General insurance brokers in Ireland are now faced with a regulatory regime designed to solve problems which they don't have, and with a regulator who doesn't fully understand what they do. Christopher McKevitt explains the background.

Somewhere in 1990s Ireland, a series of sobering financial services directives from Europe got muddled with a series of even more sobering domestic financial services scandals. The resulting atmosphere of public and political disquiet demanded that anyone involved in a money transaction needed regulation and needed it up to the gills.

So while in the UK, both the incumbent Economic Secretary to the Treasury, Melanie Johnson MP and her predecessor Patricia Hewitt MP were quite happy with the idea of self-regulation for general insurance brokers, the situation on the other side of the Irish Sea was quite different.

"If you are trying to find logic in all this, you'll be looking a long time," explains Wexford broker and current president of the Irish Brokers Association, Ciaran Sheridan. "A couple of people started with an end in mind and the end is a single financial regulator for everything." Attempting to intervene would be "like trying to stop a train." "We've been handed the legislation. We could take an opposing role but we would lose," he says.

Regulation of Ireland's insurance intermediaries, both life and non-life, has transferred from a relatively anonymous government department to Ireland's Central Bank. Key players in the insurance community say the notion of self-regulation for the non-life intermediary sector was barely touched on.

Sheridan adds that it was highly unusual for the Irish authorities not to look to the self-regulation model of the General Insurance Standards Council (GISC ) in the UK. He says it's routine for the Irish authorities to examine what's gone before in the UK when fashioning policy on insurance-related matters. So how has the relatively benign business of selling non-life insurance become so in need of statutory policing?

The answer is that there is, probably, no particular need. Ireland's non-life market is relatively straightforward. Around 55% of general business is motor insurance, of which approximately one third is transacted directly with the insurers by phone, fax or over the internet. The percentage of direct insurance has been increasing significantly in recent years, with several new companies specialising in this format of business. Complex cases usually end up going to Lloyd's, as few insurers are interested in insuring anything beyond the more easily understood risks.

Occasional instances of brokers selling policies from foreign, non-authorised insurance companies have come to light but these are not felt to have represented any significant fraud or to have damaged the sector's reputation. Indeed the supervising minister, Noel Treacy TD, said in November 1999 that insurance intermediaries had been well regulated by the Irish Brokers Association, the body which up until now has done the job on behalf of its membership with the full blessing of the Irish Government.

And one of the most senior men in charge of the new regulatory climate, Con Horan, the deputy head of securities and exchange supervision at the Central Bank told Insurance Times that "general insurance business is of a lower regulatory risk than life business".

One observer, who declined to be named, describes going down the statutory route as "madness" but says it was an "article of faith for politicians". He added that to understand the motivation you had to look at the context. And when it comes to any debate about intermediaries and handling money, the shadow of the Tony Taylor affair looms large.

Little can be said on the subject because of the sub judice rules of Ireland's legal system. Taylor, an investment broker, is before the Irish courts on criminal charges of fraud, forgery and obtaining money under false pretences following the spectacular collapse of his company Taylor Asset Managers Ltd in 1996.

The company was considered a pre-eminent player amongst investment intermediary firms in Dublin and its demise rocked the financial services community. Following the collapse, Taylor disappeared and was pursued by private detectives and the Garda Bureau of Fraud Investigation until eventually found and then arrested in August 2000 in the UK. Subsequently, he was extradited to Ireland where, in addition to the criminal charges, he also faces civil proceedings for debts of £1.7 million.

The Taylor incident together with previous and subsequent tales of investor woes at the hands of rogue investment advisers - all unconnected to the sale of general insurance products - has had the cumulative effect of generating political intolerance towards anyone who handles money on behalf of anyone else.

In addition to problems with individual intermediaries, Ireland has spent much of the last five years being rocked by one financial scandal after another. We have seen a series of explosive public inquiries into things financial. Inquiries have covered donations to politicians and secret bank accounts held off-shore.

They have also covered tax fraud involving some of the biggest names in high street banking. All this has created a mentality where anything unregulated by a leviathan central agency is suspect.

The leviathan in question is the Central Bank, Ireland's equivalent of the Bank of England, which is to extend its remit to embrace a role equivalent to that of the Financial Services Authority in the UK.

Up to 5,500 broker firms have until 30 June to fill out and return a detailed application form to the Central Bank and decide which of the following classifications most closely describes their business. The categories are:

Restricted Activity Investment Product Intermediary (RAIPI)
This is a basic level of authorisation. Brokers can receive and transmit orders from companies from whom they hold a letter of appointment and can only offer advice on products available from those insurers. The Bank estimates that about 4,000 insurance intermediaries will come under this category.

Authorised Advisors
Providing similar services to restricted intermediaries but authorised to advise on a more expansive range of products without the necessity to hold a letter of appointment from the relevant product producer. This will essentially allow an intermediary to provide advice on the entire investment and insurance market. The Bank estimates about 1,400 intermediaries will seek this second level of authorisation.

Authorised Cash Handlers
Providing the full range of insurance and investment services, as in the first two categories, in addition to cash handling and own account trading. About 100 intermediaries are expected to apply for this third category.

But already there is confusion. Con Horan of the Central Bank said that it was early days and much would depend on what was in the returned application forms. However he anticipated a large number would probably fit into the RAIPI category because they "wouldn't be giving advice on a wide range in the market".

Not so according to the IBA's Ciaran Sheridan. He says he could not sanction any of his members using the word "restricted" when describing their business offering to clients. In fact the IBA is set to table an amendment to its articles of association in May so that membership eligibility for firms is dependent on being classified as an "Authorised Adviser".

"Unfortunately, they are not talking to us at anything like the level they should", says Sheridan. "There is very little communication and everything is very official. There's not much on the lines of `Show us what you do', which is an awful pity."

The single biggest knowledge gap in the Central Bank relates to business placed on a broker-to-broker basis, for example when placing scheme business or business into Lloyd's though a Lloyd's broker. Sheridan says the Central Bank has yet to grasp that brokers have relationships with other brokers. In many instances this is of huge significance as scheme business is growing rapidly in Ireland. At the same time, the number of insurer providers has dwindled to around seven significant players with AXA, Allianz and Hibernian controlling around 50% of the market.

The chief executive of another of the big broker organisations, the Professional Insurance Brokers Association (PIBA) agrees. Diarmuid Kelly says that the RAIPI categorisation would be unworkable for the 100 or so exclusively PIBA general insurance brokers in his organisation.

Kelly says it would place brokers in an intolerable position trying to advise on potential insurance providers if the client had an existing policy with a company for which the broker had no agency. The broker would be hindered trying to explain the variations between the existing policy and the suggested alternative policy for fear of giving advice about a policy from a company he did not market. "It's like trying to fit a square peg into a round hole," he says.

The new regime in Ireland has emerged without any of the exhaustive debate or the opportunity for submission that has gone into the establishment of the General Insurance Standards Council where at least brokers had the opportunity to contribute directly to policy and could air their views to decision makers at a series of roadshows.

The impact of regulation in Ireland has not been fully assessed but both Sheridan and Kelly anticipate that the general insurance intermediary sector will become significantly more "tidy" in the new climate of regulation. Kelly believes composite brokers with only a minority of their business from the general side will wind up that aspect of their business.

Sheridan says smaller brokers who make up around a quarter of all general insurance brokers will find the new regulatory regime unsustainable. The amount of time brokers spend on administration will increase by a factor of between ten and 15, according to the IBA.

A further development is likely to be the creation of an ombudsman scheme for intermediaries. This may involve compulsory membership of an existing self-regulated scheme which has been operating for some years but which only deals with complaints against insurers.

The ombudsman is funded by the major insurance companies but, in the past, there has been some controversy surrounding the scheme's ability to operate independently. Alternatively, an entirely new ombudsman might be created within the Central Bank.

In either event some subvention from insurance intermediaries is likely with individual broker firms paying part of the bill for an investigation arising from a complaint from one of their clients.

Just as was the case in the UK, brokers are likely to offset the threat of complaint by ridding themselves of vexatious clients. And that could spell trouble in Ireland, according to Sheridan. "From the point of view of our own business, it's a case of know your client and if there are some clients you don't feel you can deal with, lose them" says Sheridan.

Contrasting Ireland and the UK
The difference between the regulatory environments for insurance intermediaries in Ireland and the UK could not be more acute. Ireland has opted for statutory regulation which centres around tightening up the manner in which client monies are handled. The new regulator will be the Central Bank, Ireland's equivalent to the Bank of England.

By contrast, the UK has embraced industry-funded self-regulation under the aegis of the General Insurance Standards Council (GISC). But in order to successfully police itself, the industry has had to develop robust, broad-focused and detailed terms of reference for the new body. The GISC has also embraced issues such as life-long learning and minimum skills for membership eligibility - issues not touched on by the Irish regime.

Funding is a key issue for any new regulatory framework and here Irish brokers have done rather nicely. The funding issue does not arise as the Central Bank is funded by the national exchequer. As an exercise in self-regulation, the GISC is funded by its membership.

The downside for Irish brokers is that the terms and conditions set by enabling legislation and interpreted by the Central Bank are highly prescriptive on the sector. This seems to be more to do with making the job of administering the scheme easier than with reflecting the nature of the marketplace.

The GISC toured with its proposals in a series of roadshows in 1999 which gave brokers a genuine opportunity to voice their concerns and tease out grey areas. That courtesy has not been extended to the industry in Ireland with all discussions taking place with the executives of various representative groups.

Also in Ireland, discussions are ongoing in political circles that will lead to the creation of a new super-regulator for the financial services industry in Ireland at some point in the near to medium term. This furtherance of the regulatory environment is likely to include compulsory membership of a consumer ombudsman scheme with some subvention towards its running costs required from brokers.