Clifford Chance

Insurtech start-ups need to understand the regulatory framework applicable to insurance companies. This Insurance Taster looks briefly at the risks of conducting regulated activities and the “financial promotion” and disclosure rules and their potential to impact insurtech projects.

Regulated Activities

The extent to which insurance regulation can impact an insurtech business model is not fully appreciated by some in the insurtech community. Persons involved in arranging the sale of insurance or in the administration of contracts of insurance by way of business in the UK, even where these activities are secondary to their main business, need to examine whether or not they are acting in breach of the ‘general prohibition’ in the Financial Services and Markets Act 2000. It is a criminal offence to conduct a regulated activity in the UK without the appropriate authorisation or an exemption applying and certain agreements may be unenforceable as a result. Apart from the risk of conducting a regulated activity without permission, a lack of appreciation of the regulatory environment in which insurers operate, in particular the conduct of business regulations, risks technology companies developing products and distribution models that are unattractive to the insurance industry.

The definition for UK purposes of some regulated activities that are relevant to insurtech distribution models is deliberately wide and designers of new insurance distribution models in particular need to factor-in the risk that their offering will result in them conducting regulated activities for which they will either need their own authorisation, or a business model that makes them exempt from authorisation. Whether or not a regulated activity is taking place will depend upon the business model in question. Providing an on-line pre-purchase questionnaire to facilitate entry into a contract of insurance might, depending on all the other circumstances mean that a regulated activity is being performed. Even when no financial benefit is being derived, the activity can still amount to a regulated activity, for example (and depending on the wider circumstances) as a result of endorsing a service, or negotiating special rates from insurers. Given that technology can be readily used across borders, international regulatory licensing requirements should also be taken into account and to minimise the risks, parties should seek suitable legal advice at an early stage of a project.

The FCA appreciates the difficulty for new technology firms in understanding financial regulation and has provided its “regulatory sandbox”, where firms can develop new ideas and seek guidance from the regulator on the scope of the regulated activities that are being conducted.

Companies that agree to act as an Appointed Representative (AR) of an insurer need to be aware of additional regulatory burdens that may be imposed on the AR, for example requiring persons carrying out specific functions in the company to be approved by the regulator and requiring the AR to be included in the Financial Services Register if it will act as an intermediary in relation to insurance. Insurers as principal must ensure their AR complies with regulatory obligations too. Companies that become an AR of an insurer may need educating by insurers on the responsibilities of an AR and an explanation of the contractual rights and obligations the insurer imposes in an AR agreement, in order for the insurer to meet its obligation to appropriately govern and oversee the AR relationship. A company can be an AR of more than one principal, but that requires different matters to be covered in the agreement between the AR and the insurers appointing the AR.

Financial Promotion Rules and Disclosure

Insurtech distribution arrangements that involve the making of “financial promotions” to customers in the UK need to take account of the financial promotion rules and the general principles and rules applicable to insurers that require them to communicate with customers in a way that is clear, fair and not misleading. A communication will only be a financial promotion if it is an invitation or inducement relating to purchasing a regulated product that is made in the course of business. Unless an exemption applies, financial promotions should only be made by, or must be approved by an authorised person like an insurance company. The rules can apply to communications made by emails, websites (even links to a website can be caught) and of course, apply to advertising and there are greater restrictions relating to so called “real time” communications.

The FCA applies the rules to social media communications that are financial promotions, but the rules have yet to adequately catch-up and adapt to the latest ways that companies now communicate with consumers. The FCA has issued Social Media Guidance to assist firms but some argue that the guidance needs to be reviewed, for example to remove the requirement that even a banner advert must be standalone compliant with financial promotion rules.

Fundamentally, financial promotion rules are aimed at helping consumers receive clear, fair and not misleading information and the FCA expects firms to apply its Principles for Business to digital communications. As consumers choose to use digital channels to research and purchase products, communications need to adapt accordingly to meet their information needs whilst still complying with regulatory requirements that are often more easily applied to traditional channels.

Financial promotions rules are closely linked to disclosure requirements and TCF obligations in the FCA Handbook that apply to general insurance and other specific activities and services. Again, the rules have yet to fully adapt to the digital and mobile communication transformation but technology can assist insurers and insurance intermediaries to fulfil their regulatory obligations, by for example, enabling a distributor/insurer to more easily tailor promotions and target communications to appropriate customers. The insurtech community can also learn from and apply lessons derived from the development of other financial services innovations, such as mobile banking, where some propose that the trade-off between regulators allowing firms to provide less-detailed information during on-line sales is that a consumer should be allowed to read the full information during a ‘cooling off period’ and be allowed to cancel if they change their mind. This kind of principle could be applied to the design of terms and conditions for insurance products purchased electronically. 

Looking ahead

A useful starting point to determine if a regulated activity is being conducted is the FCA’s Perimeter Guidance Manual, although as guidance only it does not bind the courts. The guidance has a specific section for businesses that act as introducers of insurance business and a useful flowchart to help them determine whether they require authorisation or not. The advice also provides guidance on whether exemptions from authorisation may apply to a business’s activities.

In terms of financial promotions and disclosures, the FCA launched its Smarter Consumer Communications initiative to drive change in the way firms communicate with customers in the new digital era. This work overlapped with a Call for Input on Regulatory Barriers to Innovation in Digital and Mobile Solutions. The FCA is actively encouraging firms to use innovative ways of communicating with customers and thinks firms should make the communications an integral part of the product or service design process. In its Feed Back Statement on Smarter Communications, the FCA identified a number of principles that firms might find useful for designing an effective disclosure and the FCA plans to produce and consult on guidelines on effective disclosure and digital disclosure during 2017. Digital exclusion of vulnerable customers is a concern for the FCA and it is working to understand how firms should improve their engagement with vulnerable customers through its Ageing Population initiative.

The FCA acknowledges that the industry would like greater clarity on how the FCA’s communication rules apply to digital and mobile solutions and plans to consult in early 2017 on changes to the FCA Handbook.