By Alicia Morillas Salazar, Head of Risk & Compliance, Robus Risk Services (Gibraltar) Limited An SRS Company
General Insurance intermediaries have played an important role in the Gibraltar insurance industry, despite never being in the centre of the regulatory radar as they were generally seen as lower risk compared to other types of regulated firms in the insurance sector. More recently however, this has changed with the Government & GFSC giving them some regulatory attention, which has been reflected in the following strategic and supportive regulatory changes which, I personally pursued when I joined the GFSC as the Head of Insurance Conduct, in charge of the Intermediaries Prudential and Conduct supervision in 2022 (prior to joining Robus):
Capital Requirements
The current requirement inherited from the European IDD is to hold a capital of €19.510 or 4% of annual premiums received + (in addition) 3 months’ worth of operating expenses. This requirement creates two challenges: 1. The “Premiums received” figure is not contained in the intermediaries’ Audited Financial Statements, so there is a regulatory requirement based on a “non-regulated” financial figure.2. “Operating expenses” include variable costs and costs linked to sales, such as marketing, medical screening fees, credit card processing costs, etc, which won’t be incurred in a wind-down process, and which were only permitted to deduct when the auditors separately disclosed those. So it was a variable requirement depending on the auditors accuracy. For point 1 the proposed regulatory change is to hold capital based on the Intermediaries turnover and not on Premiums received (GWP), because the new financial capacity requirements will be the higher of £10,000/£5,000 or 5%/2.5% of its annual income, where the intermediary holds/does not hold customer money. For point 2 the proposed change is to eliminate the expenditure buffer, avoiding subjectivity on the calculation.
Consumer Duty and Product Governance
Most Gibraltar Intermediaries passport services into the UK, so the GFSC has made them aware of the FCA Consumer Duty rules since 2022. The equivalent Gibraltar Consumer Duty was published on 9 May 2024 under the Financial Services (Core Principles and Consumer Duty) Regulations 2024m (the CPCD) basically a transcription of the FCA Consumer Duty applicable to all financial firms with UK retail customers. On the same day, the Financial Services (Insurance Product Oversight and Governance) (Technical Standards) Regulations 2024 were published, a final transposition of the European IDD into the Gibraltar Regulatory Framework. This Policy supplemented Regulation 18 of the FS (Insurance Distribution) Regulations 2020. The GFSC will soon publish guidance notes on both regulations, but below we have summarised the key rules for General Insurance Intermediaries to be aware of:
• Clear definition of retail customers under the Duty scope.• Only the firms with material influence on customers’ outcomes are subject to the rule. For example, firms providing factual information or IT systems are not materially influencing outcomes.
• Principal firms are responsible for the actions of their appointed representatives.
• Clear definition of co/manufacturers. Co-manufacturers must have a written agreement (in addition or contained in the TOBA) to allocate responsibilities on the Consumer Duty, the product approval process, and the distribution of product information.
• Clear attribution of responsibilities across the distribution chain: in general firms are responsible only for their own activities and do not oversee the actions of other firms in the distribution chain. However, a firm identifying consumer harm elsewhere in the chain must raise the concerns with other relevant parties. It must also notify the GFSC where it becomes aware that another firm in the distribution chain may not be complying with the Duty. Depending on the issues involved, this might be the only action a firm needs to take.
• The Duty recognises the challenges for manufacturer firms in obtaining relevant information about customer outcomes from all distribution chain participants and provides alternatives to complete the information.
• Group synergies: The GFSC does not expect firms to duplicate the work of other entities in a group structure, but each firm would be responsible for ensuring that its business complies with the Duty.
• Clearer requirements have been set for the information provided to the distributors by the manufacturer.
• Commissions paid by customers should be considered in the Fair Value to demonstrate the value to the customer. If remuneration is not reasonably related to the distributor’s cost, level of involvement, or the benefit added by them, a breach of the regulation could be considered.
• For ancillary products, the manufacturer should consider whether the proposed distribution channel would be appropriate in light of the risk that the customer focuses on the core product rather than the insurance product.
Compliance Outsourcing Opportunities
During the GFSC 2023 annual conference a change with significantly impact was presented to the Insurance Firms: the opportunity to outsource the Head of Compliance regulated position to an insurance manager. However, this was not explicitly extended to the intermediaries at that time. Considering the intermediaries’ softer regulatory requirements in proportion to their lower risks, it was unproportioned that they were required to maintain an in-house fully dedicated Compliance expert (annual cost from £70,000 plus training costs) while the insurance firms were allowed to outsource the function. It has now been resolved with the amendments to the Financial Services Bill, which have included the “insurance intermediary” into the equation: “Head of Compliance may only be outsourced by an insurance undertaking, reinsurance undertaking or insurance intermediary, and only to a Gibraltar-based individual from a Gibraltar-authorised insurance manager.”
