“Where there is a chain of insurance intermediaries between the insurer and the customer, [ICOBS] applies only to the insurance intermediary in contact with the customer”.  (ICOBS1 Annex, 4.1R)

That ICOBS rule (“Rule 4.1“) has existed since the implementation of ICOB in January 2005.  Its terms are simple and its effect should be fairly straightforward. But, in 2013 the Court of Appeal came to the view that Rule 4.1 did not absolve intermediaries “up the chain” from their ICOB[1] compliance obligations. A startling view given the simplicity of the rule’s terms.  Last month, the Supreme Court took the opposite view and confirmed an interpretation in line with common sense expectations.  But, does having that confirmation mean that intermediaries “up the chain” are free from point of sale compliance obligations entirely?

The ICOBS sourcebook in the FCA Handbook sets out the rules and guidance with which insurance intermediaries and insurers must comply when distributing insurance in the UK.  Rule 4.1, on its face, dissapplies ICOBS to any insurance intermediary in a distribution chain that is not in contact with the customer – they are “up the chain”.

In Plevin v Paragon Personal Finance Limited (Supreme Court, 12 November 2014) the Court was primarily concerned with arguments about s140A of the Consumer Credit Act 1974.  The case concerned the sale of PPI in the context of a secured loan.  Mrs Plevin obtained her loan and PPI through an independent loan broker called LLP Processing (UK) Ltd. LLP had an arrangement with a number of loan providers of which Paragon was one.  Paragon in turn had a relationship with Norwich Union, the PPI provider.  There were a number of legal arguments involved but for present purposes, one of the arguments concerned the question of whether there was a failure by Paragon to assess the suitability of the PPI for Mrs Plevin as required by ICOB4.3.1R. Paragon made the point that by virtue of ICOB1.2.3(2)R (now Rule 4.1), the only intermediary to whom ICOB4.3.1R applied was LLP since it was the customer-facing intermediary.

The Court of Appeal, faced with a situation where all other arguments looked like they would lead to an unsatisfactory outcome for Mrs Plevin, opted to fudge it.  Rule 4.1, it said, did not absolve the intermediaries “up the chain” from ICOB compliance obligations. A bit of an odd conclusion in light of what the rule says but the Court, took the view that “…the effect of the rule was to allocate ‘front-line’ responsibility for dealing with those matters, insofar as they related purely to the PPI part of the transaction, to LLP, but to do so by way of distribution of an overall responsibility in relation to the composite transaction as a whole which was shared between them”.  WHAT? It is difficult to rephrase that in a way which makes sense because it is not entirely clear that it does make sense (accepting the Court may have been outcome driven at this point).

Lord Hoffman in the Supreme Court rejected the Court of Appeal’s view. He said: “LLP was the only intermediary in the chain in contact with [Mrs Plevin for the purpose of ICOB 4.3.1R]. It follows that ICOB 4.3.1R applied in this transaction to LLP only. It did not apply to Paragon.”  Simple. That reflects a fairly common sense view of what the rule was probably intended to do. The Supreme Court sided with Mrs Plevin on other grounds and sent the case back to the lower courts for re-consideration.

So, does that mean that any intermediary “up the chain” is entitled to say that the customer-facing intermediary bears full responsibility for ensuring compliance with all ICOBS requirements? There are a number of considerations which lead to the view that intermediaries “up the chain” need to play close attention to sales practices deployed by the customer-facing intermediary:

  • Even though the rule has been in-force since 2005, its premise flies against the direction of travel regarding product governance and responsibility for customer outcomes.  It is arguable that product governance and customer outcome should be the responsibility of everyone in the chain; after all, they all receive the benefit of being in the chain in terms of commissions and/or premiums.
  • Intermediaries “up the chain” will in any event be exposed to the practical consequences of failures by the customer-facing intermediary in terms of commission and premium refunds if sales have to be reversed.
  • Depending on the structure, an insurance intermediary chain could constitute a form of outsourcing of sales by the insurer or other intermediaries “up the chain”. For an intermediary “up the chain” to simply take the view that they are not interested in ensuring compliance by the customer-facing intermediary (especially when that customer-facing intermediary may be acting as their agent) appears to ignore basic principles of outsourcing.
  • Under s384 of the Financial Services and Markets Act 2000, the FCA has the power to impose restitution requirements on any firm that was knowingly involved in a contravention of any ICOBS rule by the customer-facing intermediary. There is a reasonable expectation that all intermediaries in the chain, as well as the insurer, will have a sense of the sales practices being deployed at the point of sale by the customer-facing intermediary;  intermediaries “up the chain” cannot simply close their eyes to sales practices by the customer-facing intermediary;
  • Finally, intermediaries “up the chain” are in no way absolved of their Principle 6 TCF obligations; Rule 4.1R has no impact on that at all.

So, the safer view is that insurers and insurance intermediaries “up the chain” should still concern themselves with sales practices and with ICOBS compliance. In light of the foregoing, perhaps the better question is whether it makes sense for Rule 4.1R to be deleted.