CP23/18: Quarterly Consultation Paper No. 41

Quarterly Consultation
CP23/18
September 2023
No 41

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Please complete this form if you require this content in an alternative format. Or call 020 7066 6087 The Financial Conduct Authority invites comments on this Consultation Paper. Comments should reach us by 9 October 2023 for Chapters 2 and 3. Comments may be sent by electronic submission using the form on the FCA’s website. Alternatively, please send comments in writing to:
Chapter 2: Shimla Rizan, Insurance Market Analysis and Policy
Telephone: 020 7066 6880
Chapter 3: Stella Onyekwe, Prudential Policy
Telephone: 020 7066 6372
If you are responding in writing to several chapters please send your comments to Mary McGowan in the Handbook Team, who will pass your responses on as appropriate. All responses should be sent to:
Financial Conduct Authority
12 Endeavour Square
London E20 1JN
Email: cp23-18@fca.org.uk
When we make rules, we are required to publish an account of the representations we receive and how we have responded to them. We are also required to publish a list of the names of the respondents who made the representations, where those respondents have consented to the publication of their names. In your response, please indicate whether or not you consent to the publication of your name. For further information on confidentiality of responses, see the disclaimer at the end of this consultation paper.

Contents

1. Overview 4
2. Changes to the employers’ liability insurance rules
   to simplify the ERN matching requirements 5
3. Changes to SUP 12.4.10AR to clarify its
   interaction with MIPRU 3.2 9
   Annex 1
   Abbreviations used in this paper 12
   Appendix 1
   List of questions
   Appendix 2
   Changes to the employers’ liability insurance rules to simplify the ERN matching requirements
   Appendix 3
   Changes to SUP 12.4.10AR to clarify its interaction with MIPRU 3.2

Chapter 1
Overview
Chapter No Proposed changes to Handbook
Consultation
Closing Period
2 To make changes to ICOBS 8 Annex 1 to simplify the ERN matching requirements 5 weeks 3 To make changes to SUP 12.4.10AR to clarify its interaction with MIPRU 3.2 5 weeks

Chapter 2
Changes to the employers’ liability insurance rules to simplify the ERN matching requirements Introduction
2.1 In 2011, we introduced Handbook rules (under Insurance Conduct of Business
sourcebook (ICOBS) 8.4 and ICOBS 8 Annex 1) mandating employers’ liability insurers to publish an employers’ liability register. As part of the rules, insurers are required to exercise their best endeavours (and have processes in place) to obtain and include the insured firm’s employer reference number (ERN) on the register unless certain exceptions apply. The register is then published either on insurers’ websites or on the website of a tracing office that meets the conditions of ICOBS 8.4.9R. In particular, it must be in a searchable format and contain policy information, including the insured firm’s ERN, unless an exception applies. The register enables individuals who want to bring claims against their employer arising out of the course of their work to search for and identify the insurer(s) that provided employers’ liability cover, particularly where the employers no longer exist or cannot be located.
2.2 As far as we are aware, the Employer’s Liability Tracing Office (ELTO) is the only tracing
office that meets our requirements. It was set up by the industry to host and manage the employers’ liability register. Within the active employers’ liability market, 99% are ELTO members and use the employers’ liability register to publish the information required by our rules.
2.3 ELTO updates us periodically on developments in its tracing. It has asked us to consider
updating some of our rules to take account of enhancements to its policy matching processes:

• In ELTO’s experience, where firms do provide ERNs, they are not always accurate.
  Insurers in turn face challenges in obtaining and providing ERNs to ELTO because they are reliant on intermediaries or individual customers (outside the scope of our regulation), who do not always provide this information.
• As a result of this, ELTO has set up an alternative process to obtain ERNs from
  HM Revenue & Customs (HMRC) directly through a matching process using other policy information supplied by insurers.
• ELTO has told us that it has a notably higher success rate in obtaining ERNs
  through HMRC (approximately 55% to 75%) compared with obtaining this data from firms (approximately 50% to 55%). ERNs obtained via HMRC are also more likely to be correct.
• ELTO feels that the current requirement for insurers to obtain and provide ERNs,
  even where ELTO has obtained them from HMRC, results in a duplication of processes and costs. It feels that this cost could be better spent on tracing the remaining cases where ELTO can’t obtain the ERN from HMRC.

Summary of proposals
2.4 As ELTO’s use of the HMRC matching process has improved the success rate, the
requirement for insurers to obtain ERN information as well results in a duplication of costs and processes. The industry’s resources could instead be better directed at tracing the approximately 25% of cases where ELTO can’t obtain the ERN from HMRC.
2.5 Given this, we are proposing to amend ICOBS 8 Annex 1 so that employers’ liability
insurers which meet the following conditions will no longer be required to exercise their best endeavours to obtain and provide ERNs to a tracing office:

• the firm is utilising the employers’ liability database of a tracing office (such as
  ELTO) that meets the conditions in ICOBS 8.4.9R to publish the policy information required by our rules;
• that tracing office has effective systems in place to obtain and record accurate
  ERN data on the employers’ liability database; and
• that tracing office obtains the ERN.
  2.6 In the remaining cases where ERNs are not available, insurers must use their best
  endeavours in assisting the tracing office as far as reasonably possible to obtain the information. We are proposing a window of 28 business days for the tracing office to obtain the ERN from HMRC, after which insurers must use their best efforts to obtain the outstanding ERNs.
  2.7 Therefore, our current rules will continue to apply where firms do not meet the above
  conditions.
  2.8 We have engaged with the Prudential Regulation Authority and HM Treasury in
  developing our proposals.
  Q2.1: Do you agree with our proposed changes to ICOBS 8
  Annex 1? If not, please explain why.
  Q2.2: Do you agree with allowing a 28-business-day period for the tracing office to obtain the ERN through the matching process before insurers must use their best endeavours to obtain the remaining information (proposed rule ICOBS 8 Annex 1 1.1CAR(3))? If not, please explain why. Cost benefit analysis
  2.9 Section 138I(2)(a) of the Financial Services and Markets Act 2000 (FSMA) requires us to
  publish a cost benefit analysis (CBA) when proposing draft rules. Our analysis is set out below. However, section 138L(3)(a) of FSMA states that we do not need to provide a CBA where we consider that there will be no increase in costs.

2.10 The intention of our proposed rule change is to remove some of the regulatory burden
for employers’ liability insurers and improve the outcome for consumers (in this case, claimants with a potential right to claim under their employer’s policy). We anticipate that our proposals will remove duplication of costs and processes as insurers will be required to do less and therefore will not incur additional costs. We expect firms to use some of the cost savings to trace ERNs when they are not available through HMRC matching. Impact on mutual societies
2.11 Section 138K of the FSMA requires us to state whether, in our opinion, our proposed
rules have a significantly different impact on authorised persons who are mutual societies compared with other authorised persons. We do not expect the proposals to have a significantly different impact on mutual societies. Compatibility statement
2.12 When consulting on new rules, we are required by section 138I(2) of FSMA to explain
why we believe that making the proposed rules is consistent with our strategic objective, advances one or more of our operational objectives and (so far as reasonably possible) the secondary international competitiveness and growth objective. Further, we must have regard to the regulatory principles in section 3B of FSMA and the importance of taking action intended to minimise financial crime (section 1B(5)(b) of FSMA). We are also required to have regard to the principles in the Legislative and Regulatory Reform Act 2006 and the Regulators’ Compliance Code.
2.13 We are satisfied that the proposed amendments are compatible with our objectives
and regulatory principles. The proposals advance our operational objective to enhance market integrity by providing a proportionate regime in relation to employers’ liability products. Through the proposals, the ERN data that must be published on the employers’ liability register will be easier to obtain and more reliable.
2.14 Our proposals also advance our consumer protection objectives as the data obtained
by ELTO is likely to be more accurate. This will make it easier for claimants to search for and trace historic policies. They also advance our competition objective as they are intended to provide a more level playing field between employers’ liability insurance manufacturers.
2.15 We consider these proposals to be compatible with the FCA’s secondary international
competitiveness and growth objective. The proposals improve the operational efficiency of insurers and reduce their costs. The proposals will maintain a proportionate regulatory regime and facilitate the international competitiveness and growth of the UK economy. Equality and diversity
2.16 We have considered the equality and diversity issues that may arise from the proposed
amendments. We have not identified any adverse impact that the proposals in this

chapter would have on any of the groups with protected characteristics under the Equality
Act 2010 (ie, age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation and gender reassignment). In Northern Ireland, the Equality Act is not enacted but other anti-discrimination legislation applies.
2.17 We will continue to consider the equality and diversity implications of the proposals
during the consultation period and will revisit them when publishing the final rules. In the meantime, we welcome comments on any equality and diversity considerations respondents believe may arise.

Chapter 3
Changes to SUP 12.4.10AR to clarify its interaction with MIPRU 3.2 Introduction
3.1 Chapter 3 of the Prudential sourcebook for Mortgage and Home Finance Firms, and
Insurance Intermediaries (MIPRU) sets out rules regarding the requirement for certain authorised firms to maintain professional indemnity insurance (PII), including firms acting as principal. In particular, MIPRU 3.2.1R requires a firm to take out and maintain continuous PII. MIPRU 3.2.4R(1) requires that the contract of PII must include provisions for cover in relation to claims for which it may be liable as a result of the conduct of:

• itself;
• its employees; and
• its appointed representatives (ARs) acting within the scope of their appointment.
  3.2 At the same time, Supervision manual (SUP) 12.4.10AR requires that, before a firm
  appoints a person as an AR to carry on a Mortgage Credit Directive (MCD) credit intermediation activity, the principal firm must ensure that the person has, and will maintain on a continuing basis after appointment, PII cover in accordance with the rules applicable to MCD credit intermediaries, which can be found in MIPRU.
  3.3 We have identified an inconsistency between MIPRU 3.2 and SUP 12.4.10AR that could
  lead to a different interpretation of how a principal firm with an AR carrying out an MCD credit intermediation activity can comply with the requirement to have PII.
  3.4 SUP 12.4.10AR(1) suggests that there is an option for an AR to obtain its own PII cover
  instead of this being provided by the principal firm. While there is nothing to prevent an AR from choosing to have its own policy (and which it may find of benefit), the rules in MIPRU 3 require the principal firm to obtain and maintain continuous PII for the activities of its current and former ARs. The AR having its own cover would not satisfy the obligation upon the principal firm to cover all its business, including the regulated activities conducted by its AR.
  3.5 We therefore propose to amend SUP 12.4.10AR to clarify that it is the principal firm that
  must obtain and maintain continuous PII cover for the activities for which it may be liable as a result of the conduct of its ARs. Summary of proposals
  3.6 We propose to delete SUP 12.4.10AR(1). Currently, this may suggest that a principal
  firm would satisfy the rules in MIPRU 3.2 if its ARs that carry out an MCD credit

intermediation activity obtain PII themselves. We also propose to amend SUP 12.4.10AR(2) to clarify that a principal firm must obtain PII for its ARs in order to satisfy the rules in MIPRU 3.2.
3.7 In addition to these amendments, we propose to add guidance to SUP 12.4.10AR to
further clarify the interaction between this rule and the requirements in MIPRU 3.2.
3.8 These changes are being made to remove any inconsistency between SUP 12.4.10AR
and the requirements in MIPRU 3.2 and provide greater clarity on the original policy intention as set out in MIPRU 3.
3.9 We believe that the majority of principal firms are holding PII policies that extend to
the activities of their ARs in line with MIPRU 3.2. Principal firms that are subject to SUP 12.4.10AR and MIPRU 3 should check their policies to ensure that the activities for which they may be liable as a result of the conduct of their current and former ARs are covered and make amendments where necessary. Q3.1: Do you agree with our proposals to amend SUP 12.4.10AR to bring it in line with the PII requirements in MIPRU 3.2? If not, please explain why. Cost benefit analysis
3.10 Section 138I(2)(a) of the Financial Services and Markets Act 2000 (FSMA) requires us to
publish a cost benefit analysis (CBA) when proposing draft rules unless, in accordance with section 138L(3) of FSMA, we believe that there will be no increase in costs or that the increase will be of minimal significance.
3.11 Principal firms that are subject to MIPRU 3 should already be complying with the rules to
obtain and maintain continuous PII for the activities of their current and former ARs. We are therefore satisfied that the proposed amendments do not increase costs to firms or consumers, or that any increase will be of minimal significance. The amendments being proposed are to clarify existing rules. Impact on mutual societies
3.12 Section 138K(2) of FSMA requires us to prepare a statement setting out our
opinion on whether proposed rules will have an impact on mutual societies which is significantly different from the impact on other authorised persons. We are satisfied that the proposals in this chapter would not have a significantly different impact on mutual societies compared with other authorised persons. Compatibility statement
3.13 When consulting on new rules, we are required by section 138I(2) of FSMA to explain
why we believe that making the proposed rules is consistent with our strategic objective,

advances one or more of our operational objectives and (so far as reasonably possible) the secondary international competitiveness and growth objective. Further, we must have regard to the regulatory principles in section 3B of FSMA and the importance of taking action intended to minimise financial crime (section1B(5)(b) of FSMA). We are also required to have regard to the principles in the Legislative and Regulatory Reform Act 2006 and the Regulators’ Compliance Code.
3.14 We are satisfied that the proposed amendments are compatible with our objectives
and regulatory principles. The clarification will remove ambiguity about who is to obtain PII for the activities of ARs that carry out an MCD credit intermediation activity. It will also ensure that principal firms are clear on their obligation to obtain and maintain PII cover in line with our expectations. These amendments therefore advance our operational objectives of securing an appropriate degree of consumer protection. The proposed clarification removes ambiguity in the requirement without bringing material costs to firms or consumers and is compatible with the FCA’s secondary international competitiveness and growth objective. Equality and diversity
3.15 We have considered the equality and diversity issues that may arise from the proposed
amendments. We have not identified any adverse impact that the proposals in this
chapter would have on any of the groups with protected characteristics under the
Equality Act 2010 (ie, age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation, and gender reassignment).
3.16 We will continue to consider the equality and diversity implications of the proposals
during the consultation period and will revisit them when publishing the final rules. In the meantime, we welcome comments on any equality and diversity considerations respondents believe may arise.

Annex 1
Abbreviations used in this paper
Abbreviation Description
AR Appointed representative
CBA Cost benefit analysis
ELTO Employers’ Liability Tracing Office
ERN Employer reference number
FSMA Financial Services and Markets Act 2000
HMRC HM Revenue & Customs
ICOBS Insurance Conduct of Business sourcebook MCD Mortgage Credit Directive, Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property MIPRU Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries PII Professional indemnity insurance SUP Supervision manual

We make all responses to formal consultation available for public inspection unless the respondent requests otherwise. We will not regard a standard confidentiality statement in an email message as a request for non-disclosure. We will only publish the name of a respondent to a consultation where that respondent has consented to that publication. Despite this, we may be asked to disclose a confidential response under the Freedom of Information Act 2000. We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by the Information Commissioner and the Information Rights Tribunal. All our publications are available to download from www.fca.org.uk. Request an alternative format Please complete this form if you require this content in an alternative format. Or call 020 7066 6087 Sign up for our news and publications alerts

Appendix 1
List of questions
Q2.1: Do you agree with our proposed changes to ICOBS 8
Annex 1? If not, please explain why.
Q2.2: Do you agree with allowing a 28-business-day period for the tracing office to obtain the ERN through the matching process before insurers must use their best endeavours to obtain the remaining information (proposed rule ICOBS 8 Annex 1 1.1CAR(3))? If not, please explain why. Q3.1: Do you agree with our proposals to amend SUP 12.4.10AR to bring it in line with the PII requirements in MIPRU 3.2? If not, please explain why.

Appendix 2
Changes to the employers’ liability insurance rules to simplify the ERN matching requirements

FCA 2023/XX
INSURANCE: CONDUCT OF BUSINESS SOURCEBOOK (EMPLOYERS’ LIABILITY INSURANCE AMENDMENTS) INSTRUMENT 2023 Powers exercised A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise of the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(1) section 137A (The FCA’s general rules); and (2) section 137T (General supplementary powers). B. The rule-making provisions listed above are specified for the purposes of section 138G(2) (Rule-making instruments) of the Act. Commencement
C. This instrument comes into force on [date].
Amendments to the Handbook
D. The Insurance: Conduct of Business (ICOBS) sourcebook is amended in accordance with the Annex to this instrument. Citation E. This instrument may be cited as the Insurance: Conduct of Business Sourcebook (Employers’ Liability Insurance Amendments) Instrument 2023. By order of the Board [date]

FCA 2023/XX
Annex
Amendments to the Insurance: Conduct of Business sourcebook (ICOBS) In this Annex, underlining indicates new text and striking through indicates deleted text, unless stated otherwise. 8 Claims handling …
Annex
Employers’ liability register
See ICOBS 8.4.4R(1)(a)
Part 1 In relation to information to be included in the employers’ liability register
…
1.1C R A firm is not required to include the employer reference number (ERN) required by 1.1R(1) and (2) if the following conditions are met:
(1) (a) the firm has not been able to obtain that information solely due to failures by parties outside the firm’s control; and or (b) a tracing office meets the conditions in ICOBS 8.4.9R and 1.1CAR(1) and (2) but fails to meet the condition in 1.1CAR(3); and (2) the firm has used and continues to use its best endeavours to obtain the information, other than refusing to provide cover to an employer solely because it has not provided the information requested. 1.1CA R The conditions referred to in 1.1CR(1)(b) are:
(1) in accordance with ICOBS 8.4.7R(1)(a)(ii) and ICOBS 8.4.11R(2), the firm has arranged to make the information on its employer’s liability register available on the website of a tracing office that meets the conditions in ICOBS 8.4.9R; (2) the tracing office referred to in 1.1CAR(1) has effective systems in place to obtain the ERN; and (3) the tracing office referred to in 1.1CAR(1) and (2) obtains the ERN within 28 business days of the date that the firm arranged to make the information on its employer’s liability register available on the tracing office’s website.

FCA 2023/XX
…

Appendix 3
Changes to SUP 12.4.10AR to clarify its interaction with MIPRU 3.2

FCA 2023/XX
SUPERVISION MANUAL (PROFESSIONAL INDEMNITY INSURANCE AND APPOINTED REPRESENTATIVES) INSTRUMENT 2023 Powers exercised A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise of the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(1) section 137A (The FCA’s general rules);
(2) section 137T (General supplementary powers); and (3) section 139A (Power of the FCA to give guidance). B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-making instruments) of the Act. Commencement
C. This instrument comes into force on [date].
Amendments to the Handbook
D. The Supervision manual (SUP) is amended in accordance with the Annex to this instrument. Notes E. In the annexes to this instrument, the “notes” (indicated by “Note:”) are included for the convenience of readers, but do not form part of the legislative text. Citation F. This instrument may be cited as the Supervision Manual (Professional Indemnity Insurance and Appointed Representatives) Instrument 2023. By order of the Board [date]

FCA 2023/XX
Annex
Amendments to the Supervision manual (SUP)
In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 12 Appointed representatives …
12.4 What must a firm do when it appoints an appointed representative or an FCA
registered tied agent?
…
Appointed representative carrying on MCD credit intermediation activity 12.4.10 A R Before a firm appoints a person as an appointed representative to carry on an MCD credit intermediation activity, it must ensure that the person has, and will maintain on a continuing basis after appointment, professional indemnity insurance in accordance with the rules applicable to MCD credit intermediaries. A firm will satisfy this requirement if:
(1) the appointed representative has professional indemnity insurance which satisfies the rules in MIPRU 3.2 applicable to the activities of the appointed representative, as if the appointed representative were an MCD credit intermediary; [deleted] (2) professional indemnity insurance which would satisfy the requirements of SUP 12.4.10AR(1) is provided by the firm the firm has professional indemnity insurance in respect of claims for which the firm may be liable as a result of the conduct of its appointed representative, which satisfies the rules in MIPRU 3.2; or (3) the appointed representative holds a comparable guarantee (as understood by reference to MIPRU 3.1.1R(3)(b)) provided by the firm. [Note: article 31(2) of the MCD] 12.4.10 AA G (1) The effect of SUP 12.4.10AR(2) is that a firm itself must take out and maintain professional indemnity insurance that covers claims for which it may be liable as a result of the conduct of its appointed representatives (in addition to the conduct of the firm and its employees). This approach is consistent with the requirement in MIPRU 3.2.4R(1) and the responsibility of the firm for the conduct of all of its appointed representatives (MIPRU 3.2.6G). (2) In addition to the professional indemnity insurance that the principal must hold under SUP 12.4.10AR(2), an appointed representative may take out, or have its own, professional indemnity insurance covering its

FCA 2023/XX activities to provide additional mitigation against the risk of harm to consumers, market integrity or itself. …

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