It came as no surprise when the FSA announced that it proposed to extend the FSCS to include insurance mediation activities from N.GI day in January 2005.
Retail clients and small commercial clients (with turnovers of up to £1m) will be eligible to make claims against the FSCS, but this is a scheme of 'last resort', whereby claimants must first demonstrate that they have been unable to effect recovery of admissible losses by conventional means. This might include pursuing the 'Approved Persons' legally liable in tort for a brokerage failing to meet its obligations to clients. The 'Approved Person' regime is part of the FSA application process and needs to be considered very carefully - especially by non-executive directors/sleeping partners/etc.
The FSA has proposed that for insurance mediation, FSCS awards will be the same as those that currently apply to insurance companies that cannot meet their obligations under policies issued. Namely 100% in respect of statutory classes (such as TP motor and Employer's Liability) and 90% excess of £2,000 @ 100% in respect of other classes.
The very real worry for insurance brokers is that unlike insurance companies, they are not in a position to pass levies on to the end consumers - policyholders. All prudent underwriters make an estimated allowance in their rates for levies (which for motor insurance includes the MIB in addition to FSCS) from the outset, rather than wait until after the event, so these costs are factored into premiums. Brokers cannot do this and any FSCS contributions will come straight off their bottom line - reducing the incomes of well managed firms to pay for those which take a much more cavalier approach to their business conduct.
IBrokers may be potentially exposed to some fairly significant levies, by way of an annual 'whip round', in an individual case unlimited compensation environment, unless this can be capped in some acceptable way.
There is a balance to be struck between brokers generally having a 'no care' attitude and an amount which will encourage and stimulate good business practices within the intermediary community itself. The trouble with trying to achieve such a balance, is that unlike 'Peer Regulation', as for example, under the statutory IBRC, it will be FSA officials who make the decisions regarding who they authorise and who they do not - because their salaries will remain unaffected.
The FSA has proposed adopting the EU Insurance Mediation Directive minimum PI limit of ¤1m (£700,000) any one claim, while not capping FSCS awards arising from insurance mediation at the same level. There are bound to be cases of brokers having inadequate PI limits for the type of business they transact and going straight through these, with the shortfall being 'picked up' by their more astute brethren. There is also a risk of some firms trading without PI or having a non-compliant policy wording. When the IIB administered carefully checked PI policies for compliance the percentage of those not meeting the rules was staggering!
