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Private investigators: who’s watching the watchers?

News / / Private investigators: who’s watching the watchers?

The Financial Conduct Authority (FCA) has recently published a factsheet aimed at general insurers who use the services of private investigators when looking at claims. The FCA spoke to ten insurers, and carried out other research, with the aim of discovering how often private investigators were used, for what reasons and the controls put in place by insurers when entering into this type of outsourcing. As the FCA factsheet says, “We expect insurers to behave appropriately and do the right thing in their use of private investigators”. The FCA is likely to have been particularly interested because the private investigatory sector has historically been largely unregulated (although subject to general laws such as the Data Protection Act 1988).

As a general principle, the regulatory regime permits insurers to delegate (outsource) significant functions of their business, but not regulatory responsibility for those functions. The Systems and Controls section of the FCA Handbook sets out detailed requirements on how insurers are to manage the risks of outsourcing, given the FCA's view that outsourcing is a key operational risk because it puts personnel and systems outside the immediate supervision of the insurer. Claims handling has always been a particular focus for the FCA, and its predecessor the FSA, and, notwithstanding any outsourcing, insurers are expected to handle claims promptly and fairly in line with the Insurance Conduct of Business Sourcebook and other requirements.

The FCA's review found that the relationship between the ten insurers and the investigatory firms was often informal and of an ad hoc nature (rather than a general appointment). Of the ten insurers, the FCA said six had no “contractual agreements”(by which they presumably mean written agreements) with the investigators. Five of the ten insurers did not follow a formal procurement process and it was noted generally that procurement and due diligence processes varied substantially; in particular around formality and the seniority of those responsible. After appointment, eight of the ten insurers undertook no, or limited, file review exercises of the private investigators' work. In terms of management information, two firms did not know the number of claims in respect of which an investigator had been appointed, while nine of the ten did not know how frequently surveillance identified a fraudulent or exaggerated claim.

The FCA has said it will consider the appointment of investigators in its day-to-day supervision and firm visits, including requesting evidence of work done to comply with the Systems and Controls, and other requirements. The FCA highlighted that it may do further ‘thematic' work looking at the sector and subject as a whole. In the meantime the FCA advises that insurers should be aware of how the FCA Handbook applies to outsourced work and ensure that they can show how they have monitored and mitigated any potential risks to customers from outsourcing work to private investigators.

No doubt insurers would appreciate the ability to work with regulated investigators and will therefore be watching government proposals to regulate the sector (through the Security Industry Authority) which are expected at some point in 2014.

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