In a costly settlement, Royal
Liver has become the latest insurer to experience the Financial
Services Authority’s wrath for the mis-selling of products to
consumers. However, Royal Liver may have got off lightly compared
with future offenders that will be subject to the regulator’s new,
far more punitive fines.
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Cracking its regulatory whip, the UK’s
Financial Services Authority (FSA) has reached an agreement with
Royal Liver Assurance under which the mutual life insurer will pay
between £5m ($7.5m) and £7.8m to compensate customers who were
victims of mis-selling by its independent financial adviser (IFA)
unit, Park Row.
Based on the £7.8m figure, the penalty equals
3% of Royal Liver’s capital at the end of 2008. However, with the
FSA having introduced stricter penalties a few weeks after the
agreement, Royal Liver may well have gotten off lightly.
Focus of the FSA’s attention was Park Row’s
conduct between 1 January 2007 and 20 January 2009, a period during
which it had up to 535 IFAs and completed 37,409 regulated sales to
23,688 customers, in the process generating commissions and fees
totalling almost £10.4m.
Among serious failings the FSA identified were
insufficient controls to ensure suitability of sales and advice
given to customers. This included pensions advice, advisers
providing advice when not authorised and the risk of commission
influencing the selection of products.
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By GlobalDataAggravating the situation, the FSA reported
that during the relevant period Park Row was made aware by the FSA,
among others, that it had insufficient controls in place to ensure
suitability of sales. The FSA noted that had Park Row not been in a
state of orderly wind-down it would have been subject to a £2.4m
fine.
Also the subject of the FSA’s wrath was Park
Row’s former CEO, Peter Sprung, who was fined £49,000 and had his
approval to perform at any regulated company withdrawn for five
years. Sprung was CEO between January 2007 and January 2009.
Margaret Cole, the FSA’s director of
enforcement said in a statement: “As chief executive, Peter Sprung
was responsible for ensuring that there were appropriate systems
and controls at the firm and that it treated its customers fairly.
He failed to do this despite being given the opportunity to do so
on a number of occasions.”
For Royal Liver this was not its first brush
with the FSA and came less than four years since the regulator
slapped a £550,000 fine on it for mis-selling with-profits savings
policies between July 1999 and September 2003.
Commenting at that time Cole said: “This was a
serious case of mis-selling, particularly as a significant number
of Royal Liver Assurance’s customers were nearing retirement age
and did not need the cover they were sold.”
FSA on the warpath
The FSA’s latest crackdown on Royal
Liver builds on its tough stance on abuse of customers by financial
services companies. In the first two months of 2010 alone, the FSA
imposed 11 fines totalling £3.95m. This followed 42 fines totalling
almost £35m in 2009 and a total of 221 fines totalling about £136m
between 2002 and 2009.
However, under a new framework introduced by
the FSA on 6 March 2010 things are set to get a lot tougher for
offenders. Under the new framework, fines will be linked more
closely to income and be based on:
- Up to 20% of a company’s revenue from the
product or business area linked to the breach over the relevant
period; - Up to 40% of an individual’s salary and
benefits, including bonuses, from their job relating to the breach
in non-market abuse cases; and - A minimum starting point of £100,000 for
individuals in serious market abuse cases.
“Despite industry opposition we have decided to
implement these proposals as we believe enforcement penalties are a
powerful tool to help change behaviour in the industry,” said Cole.
“We imposed record fines in 2009, but this new approach further
amplifies the deterrent effect of our penalties and sends a
powerful message to firms which makes it clear that non-compliant
behaviour will not be tolerated.”
Removing the commission
trap
Antonello Aquino, vice-president and
senior credit officer at rating agency Moody’s, highlighted the
FSA’s finding that Park Row IFAs had sold Royal Liver’s products
based on the level of commissions received rather than providing
impartial advice.
“We see this event as the latest of several
cases where the regulatory body has adopted a tough stance towards
product mis-selling,” said Aquino.
He added that the Retail Distribution Review
(RDR) directed by the FSA, which comes into force at the end of
2012, has the objective of removing commission-driven incentives
for insurance sales, thereby reducing mis-selling risk. Aquino
explained that the RDR’s key objective is to improve commission
transparency and professional standards for IFAs.
“Better transparency is set to be achieved by
forcing advisers to make it clear when they are offering clients
‘independent advice’ or ‘restricted advice’, the latter being where
only a limited number of providers/products are offered,” he
said.
More importantly, he added that regarding
commissions, the RDR will bring to an end the current,
commission-based system of remuneration for IFAs, who, instead,
will be required to agree a fee for their service directly with
their customers.
Aquino continued that the RDR represents a
“significant strategic challenge” for the UK insurance sector as a
whole given its current dependence on IFA distribution. In the
first nine months of 2009, IFA distribution represented 65% of
total annualised premium equivalent sales, he noted.
Some IFAs may find the new compensation system
and professional standards difficult to work with, and various
sources expect 20% to 30% of IFAs to exit the market, said
Aquino.
“Clearly, there is a risk of a serious
disruption to this important distribution channel,” he added.
Particularly hard hit will be second-tier
insurers or those relying solely on IFA distribution, Aquino
warned. “These companies will struggle as new business will flow
increasingly to the larger, better-recognised and multi-channel
insurers,” he predicted.
On a positive note Aquino said that beyond the
initial challenges and uncertainty posed by the RDR, its potential
long-term advantages for the insurance industry are clear.
“It could improve the quality of advice and
reduce mis-selling, leading to increased persistency, and reduce
value dispersion in the business chain,” he concluded.
