (0)20 7054 2727M: +44 (0)7790 909079E: jason.collins@pinsentmasons.com

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21. Employment: Northern Ireland Court of Appeal rules voluntary overtime can be included in calculating holiday pay In Patterson v Castlereagh Borough Council, the Northern Ireland Court of Appeal has ruled that, in principle, voluntary overtime can be included in calculating holiday pay.

The facts in the case relate to the inclusion of voluntary overtime (being any overtime that the employer is not obliged to offer and the employee is not obliged to accept) in the calculation of holiday pay. The appeal considered the Industrial Tribunal’s original decision that voluntary overtime should not be included in holiday pay calculations. At the hearing, counsel for the employer conceded that the consideration of voluntary overtime may not have been properly considered at the Tribunal hearing. Further, it was conceded that there is ‘nothing in principle to stop voluntary overtime being included within the calculation of holiday pay’. It was argued that this should only be where voluntary overtime constitutes “normal remuneration” as set down in the earlier decisions such as Bear Scotland. This would require the detailed facts (including the regularity of overtime performed) to be considered.

The Northern Ireland Court of Appeal has now confirmed this position in its judgment, ruling that in principle, there is no reason why voluntary overtime should not be included as a part of a determination of entitlement to paid annual leave.

Although decisions of the Court of Appeal in Northern Ireland are not binding in Great Britain, this decision carries considerable weight as a persuasive authority in the short term. In the longer term, if the case proceeds to a further appeal to the Supreme Court, it may yet bind the courts and tribunals in Great Britain directly. The case has now been remitted to the employment tribunal for factual determination of whether voluntary overtime was normally carried out by the worker and whether it forms part of normal remuneration to trigger its inclusion in the calculation.

Comment

• The court confirmed that the question of what constitutes normal working hours is a matter of fact for each tribunal and should be assessed over a reference period. The Court did not however provide details on what the correct reference period should be.

• It is worth noting that, with the voluntary overtime point having been initially conceded, the judgment records that as a result of this the Court failed to hear full legal arguments on this question and that their views should be treated with caution.

Government to publish consultation on gender pay gap reportingThe Government has confirmed that it will deliver its manifesto commitment to require companies with at least 250 employees to publish gender pay information. The Minister for Women and Equalities, Caroline Dineage, told the House of Commons about the Government’s plans for the new legislation on pay transparency, stating that “a consultation will be published in the Summer with a view to making regulations in early 2016”.

Jon FisherPartnerFinancial Institutions & Human Capital, EmploymentT: +44 (0)113 294 5198M: +44 (0)7717 348488E: jon.fisher@pinsentmasons.com

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22. Middle East: Civil and commercial arbitration law due soon in Qatar Qatar is working on an arbitration law covering civil and commercial disputes.

A new arbitration law is essential for the country. The current arbitration law in Qatar stems from a time when the use of arbitration was still in its infancy in the Gulf and in its current state it is outdated and does not meet the standards of a modern arbitration law. This is essential to give foreign investors the confidence that they can have access to a quick, effective and just dispute resolution process outside the local courts in case a dispute arises.

In the past, companies as well as private investors have had some poor experiences with proceedings in the Qatari Courts especially when it comes to the enforcement of local or foreign arbitral awards, where the Courts have regularly refused to enforce arbitral awards.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards came into effect in Qatar in March 2003, and it is time to formally implement its obligations under that Convention into a new arbitration law. Saudi Arabia brought in a modern arbitration law in 2012, one of the first countries in the Gulf region to do so. Furthermore, the arbitration laws in Dubai were brought into line with the New York Convention in December 2013. Click here to read more about the changes to arbitration law in the Dubai International Financial Centre (DIFC) on Out-Law.

Arbitration is not new to the United Arab Emirates (UAE) having been a recognised concept in the Arab world since at least 1877 when the ‘Medjella’ was published by the Ottomans as the first attempt at codifying the Shari’ah law, which provided for disputes to be resolved by legally appointed arbitrators. The UAE government has been working towards a new arbitration law for a number of years but it is yet to be enacted. Click here to read our guide to Dispute Resolution in the UAE on Out-Law.

If Qatar acts swiftly and brings out a modern arbitration law in accordance with best international standards – such as one that takes close guidance from the UNCITRAL Model Law on Arbitration – that would build confidence and trust for the international community and Qatar could propel itself as one of the major hubs for arbitration within the region.

Roger PhillipsLegal DirectorLitigation & Compliance, Insurance DohaT: +974 442 69206M: +974 6661 4082E: roger.phillips@pinsentmasons.com

Björn GehlePartnerConstruction Advisory & Disputes T: +971 4 373 9642M: +971 50 454 1219E: bjorn.gehle@pinsentmasons.com

This article was adapted by the editor from content that originally appeared on Out-Law, Pinsent Masons web news resource. To access the original content, click here.

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23. Looking AheadA snapshot of some important dates in the calendar for insurer clients over the coming 12 months and beyond.

Date Development Further Detail

3 July 2015 PRA policyholder protection rules take effect Section 2

9 July 2015 Alternative Dispute Resolution Directive (ADR Directive) – transposition into UK law

Section 3

1 September 2015 FCA final rules on Guaranteed Asset Protection (GAP) Insurance come into force

Section 18

7 September 2015 FCA Call for Input on the regulatory barriers to innovation in digital and mobile solutions consultation period ends

Section 1 and Section 14

1 October 2015 Consumer Rights Act 2015 comes into force Section 17

1 January 2016 Solvency II - implementation date Section 2

9 January 2016 Online Dispute Resolution regulation (ODR Regulation) comes into force Section 3 and Section 15

March 2016 FCA Improving Complaints Handling – expected implementation of new rules

April 2016 Flood Reinsurance Scheme (Flood Re) to go live Section 6

June 2016 Expected publication of FCA policy statement and final rules on implementing MiFID II

Section 4

July 2016 Transposition deadline for MiFID II Section 4

12 August 2016 Insurance Act 2015 comes into force Section 6

December 2016 PRIIPS KID Regulation requirements come into force

3 January 2017 MiFID II Regulatory Regime for investment services comes into force Section 4

2017 IMD2 regime expected to apply, subject to the date of its adoption Section 4

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