ABI's Vipond warns requirements will stifle future mergers
Requirements for insurers and brokers to employ internal audit committees rather than outsource the responsibilities will increase costs and stifle future mergers, the ABI's Peter Vipond said.
The Association of British Insurers (ABI) head of financial regulation Vipond said the association welcomed the new Financial Services Authority (FSA) consultation paper (CP140). CP140 is the proposed text for guidance on systems and controls for insurers, friendly societies and the Lloyd's Market.
But Vipond warned compliance to the regulatory regime could be expensive.
He said: "It will be more cost to the industry. Many insurers have introduced internal auditing procedures which have been done well, but this is not universal.
"This may put pressure on future deals and affect consolidation in the industry," he added.
CP140 is part of FSA managing director for investment, banking and insurance John Tiner's project, which will outline his plans for the regulatory regime before its implementation in 2004.
There are two key areas of CP140. First is the emphasis on the FSA handbook's principle 3 that requires "a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management."
Second, insurers must make arrangements for an internal audit committee with an element of "independent oversight". The report said that only in "exceptional cases" should the audit be outsourced. If it is outsourced, the overall supervision should come under the remit of the firm's own internal audit staff.
But after the Enron and WorldCom scandals in the US, it has become clear that the internal audit system has "clearly gone wrong, with the auditor function muzzled," said Vipond.
A spokeswoman for the British Insurance Brokers' Association (Biba) said Biba welcomed any guidance that helped the industry "conform to a code of best practice".
Vipond said a letter has been sent to all ABI members saying that the ideas "were not unhelpful" and that the ABI will be responding to the FSA.
CP140 is available on the FSA website: www.fsa.gov.uk and responses should reach John Tiner's office by 3 October.