End of term report

Q10 months into broker regulation, how does the FSA feel the market is performing in terms of compliance?

To date we haven't found any significant evidence of wilful non-compliance. However, we have found that firms are not meeting our rules in a number of areas and our findings disclosure was a good example of that.

Overall our feeling is that generally the industry wants to comply with the rules. There are obviously areas where the rules bite them in terms of additional burden, but overall while standards in terms of compliance are not necessarily high in all areas, firms are taking steps to try to understand better what the rules are and to ensure that they comply with our rules and requirements.

QWhich particular areas are causing most difficulty?

Disclosure is one, and that was the priority area. We've come up with some fairly detailed rules about what can and can't be in the various disclosure documentation. In relation to policy summaries, there is a lack of clarity in layout, and important things like exclusions are not being made sufficiently clear. Firms are not doing what they need to do in order to ensure that consumers can make informed decisions.

Likewise, if status disclosure in the initial disclosure documentation isn't right it confuses the customer. More needs to be done on that and we will offer practical help, in the way that we did for mortgages, so firms can understand what they really need to focus on.

QIs the general insurance industry at the same sort of stage as other sectors were in becoming compliant?

The Mortgage Code Compliance Board probably had more influence in the mortgage sector than, say, GISC did in the general insurance sector, as well as in terms of membership coverage. That obviously has conseQuences in terms of firms' understanding of compliance.

The general insurance sector also includes a large number of secondary intermediaries. These are firms that don't really feel they are financial institutions.

QSo is it taking longer for the general insurance industry to come up to speed?

In terms of the profile, yes, that's probably fair.

QIs compliance with the client money rules still a significant issue?

The 'Dear CEO' letter on client money that went out earlier in the year related specifically to the wholesale sector, where it was felt that the risks were potentially greater, simply because of the volumes of client money involved.

On the back of the findings in relation to wholesale firms, the decision was taken to re-prioritise work in the retail sector.

We've pushed back the work that we're going to do on claims handling in favour of comparable work on client money for retail firms. We're currently scoping how we're going to do this and expecting to report back early next year.

It's not unlikely that we will see similar problems, probably worse, in the retail sector than in the wholesale sector.

QSome brokers complain that it is almost impossible to comply properly with the client money rules. Has that been your experience?

We're not yet in a position to say whether firms are complying or not, because we haven't started this work. There are elements of the rules which we appreciate are complicated, and a lot of work has been done with our policy people in consultation with the industry in developing these rules.

Obviously, with the benefit of more analysis about how the rules are working in practice, which we'll get through our investigative work, we'll be able to feed back on that. It will help inform us whether or not the rules are really achieving what they're meant to. This is part of our ongoing process for all rules.

QCould the FSA end up changing the client money rules?

Our starting point is to focus on whether firms are complying with the rules and protecting customers in the way they should be. However, where there is substantial evidence that a rule isn't working there is always the possibility of it being reviewed.

We would obviously review any rules where we find, with the benefit of experience, that the cost/benefit analysis changes.

QAre there concerns over how appointed representative networks are managed?

Yes - and these concerns are an issue across the financial sector.

This is a priority area on which we will carry out some thematic work this year. A particular focus will be the systems and controls that the principal has in place over the network, to ensure that customers dealing with the appointed representative (AR) are in no worse position than dealing with a firm directly.

We want to understand how the principal is able to monitor on a proactive basis what the ARs are doing, the systems they have in place to do that, and the type of risk-based approach they adopt to look at what the ARs are up to.

Some preliminary findings are due to be published within the next few weeks. We're planning to communicate the first round of findings on that.

QHave the "teething problems" with the Retail Mediation Activities Return (RMAR) process been ironed out?

Yes. We've now made some software releases to improve specific aspects of the RMAR which were proving problematic.

We're very encouraged by the response rate, which is much higher than the response rate for paper returns. This medium is proving to be effective, despite its complexity and the fact that the huge number of firms involved have never done anything like it before. IT