Why financial services is on the risk and compliance agenda

The next Ark Risk and Compliance conference is taking place from 29 - 30 January 2019. I'm delighted to have been asked back again; it has been a whirlwind couple of years in terms of all our regulatory, compliance and ethics agendas and, of course, more change is imminent with the SRA's ditching of the 2011 Handbook and the launch of its new style regulatory package in 2019. January will be a good time to take stock, reflect and plan for ongoing compliance solutions.

I will be taking to the stage to discuss financial services. This topic has been triggered most obviously by the Insurance Distribution Directive (IDD), which prompted changes to the SRA Handbook in October 2018. However, its inclusion on the programme is based more generally on the nagging thought that it can only be a matter of time before the SRA feels compelled to find out more about what we are all doing in this field.

Perhaps the more important question that the SRA should be asking, and we should be confident in answering, focuses on whether we know what we can do in circumstances where our law firms are not authorised by the Financial Conduct Authority (the FCA). The short answer is that we are allowed to "dabble" in certain types of financial services but only where that dabbling is done in a competent manner and in accordance with the SRA Handbook. So, in fine tuning the initial question, I would ask: are we confident that we deliver financial services to our clients in a legal and ethical way?

The fact that all bar a handful of law firms are not FCA-authorised, but they can nevertheless perform certain financial services activities, is a huge gift from the financial services world. We are trusted to deliver a limited number of services because we are professionals who also operate in a regulated environment. If we were not trusted to do this, there would be a number of different services which we would not be able to provide to our clients and which we would have to outsource.

It is not uncommon, however, for there to be less interest in this topic and all the compliance requirements which come with it than, say, money laundering and data protection. The fact that this is a topical discussion is due to the fact that the aforementioned IDD has created greater protections for consumers of insurance products and we are expected to demonstrate that we understand this and deliver these services in an appropriate manner.

The following is a summary level introduction to the IDD subject which I will discuss in greater detail at the conference.

Who needs to understand this topic?

The managers, compliance officers and compliance team, the insurance distribution officer (see below), and everyone who is involved in providing services which include arranging or recommending insurance policies for their clients.

What is the Insurance Distribution Directive?

The Insurance Distribution Directive (IDD) is European legislation containing regulatory requirements to support the protection of consumers when buying insurance products. It came into force on 1 October 2018. This is not a new protection; the IDD replaced the Insurance Mediation Directive which previously applied. However, the IDD has wider application. A breach can, in some cases, be a criminal offence.

Solicitors and law firms often provide services to clients which involve insurance products and must therefore ensure that they are complying with the IDD. Where the firm is not authorised by both the FCA and the SRA, the latter has provisions in the SRA Handbook which those individuals and law firms must observe when carrying on these activities.

These provisions are contained in the SRA Financial Services (Scope) Rules 2001 and the SRA Financial Services (Conduct of Business) Rules 2001. Full compliance with these Rules is likely to ensure compliance with the IDD.

What are insurance distribution activities?

Insurance distribution activities are a type of financial service activity. Specifically, these are the activities of advising on insurance contracts, making recommendations, carrying out work prior to the completion of a contract of insurance such as making arrangements, the completion of an insurance contract, and assisting in the administration and performance of a contract.

It is most likely that the personal injury, conveyancing and probate teams in your law firm will be involved in insurance distribution activities; familiar examples include arranging/advising on such insurance policies as after the event insurance, buildings insurance, defective title and similar.

Key requirements

1. The firm must be on the FSA register and appointed an insurance distribution officer;
2. The firm must state that it is an ancillary insurance intermediary and update its status disclosure statement (usually included in the client care or terms and conditions literature);
3. The firm must give some general information to the client: this includes information about whether they are also acting for the insurer in the transaction;
4. Information about the basis on which a personal recommendation has been made must be provided;
5. A demands and needs statement must be provided;
6. The status of insurers and other third parties involved in the process must be checked;
7. Complaints handling duties must extend to non-clients;
8. Remuneration considerations must be taken into account;
9. The firm must be satisfied that relevant employees possess the appropriate knowledge and ability to understand what they are doing; and
10. The firm must ensure that the client is given an Insurance Product Information Document and other appropriate information from the insurer

I will be discussing all the above and more during my conference slot, and look forward to seeing many of you in person. Please do email me with any financial services questions you may have, and I will answer these as well.

This article was written by Tracey Calvert, board member of the Legal Compliance Association and director at Oakalls Consultancy Limited and was originally published on the Legal Compliance Association webiste.