Ensure you can insure!

Introduction

You may have read some of the recent stories about businesses that didn’t realise the implications of offering insurance related products through their business. Some of the products involved seem innocuous on first glance but nevertheless do now fall under the oversight of the Financial Services Authority (FSA). If you offer any type of insurance related product through your business read our answers to the questions we’ve been asked the most, to find out whether you too could be affected.

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Questions and Answers

Q. Who are the ‘FSA’?

A. The FSA is the organisation that regulates the financial services industry in the UK. One of the FSA’s main aims is to help the public get a fair deal when it comes to financial products, hence they have rules that those involved with financial products must comply with.

Q. I’ve heard that suddenly lots of businesses could potentially be affected by some of the FSA’s rules; what types of business could be affected?

A. Technically speaking, all businesses that are involved in ‘regulated insurance mediation activities’ (‘insurance business’) are affected. This is a wide definition and the simplest way to explain is by example. The table below highlights some of the businesses affected through certain insurance related products that they offer.

As you can see, this covers far more than just traditional insurance brokers.

• Arranging the purchase of insurance policies. This includes such activities as introducing a customer to an insurer or insurance broker or helping a customer fill in an application form for insurance, then sending the form to the insurer or insurance broker.
• Advising on insurance policies. This includes recommending a specific insurance policy to a customer.
• Dealing as agent. This includes entering into a contract of insurance with a customer on behalf of the insurer, for example, issuing a cover note.
• Assisting in the administration and performance of insurance policies. This includes notifying an insurance claim to the insurance company and negotiating a settlement on behalf of the customer. However, handling claims on behalf of the insurer and not the customer is not a regulated activity and neither is simply providing information to a claimant or insurer in connection with the assessment of a claim, as for example, a garage might do when assessing the cost of rectifying damage to a car.

Q. Is any ‘insurance business’ allowed without regulation?

A. Yes. There are certain exceptions for retailers, the most common example being extended warranties provided by electrical retailers and also for travel agents. If you think these may be relevant to you, we would be pleased to discuss the exemption conditions in more detail with you.

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Exemptions for certain trades and specific types of policy

Other trades and certain specific policies may also be exempt and it is worth checking to see if your trade or insurance provider does have a specific exemption.

For example, following an application for a judicial review by the National House-Building Council (NHBC), the FSA reached the view that builders registered with NHBC and participating in the Buildmark scheme do not carry out regulated activities in respect of insurance mediation and therefore do not require FSA authorisation.

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Provision of information

As previously noted, introducing a customer to an insurer or insurance broker is a regulated activity. However, simply making a leaflet available for an insurance policy (for example, on your premises), without giving any advice and without contacting the insurer or broker on behalf of the customer is classified as the ‘provision of information’.

This is not a regulated activity, provided it is incidental to your business’s main activities. Therefore, for example, a vet may give a leaflet about pet insurance to a customer or provide information about making a claim to a customer who has a pet insurance policy.

In this example, information about pet insurance is incidental to the vet's main business of treating sick animals.

However, the ‘provision of information’ exclusion may not be available if a business:

• recommends a particular insurance product to its customers
• helps a customer fill in an application or proposal form for insurance
• checks completed application forms and sends them to an insurer or broker for the customer or
• agrees to arrange an insurance policy for the customer.

If you believe you may be able to rely on this exception, you must ensure that your staff are aware of what they can and cannot do in respect of the information your business provides to customers.

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The business is the insurance policyholder

Another option is for your business to be the insured party. Here the insurance policy that is offered to customers is one in which they themselves cannot make claims on the insurer. Instead, customers can only request that the business makes claims on their behalf. In these circumstances a business is not ‘arranging’ an insurance transaction.

For such an arrangement to work the business would need to have an ‘insurable interest’ in order to become a policyholder in the first place. An example would be the type of fee protection insurance that accountants could offer against fees that might be encountered during a tax investigation. Here it would be the accountants that would make any claim on a client’s behalf for the fees involved. Such a policy might also be an option for businesses such as freight forwarders for goods in transit.

Businesses do need to be careful if using this option as there are other factors to consider. We would be pleased to discuss these with you and would strongly recommend that you consider seeking professional legal advice if you are considering relying on this type of scheme.

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More Questions and Answers

Q. What would FSA-regulation mean for my business?

A. Your business would have to comply with certain FSA rules - remember the FSA is there to regulate the selling of financial products. If you are authorised directly by the FSA, you will in particular have to:

• comply with the requirements of the FSA Handbook, including the financial resources requirements
• obtain professional indemnity insurance
• submit certain forms to the FSA, the main one being the Retail Mediation Activities Return (RMAR) and
• if you hold client money, the FSA require an audit of the client accounts if the money is held in a non-statutory trust or if more than £30,000 is held in a statutory trust.

Q. What are the financial effects of FSA-regulation?

A. Your business would have to meet certain capital resources requirements, the level of which depends on whether or not you actually hold your customers’ money when they buy an insurance related product through you. In simple terms, the capital resources of a company are the net assets as shown in the balance sheet, plus any subordinated loans, though there may be certain adjustments to make to this figure to meet the FSA definition.

You will also need professional indemnity insurance cover.

Q. If my business is caught by the rules, are there any alternatives to direct regulation by the FSA?

A. Yes. An alterative to being regulated direct by the FSA is to be an ‘Appointed Representative’ (AR) of a firm that is itself directly authorised by the FSA. An example would be one of insurance companies whose insurance products your business sells. Such a firm is known as a ‘principal’. There must be an agreement in place with the principal and the principal takes responsibility for the actions of its ARs.

There are no regulatory requirements for being an AR, although the principal firm will almost certainly have a set of rules that an AR must comply with.

There is also a second, more restricted type of AR, known as an ‘Introducer Appointed Representative’. As implied by the title, this is an AR whose scope of appointment is limited to:

• effecting introductions and
• distributing non-real time financial promotions (eg brochures).

If you are interested in this type of arrangement, you should contact the firms whose insurance related products you sell to see whether they offer this and on what terms.

Q. I think that part of what I do is caught by the rules - what should I do now?

A. Once you have confirmed that you are caught by the rules and would like to carry on selling insurance related products, decide whether you want your business to be regulated direct by the FSA or to be an AR. To be an AR is relatively simple, providing you can find an authorised firm that is willing to take your business on this basis. Remember to ask about what terms and conditions will apply to this type of arrangement.

To become directly authorised, you need to apply to the FSA. It is unlikely that many small and medium sized businesses will decide to go down this route. If you do, in the first instance further information can be found on the FSA’s website www.fsa.gov.uk

Q. What happens if I don’t comply with the FSA’s rules in this area?

A. It is illegal for a business to carry on a regulated activity in the UK unless it is authorised by the FSA, is an AR or has some other exemption. Failure to comply is a criminal offence, with a potential penalty of a maximum of two years imprisonment and an unlimited fine.

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How we can help

The regulations in this area can appear complicated and we would be pleased to discuss them in more detail with you. There are certain formal implications of holding your customers’ money which may mean your business requires a ‘client money’ audit. As well as helping to ensure that your client money systems are compliant we are also able to perform any necessary audit and advise you on completing any FSA returns.

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Disclaimer - for information of users

Disclaimer - for information of users: This bulletin is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by the authors or the firm.

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Employers' Compliance Update

Introduction

The pace of change in employment legislation is relentless and every aspect of the employee relationship now demands not only thorough procedural understanding but also a strong appreciation of what is and is not reasonable.

Employers cannot afford to ignore their ‘people’ responsibilities, if they wish to avoid the disruptive, time-consuming and often financially painful consequences, of employees becoming increasingly aware of their statutory rights and entitlements.

This update provides a brief round-up of some of the latest legislation and case law affecting all employers.

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Age Discrimination Legislation

Although the Government launched a non-statutory Code of Practice in June 1999, legal protection against age discrimination has always seemed to be a concern for the future. However, formal legislation is now just around the corner and employers have less than a year to ensure they are prepared for it!

In July 2005, the DTI published the Employment Equality (Age) Regulations which will become law on 1 October 2006. Age is regularly used as a criterion for making decisions throughout the employment process, from recruitment through to retirement and therefore compliance with this new legislation will require a comprehensive review of employers’ attitudes and practices.

The proposed legal framework will be similar to existing discrimination laws in respect of direct and indirect discrimination although one distinction for employers is that they will be able to justify direct discrimination if it is ‘a proportionate means of achieving a legitimate aim’. An example of this might be the fixing of a minimum age to qualify for certain employment benefits in order to recruit or retain older people.

There will also be direct protection against harassment. So a mature trainee teacher tormented on the grounds of age during teaching experience will have recourse to the legislation if no action is taken by the school.

The regulations will have important implications in respect of the whole of the recruitment process and in particular advertising. It will no longer be possible to target certain age groups; for example a retailer of trendy fashion items will not be able to advertise for young shop assistants purely on the basis of targeting young buyers.

Protection will also apply to selection processes. So it may not be directly discriminatory to require all applicants to pass a health and fitness test for recruitment but it might be indirect age discrimination if people of certain ages were less likely to pass the test. This is more likely to be the case if the vacancy is for an administrative position which does not require certain levels of fitness, in contrast to a health instructor vacancy in a sports centre.

Employers will also need to think carefully about selection criteria for example requiring a courier to have held a driving licence for five years may be indirectly discriminatory as a higher proportion of those aged say 40 and above will have fulfilled this criteria than those aged 25!

Businesses need to review their processes very carefully before next year to ensure they don’t fall into further traps when trying to recruit in what is already a highly competitive market place.

Other key aspects of the legislation include:

• a default retirement age of 65
• employees will have the right to request to work beyond 65
• employers will have a duty to consider such requests
• employers must give their employees between six and 12 months notice of their due retirement date and also advise them of their right to request to continue working beyond that date
• the upper age limit for unfair dismissal and redundancy will be removed.

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Disability and Reasonable Adjustments

Since the introduction of the Disability Discrimination Act (DDA) in 1996 the law has continued to evolve. Not only have the original provisions of the Act been subject to judicial interpretation, but major changes have been made to the legislation itself.

In October 2004 the Act was extended significantly and now all employers irrespective of size must not discriminate directly or indirectly against disabled persons and must also ensure they make all reasonable adjustments that will enable those with disabilities to do their job. But with disabled people still twice as likely to be out of work and likely to earn less than able-bodied colleagues there is still a long way to go to remove discrimination.

The scope of disability however is becoming more far reaching. The definition of a disabled person is someone who has a physical or mental impairment which has an effect on their ability to carry out normal day-to-day activities. The effect must be substantial, adverse and long-term. Until recently it has been necessary for less visible conditions to be ‘clinically well recognised’ for example mental illness or mental health problems. However, it is likely from the end of 2005 that a clinical definition will no longer be required, just evidence that the condition prevents the individual from carrying out normal day-to-day activities.

In all circumstances, employers must consider reasonable adjustments if they know or could reasonably be expected to know that an employee has a disability. The latter would be the case if an employee who sometimes cries at work suffers from depression. If the employer makes no attempt to find out if the employee is disabled and even disciplines them without giving any opportunity to explain that the problem arises from a disability, the employer may be in breach of a duty to make reasonable adjustments.

In a recent case an employee suffering from diabetes was found to be discriminated against when he was placed on poor attendance procedures for being absent from work with a number of viral infections, as the employer didn’t take into account that diabetes sufferers are more prone to general viruses and infections. In another case a fork lift truck driver won an unfair dismissal case on the basis of disability discrimination because his employer did not make reasonable adjustments for his ‘borderline learning difficulties’.

An even more significant case concerned a road sweeper who injured her back whilst working for the Fife Council and applied unsuccessfully for a number of office positions. In line with the policy that all jobs were advertised on a competitive basis the tribunal, in this instance, ruled that a reasonable adjustment would have been to recruit her to one of the roles even though she may not have been the best candidate.

Employers need to ensure that their managers are given proper training in disability discrimination so they are able to deal effectively with disability issues to the benefit of the business.

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Harassment and the Law

In the case of Majrowski v Guy’s & St Thomas’s NHS Trust, the Court of Appeal held that under the Prevention of Harassment Act 1970 an employer may be held vicariously liable for harassment committed by one of its employees in the course of his/her employment. This means there is now a further source of protection from harassment outside of discrimination legislation.

The Claimant, Mr Majrowski, was employed by Guy’s & St Thomas’s NHS Trust and during his employment was bullied, intimidated and harassed by his line manager.

Until now, the Prevention of Harassment Act only allowed claims to be made against the ‘harasser’ but, following this judgment, employees can now potentially sue their employer as well. Importantly, they do not have to prove they have suffered personal injury, simply demonstrate that unreasonable harassment or bullying has taken place on at least two occasions. A rich source for harassment claims in the future!

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Maternity Considerations

Important developments in case law mean that employers must be aware of the following considerations.

• Annual leave continues to accrue whilst on maternity leave and whilst the Working Time Directive does not confer the right to carry forward annual leave from one holiday year to the next, as a result of a recent case at the European Court of Justice, employers should allow holidays to be carried forward if maternity spans more than one holiday year.
• Traditionally the statutory maternity pay (SMP) rate has been determined by the employee’s average weekly pay during the reference period, ie the eight-week period to the end of the qualifying week (15 weeks before the baby is due). New regulations oblige employers to recalculate the level of SMP if a pay rise takes effect at any time between the reference period and the end of the maternity leave. This could result in low paid women qualifying for SMP for the first time or a new weekly rate of SMP for someone already on maternity leave.
• The case of Athis v Blue Coat School sends an important message to employers to keep employees on maternity leave fully informed about their contractual terms. In this case, an employee on maternity leave had not been granted a pay award because the school had failed to make her aware of a notice displayed in the school staff room outlining the employees’ right to make representations to the Head about a pay review.
• The well publicised case of Starmer v British Airways highlights the importance of taking requests for flexible working seriously upon return from maternity leave. In this case the employer was found to have indirectly discriminated against Starmer who was an airline pilot by refusing to allow her to work 50% of her usual hours. Their rule that pilots had to fly at least 2,000 hours per year operated to the detriment of more women than men and was deemed to be indirect sexual discrimination. So whilst requests for flexible working may be declined for business reasons, they will not be accepted without challenge and employers should ensure they have a clear and objective justification for saying no that will stand up to examination.

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Race Discrimination and BNP Activities

Can someone be racially discriminated against for their political beliefs?

Mr Redfearn was a postal delivery driver for the West Yorkshire Transport Service and was a ‘perfectly satisfactory employee’. However when it was discovered that he stood for and was elected as a local authority councillor representing the BNP he was dismissed. The reason given for his dismissal was ‘fear of violence in the workforce flowing from his political beliefs’. The Employment Appeal Tribunal however held that the phrase ‘on racial grounds’ must be interpreted widely and concluded that the decision to dismiss was significantly influenced by questions of race. Mr Redfearn was entitled to protection from race discrimination.

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Fire Safety

The government has announced the biggest single reform of fire safety legislation in over 30 years which will come into force in April 2006, consolidating existing fire safety law currently scattered across 70 pieces of legislation.

The aim is to simplify the law for businesses and key points include:

• responsibility for fire safety will lie with the employer or ‘responsible person’ for the building or premises
• the responsible person will be required to assess the risks of fire and take steps to reduce or remove them
• businesses will no longer need a fire certificate and these will cease to have legal status
• fire and rescue authorities will continue to inspect premises and ensure adequate fire precautions are in place.

These will inevitably add to the financial burden on many employers as they will either have to assume these responsibilities themselves or employ fire consultants to undertake audits and implement appropriate safety measures for them.

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Disclaimer - for information of users

Disclaimer - for information of users: This bulletin is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by the authors or the firm.

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