With regulation approaching how ready is the industry to face the many challenges? Insurance Times hosted a round table discussion in conjunction with Citigate Technology involving compliance experts from around the industry
Suzy Frith, chairman, Citigate Technology
Colette Jolly, compliance manager, AXA
Gary Dixon, managing director, Compliance Solutions
Jim Evans, compliance consultant, Deloitte Consulting
Stuart Reid, joint managing director, Stuart Alexander
Steve Naylor, marketing director, Tower Technology
Adrian Cobb, managing director, Tower Technology
Dave Smith, head of business operations for Zurich UK's commercial unit
Andy Cook, editor, Insurance Times
Tristan O'Carroll, Insurance Times - chair
Tristan O'Carroll: What has been the most challenging experience that your company has faced in preparing for FSA regulation?
Stuart Reid: We feel challenged by the principal agent scenario, CP159, which we believe is fundamentally flawed. There has been little interest in the principal agent as set out at the moment, which must be painful to the FSA, bearing in mind what is perceived is a large job ahead.
There are serious issues for us with regard to basic things, such as professional indemnity cover. The FSA has suggested that as many as 5,000 companies are trading in the broking arena without professional indemnity. The thought of 5000 people requesting cover in one go is worry.
When you have a broker of size it is easier to take on board these sorts of things. For the smaller brokers, not only do they have the financial concerns, but also they have to undertake changes to business practices.
Adrian Cobb:The biggest challenge is for my organisation to understand the cost of addressing the compliance issues. We have been keen to understand how as an organisation we can move away from being clearly a technology provider to a business partner, while improving its cost effectiveness.
Steve Naylor: The biggest challenge is deciding whether it's an opportunity or a problem. This is an opportunity for brokers to make themselves "different" in the marketplace, and an opportunity to restructure their processes. It does require a fairly fundamental view that says: "You shouldn't actually have any compliance systems, what you should have are processes that are inherently compliant, and if you take that view you're heading down the route of opportunity."
David Smith: The first phase of the challenge - shaping the regulations - is coming to a close to some extent. We've had to shape the regulation through lobbying to make sure the regulation is proportionate to risk - and that has been a challenge.
The second phase for us is very internal - it's formalising operations. The good news is there's a lot of good practice that goes on; the bad news is we don't document it as well as we should do. It's a case of putting in place recording systems and documenting what you do rather than reinventing the wheel. The third challenge for us is assessing market change and making sure that it is an opportunity, not a threat, and that's really a matter of digging deep down into CP159 and CP160.
The overall challenge is to build a culture of consistency and continuous improvement.
Jim Evans: The challenge has been for senior management to understand and to the fact `buy in' that regulation is going to happen and it's something that's not going to go away. The regulators aren't going to change tack, and senior management have had to put the necessary resources in to make this happen.
A key attitude challenge is to ensure that compliance is not an irritating afterthought, but becomes one of the key strategic drivers to your business. Unless you can get that embedded within the firm, you will be paying consultants lots of money to mop up afterwards. We'd much prefer to help design the future rather than fix the past.
Colette Jolly: The main challenge is a lack of understanding. People have to get into the habit of consulting the compliance team when they want to make business changes. However, if you compare general insurance to the life industry, it has had 15 years of experience and is still struggling with FSA regulations. So, for general insurers, and especially brokers, for them to come in brand new to regulation, it really is a challenge.
Another challenge is gaining senior management buy-in. AXA's bought into the process of regulation and compliance, but it's quite difficult to plan without knowing the exact FSA rules, as they are still at consultation stage. We have set up our entry programme, but it's difficult to have a business book without knowing what's actually going to come out of the FSA.
Cost has been another challenge. Our prudential source book up to 2005 has been estimated as costing half a million pounds. So the challenges have been resources, culture change and lack of experience.
Gary Dixon: There are a number of problems facing the industry, principally around the fact that the compliance profession is pretty much still in its infancy. We're seeing more and more competing resources in that area and, with the advent of so many distribution firms, we're really going to see resources being stretched.
There is, therefore, inherent uncertainty in what is required, and that doesn't help people. It either makes them sit on the fence, or they can commit resources and spend money without actually knowing what return they're going to get from it. What is important for the clients that I'm involved with is to recognise where they'll get value for money.
Looking at it from a broader insurance perspective, there are going to be quite a lot of changes in the distribution models for insurers. Insurance companies need to be looking into it and their technology with their key brokers. The technology on the broker side is so disparate it's unreal. I've been looking for some time to try to find a panel of preferred people on the IT side for the different products, and there are just too many out there to assimilate.
The other element of uncertainty is related to things like networks. Grant Ellis [of The Broker Network] told me a couple of weeks ago that, although they're not taking that approach, they're going to deal with compliance in house. So, people are already reaching half-way houses. But there's a danger in doing that.
The clients I talk to, that are active in this area, see a lot of opportunities within the consolidation that will take place.
Lots of brokers are expecting to be able to "piggy-back" on other people's infrastructures because they're going to sell their business to them. And I know people on the opposite side who are saying: "Right, well I'm going to mop up x per cent of this district because I have got a good infrastructure that I can actually apply to them."
There's a huge amount of change there and people are going to struggle to keep up with it.
O'Carroll: Is compliance is being seen as an opportunity by the industry?
Cobb: This question was asked at the Biba conference. Not one hand went up as a threat, every hand went up as an opportunity. It was quite a shock. There is a general feeling that it is an opportunity, although it is perhaps a fearful opportunity.
What proportion of those would have experienced some sort of regulation before, Stuart [Reid]?
Stuart Reid: Very few. A lot of insurance companies perhaps had a financial services division - the smaller brokers may have had a financial services element- but a lot of them ditched it when it got too tough.
Cobb: But Stuart [Reid], do you think their reaction was because regulation is going to change the nature of their business, and that they see that as the opportunity, rather than they're worried about how to comply with the regulation?
Reid: You're right. We've been quite acquisitive and you always get the comment: "But as soon as compliance comes in, I'm out, I'm not going through that."
The age base of a lot of the provincial brokers is quite elderly, and they've always been quoted as saying that when the FSA come in, that's it. So the concern I have is that we don't even know how many brokers will leave the industry.
I'm fearful over the level of responses from small brokers. There were 159 responses to CP160 out of thousands of brokers. I'm fearful that a lot of these will say, "Oh it's [FSA regulation] another year away".
David Smith: The concern is that this apathy doesn't carry over post-2005. There's an expectation that the major insurers will fight the FSA. But brokers must realise that FSA regulation is the minimum standard. There's lots to prepare for.
Dixon: I'm concerned about the future. The industry age profile is there to be seen and there is a lack of the new 21st century broker. The older ones don't have the resources to look at these things, because it takes time and money to devote to looking at consultation papers. And the margins that people have been working on have been squeezed for several years now and it's simply becoming too much hard work for people.
And I understand why some of them might say, "Well I'm not going to look at it now. I'm represented by trade bodies will therefore marshal the arguments together and will actually put them forward to the FSA", but, as David Smith says, they are just minimum standards. People who are going to remain within the trade have to realise that they have to keep up to those standards, and they have to take the steps to reach it, but I think some of them are at looking for divine inspiration at the moment.
Reid: Consolidation has definitely started. I've mentioned this a few times, but the amount of brokers that are for sale passing has increased dramatically in the last few weeks. What is a huge surprise for me is the quality, which is extremely high, and one might argue that those of quality would look to sell perhaps at the early stage rather than the later stage.
A broker I know told me he had two quality brokers walk through his doors and the first thing they said was: "I don't fancy compliance, do you fancy my company?"
Naylor: Isn't that what the regulator wants, to a certain extent - a polarisation towards bigger groups of brokers, thereby lowering the risk that the smaller broker brings?
Reid: My concern is that a lot of these brokers will leave it late and then suddenly we're faced with January 2005. Acquisitive brokers will have emptied their coffers, bought what they can, and there'll be these lost souls. Presumably, therefore, what will happen is that the insurance companies will be in the controlling arena. They have these brokers that cannot trade and therefore they'll hand out pieces of business perhaps to the compliant brokers.
Jim Evans: Or there will end up being lots of new entrants to the market.
Andy Cook: The FSA's Eleanor Linton stood up at the Biba conference and, faced with the question of how small firms will be treated, said: "No, we like small firms, they offer alternatives".
Dixon: Oh it's a load of rubbish, they're lying through their teeth.
Jolly: I agree with Linton's comments. If you look at the way the FSA categorises the firms - taking a risk-based approach - you see that it focuses more of its resource on the AXAs and the Zurichs. It focuses less of its resource on the smaller one-man bands, who don't have allocated provisions. So the FSA does like small brokers. Itdoesn't want to get rid of them, especially when you think that one of their statutory objectives is the protection of consumers.
Cook: What's the view that's formulating in AXA and Zurich regarding appointed agents?
Smith: There's definitely going to be a place and Zurich will have tied agencies. We expect fully-tied agents to become the norm over the next two to three years. But it's too early to say exactly what that will mean.
Jolly: We can probably learn our lessons from the life industry. AXA's not going to rush out to tie every single firm out there. But it is likely that tied agents will be the way forward. We back this approach. Although a range of possibilities are open at this stage.
Dixon: It's not likely that there'll be that many insurance companies tlooking at being tied to anyone who isn't compliant anyway, because they would not be willing to accept the risk attached to it.
Jolly: It's very difficult to come up with an inter-principal agreement. We're working on that at the moment with the ABI, and it is quite difficult.
The ABI asked the question:"What would you expect to see in an inter-principal agreement?"We found it difficult to answer that at this stage.
Cobb: It strikes me that the insurance industry's always had a bit of a problem in deciding who owns the customer. You're going to end up in a situation where the person who takes responsibility for compliance is going to be the stakeholder who "owns" the customer.
O'Carroll: What are your thoughts on how you have overcome the challenges and barriers to compliance that we've talked about?
Dixon: The principal way for any company looking at the impending regulation issues is to assess resources and staffing, because you have to have the right people in order to make the right decisions. I would exercise some words of caution to the smaller practitioners, I would say in all honesty, don't be too scared now.
Most of the doom and gloom that's been espoused is because, on the life side, where we saw regulation kick in some years ago, we saw a number of surprises come out of the cupboard on how people had been regulated. However, that has now happened.
It is difficult to see how any of the retrospective application approvals could have a significant impact upon the general market, so it isn't as difficult as some people might think it is to actually pull together a compliant infrastructure if you approach it properly.
Jolly: Considering how compliance drives business, it has to be an integral part of the strategy. Another thing we are doing is setting up a programme to assess the impact on our business. To do that you really need to plan early and allocate your resource. Also, externally with our stakeholders, we've been providing summaries for brokers to help them understand what the regulations mean.
Smith: I absolutely agree with Colette [Jolly]. The key thing that we're doing is to integrate the issue of compliance in a strategic direction. We are trying to support brokers as best we can, both in the lobbying debate and providing advice, training packages and help to set expectations about what we'll be looking for.
We're no different from AXA or anybody else. We're trying to integrate compliance within the overall strategic direction of the business.
Reid: One of the biggest things that we've done is that we've started undertaking a survey of brokers, to find out what they're doing. If there are a lot of small brokers out there who are consider that an agent scenario sits with them better than anything else, then I might gear my strategy towards that. And then when we find out what they want to do we can gear our strategy accordingly.
A serious issue for us is IT. We're contemplating changing our IT platform. Our time scale is that we will decide what system we want by the end of this year. I find it irritating that we're going live on 1 January 2005 because it's the same year that we'll be going into a compliance regime.
In conclusion, I think everybody on this would agree that if you're a broker and you're concerned about compliance, get on with it now.