New FSA broker regulations promise the advent of best advice. But what does it mean and how can it catch you out? Michael Connor explains

Financial Services authority (FSA) regulation promises many changes for insurance intermediaries. One of the most profound may come as a result of the application of two simple words "best advice".

Best advice is a concept familiar to any general insurance broker, which also has a life and pensions arm to its business. The concept goes to the very heart of being an independent adviser. When the new FSA regulations are rolled out it is predicted that all intermediaries will be expected to adhere to the "best advice" principle.

Best advice means that an adviser must provide the prospective investor or purchaser of insurance products with all relevant information affecting the particular investment or purchase and use his best endeavours to see that the client understands the nature of the risks involved. Every adviser must seek from the prospective client any information which might be expected to be relevant so that he can offer appropriate advice. This can include:

  • Details of the client's personal circumstances

  • Financial circumstances of the client including available means

  • Financial objectives of the client

  • Any personal preferences of the client.

    If brokers are already operating along these lines, will the "best advice" principle mean anything really changes?

    One question which may arise is whether an insurance intermediary can demonstrate its independence to the prospective insured while at the same time satisfying the requirement to give best advice.

    The independence of insurance intermediaries is being threatened as insurers continue to consolidate and merge. In future a more demanding regulatory regime might demand consolidation so that, in many classes of business, the broker may be faced with a limited choice of insurers for its clients.

    Furthermore, independent brokers may be to an extent tied to an insurer as a result of the delegation of authority to them from that insurer, or as a result of their participation in an insurer-formed broker club. A broker may consider it difficult to be truly independent in such scenarios. Additionally, brokers may be limited to a smaller pool of insurers if premiums from a particular class of business do not meet certain insurers' thresholds.

    Another concern is that any additional requirements imposed on brokers (which may include the requirement to give best advice) may lead professional indemnity (PI) insurers to increase rates or limit cover. The effect of the new FSA regime on PI cover remains to be seen.

    The following general principles may be a useful guide, pending publication by the FSA of detailed rules:

  • Keep detailed client records to demonstrate what matters were taken into account when considering the requirements of the client and how these were satisfied

  • Manage conflicts of interest. It will probably be necessary to disclose any potential conflicts of interest (for example, where a broker has delegated underwriting authority or can place business under a scheme arrangement). The client can then decide whether to instruct the broker to provide some form of facultative placement for the specific risk offered, or to look to another intermediary to provide the cover sought

  • Formalise terms of business. A terms of business letter would assist in detailing the nature and scope of the broker's duty and the responsibilities of the client to provide, for example, accurate and timely information

  • Establish an efficient and speedy complaints system to identify any weaknesses, to provide speedy redress to clients and to facilitate the reporting of any significant exposures in a timely manner to FSA/PI insurers.

  • Train staff to ensure that they provide clear and honest advice and are familiar with the products offered.

    While these general guidelines will already be familiar to the well-run insurance broker it is important to note that the FSA will require plenty of hard evidence that best advice principles are being adhered to.

    Brokers should start reviewing all internal procedures and documentation now to ensure they will not fall foul of the rules when they are finally produced.

  • Michael Connor was a principal regulatory officer in Lloyd's regulatory division and is a solicitor in Reynolds Porter Chamberlain's insurance and reinsurance department

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