During its time overseeing the industry, the FSA has brought about change that has split broker opinion – and pushed some smaller players into the arms of bigger rivals. Insurance Times reports on how independent brokers have been navigating the red tape
The FSA spokesman sounds perplexed as Insurance Times reads out a list of allegations and criticisms that one small broker has made against the regulator.
He shouldn’t be entirely surprised: a good chunk of the independent broking sector have been infuriated by what they see as a red tape-loving organisation, which enforced pointless rules that have dramatically increased costs.
However, the broker who made those comments does not feel comfortable adding his name to the choir of critics, and has refused to go on the record. Echoing a widespread fear among brokers who have contacted Insurance Times, he believes that going public would result in the FSA embarking on a “witch-hunt”, finding ways of fining the broker for not meeting parts of the organisation’s rulebook.
“If you make criticisms in the press, the FSA thinks: ‘Let’s go and investigate them’,” he claims. “They don’t want anybody to rock the boat.”
The FSA spokesman dismisses the allegation, suggesting it is unworkable, let alone borderline illegal. “The FSA supervises firms according to its rules, not according to what is said by firms in the press.”
It is a stark example of the state of relations between the broking community and its regulator. But, like the self-regulating industry body Insurance Brokers Registration Council before it, FSA supervision will not last forever. The authority is to be dismembered and insurance potentially cut between two quangos: the Prudential Regulation Authority, which will ensure that insurers and other financial institutions like banks have sufficient capital on their balance sheets to survive another economic meltdown; and the Consumer Protection and Markets Authority (CPMA), where the regulation of business conduct will go.
The ideas are out to consultation, with more detailed proposals expected next year, so it is likely to be 2013 at the earliest that the carve-up will start.
Hopes for the new set-up are mixed, just as opinions on the nearly six years of the FSA regime divide independent brokers. Rarely has one regulatory body stirred up such emotions in a sector as independent brokers feel about the FSA.
So, as part of Insurance Times’s Best of Brokers series, it seems a good time to examine how smaller brokers are coping with the regulators’ strictures, why it is forcing some into the arms of larger units, and what independents can do to ease the burden.
The FSA took charge of general insurance regulation in January 2005, charged by the government at the time to improve services to the consumer. The FSA’s then retail markets managing director, Clive Briault, told the Chartered Insurance Institute’s annual conference in 2005: “Consumers buying insurance on an advised basis are recommended suitable policies that meet their demands and needs … There was generally little evidence of formal procedures to ensure that the broker’s duty to the client was not being compromised by the relationship with the insurer.”
This all sounds fine, but our broker source thinks this has led to needless form-filling, such as the statement of fact. The argument is that this document provides the kind of basic information, like policy cancellation rights and the occupation of the insured, that adds nothing to what the customer already knows.
“You have to send this out to clients, and that costs in postage and printing,” the broker says. “The costs get passed on to the customer.”
There are even bigger costs at stake, of course. Institute of Insurance Brokers (IIB) chief executive Barbara Bradshaw says that the levies imposed by the FSA, along with the need to bring in external advice for compliance, could be forcing broker closures. Bradshaw says that names drop off the IIB’s membership list each month, at least some of which have ceased trading.
The much-maligned, ever-increasing cost of the Financial Services Compensation Scheme, which covers customers in the event of industry failures such as the mis-selling of payment protection insurance, is one such levy, typically costing small brokers thousands of pounds.
Then there is the sheer volume of tweaks to the code. “Sometimes there are two or three new documents a week,” Bradshaw says. “There’s no way a small broker can keep up with what’s going on.” The FSA disputes this, stating that the regulations were part of a five-year framework. The authority claims that most of the tweaks to these regulations derive from EU legislation changes.
But Biba head of compliance and training Steve White points out that the way the rules are interpreted has changed. For example, the FSA established the ‘treating customers fairly’ principle, but this took a fairly light-touch approach. The idea has since developed to the extent that brokers have to prove their vigilance to the consumer by producing evidence of complaints being logged and details of policies lapsing. White says that this has led to the EU’s most costly regulatory environment for insurance intermediaries.
Not many small brokers have gone bust as a direct result of costly regulation that they simply couldn’t afford, but some have lost their independence to bigger, stronger rivals.
Dorset-based broker Alan & Thomas has been acquiring its local peers at the rate of around one a year since 2007. These acquisitions are the major reason that the firm’s gross written premium has increased 60% to £16m since the start of the FSA regime.
“We were in dialogue with smaller business [about merging] before,” Alan & Thomas’s managing director, Julian Boughton, explains. “But rising costs in regard to compliance has meant that they came to us about selling.”
Boughton is a fan of the FSA’s work, saying that its rulebook forced him to rethink certain aspects of the business. For example, systems and controls meetings had been held on an “ad hoc basis”, but are now held monthly to ensure every policy signed is watertight. It has, Boughton says, made Alan & Thomas “a better business”.
Another broker who generally praises the FSA is East Sussex-based Manor Insurance director Ian Mantel. The FSA called on brokers to conduct a ‘gap analysis’, which is a piece of work to see whether a business is working to its full potential. Mantel says that taking such a review of Manor made the firm “leaner and meaner”. He is more critical of the way that some smaller brokers have interpreted the guidelines, saying that they share the blame with the FSA for being over-zealous.
“There are things that are applicable to a Willis or an Aviva, not a small broker,” he sighs. “[Bigger organisations] have a boss who doesn’t know many of the staff’s names, let alone what they do day to day. But when you sit with your staff like we do here, you know who has had a row with their boyfriend last night, or who had their car clanged into a couple of weeks ago.”
In other words, a smaller broker is informally monitoring their staff and performance every day just by being there. Box-ticking isn’t necessary for every situation and not all compliance advice needs to be taken under even the FSA’s tough regulations.
An oft-voiced complaint is the cost of compliance advice, which some claim can cost thousands of pounds. Mantel thinks that much of it is unnecessary, that a firm only uses an external tax consultant when returns are going to be filed, certainly after learning from them once how to account as the firm trades. The same should apply to compliance advice.
One such adviser, Branko Bjelobaba of consultancy firm Branco Ltd, concurs: “Our aim is to enable knowledge transfer. So, once we develop a letter to clients for a broker, they can then tweak that for their everyday needs.”
The trouble is, Bjelobaba argues, some brokers can have “a cavalier attitude” to managing compliance themselves and have had to be “dragged through the [FSA] regime kicking and screaming”.
Dart Compliance managing director Jim Dart says that longer-established brokers are more resistant, especially if they generally don’t get many complaints. As a result, there can be a “lackadaisical attitude” to FSA rules, he says, with these brokers believing that the suggestion they get advice or compliance health-checks is almost a slur on their reputation.
Dart says that brokers are more open to these checks if they become part of a network, as that advice usually comes “as part of the package” and so is not an implicit criticism. He also believes that many small firms would benefit from joining a network to save on costs, as there is often compliance guidance spread across the member firms, often provided by a dedicated in-house unit.
Both camps broadly agree that the FSA’s regulations are too detailed and difficult to distill to the layman. The differences are on whether the regulations actually work in practice.
However, there are already fears that the new regulatory regime will be no less cumbersome. The current consultation, which ends today, says that the CPMA, under which brokers should fall, “will build on the progress recently made by the FSA towards a more interventionist and pre-emptive approach to retail conduct regulation”.
There are plenty of brokers whose blood will boil at the idea of their businesses being subject to even greater scrutiny and the increase in more pointless form-filling that will follow as a result. IT
Mark Leftly is deputy business editor at The Independent on Sunday.