Head to head: Wood vs Paddick

Robin Wood
The proposals put forward by the Institute of Insurance Brokers (IIB) are for a trade association and regulation of that trade association, not as a regulator of an industry.

These are two very different animals and I am disappointed that, after all Andrew Paddick's histrionics, this is all he has to offer. It remains no more than a club for self-satisfied advisers and has little to do with improving standards and protecting the public.

Modern regulation is about defining market practice as seen by the body of opinion among peer practitioners. Ultimately, the model one seeks to create is one that may be quoted in court as evidence of the standards one would expect a reasonably competent practitioner to meet. It is also about financial security and reporting procedures that define standards that will protect the public from undue financial risk.

What we appear to have here with the code is a splendid looking, but actually rather anaemic, sales prospectus. The first part is rather telling: "No IIB main board director will be permitted to sit on the Regulatory Council (IIBRC), in order to avoid any potential conflict of interest." What conflicts are envisaged by this statement?

Secondly, "individual registration requires having suitable qualifications/experience" - this is archaic. The emphasis should be on competence to do the job. A qualification can go a long way to demonstrate knowledge of a subject, but this is the sort of standard one would expect to see on an application to join a club or institute - not the requirement to be a registered individual with a regulator.

It might be acceptable if the entry requirement was the acquisition of an up-to-date diploma or certificate to be re-sat every three years or so, but that is likely to put people off joining. Regulated individuals must show they can do the job competently or that their knowledge is up-to-date and tested to be so. The best way to do this is regulate competence standards from within. Professional practice is nothing to do with title or longevity. It is about seeking to do a job to the standard where you cannot get it wrong.

A recent press release promotes the concept that the IIBRC would regulate professional broking practices. However, it is extraordinary that there is no question here of the client account being a trust account, as the public might expect from an esteemed body of practitioners. Is this being considered?

Equally, the suggestion that the minimum solvency requirement for a professional firm should be a paltry £1,000 is laughable.

Who will sit in judgment?
Discipline does not seem to get much of a mention either. Will there be a disciplinary committee and who will do the monitoring (the IIB perhaps)? Will members be fined or have to pay the costs of disciplinary measures? How will the disciplinary process be constructed and who will sit in judgment? And will there be an appeals procedure?

On the matter of training and competence, it is all very well designing a new diploma and online training, but there are, again, many questions that need to be answered. What standards will be required? How often will competence have to be assessed? Will the IIBRC approve training providers? What qualifications will it accept?

It seems the IIB has spent time and money developing training products and is happy to promote them, but thought must be given to the above. We need to have some idea what to expect before parting with our money.

Who will undertake and be paid for administration, monitoring and investigations? Has the IIB assumed it will undertake the administation functions for a fee or will this be a matter for the new regulatory division on a non-profit basis?

Regarding compensation, yet more questions arise. Will there be a grants scheme? Will members be responsible for meeting the cost of awards made to the public?

And how much will fees be?

The IIB must have completed some form of financial forecast. I ask that these be made public. We should be able to see the project is financially viable before signing up.

The same must be said for the legal structure of the entity itself. I see it is to be a division of the IIB - I would like to know what that means exactly.

Judging by the wording of the election scheme, it seems firms and individuals are to join up now and, of those accepted by January 2002, a handful will put themselves forward as candidates for election to the committee. If the approval process is to be rigorous, in the space of a few months there might be a relatively small number of firms registered and thereby they would be entitled to put themselves forward.

I am playing devil's advocate and it is clear the proposals outlined in this press release and interim rules are a holding operation and cobbled together reasonably well from various sources of regulation. But what

I want to make clear is that the formation of a new regulator, with due regard to consultation with the peer group and other parties, is going to take a long time to bed itself down and develop rules and guidance.

Commit in haste?
There seems to be an indecent haste to sign up members before consultation has taken place and before the downside aspects have been answered. How can a complicated rule-book be drawn up in the first half of 2002 if the committee is not going to be formed until March 2002?

It will take substantial funds to bring the rules and codes to fruition, but that should not be the role of the independent insurance intermediary via entry fees. If the IIB wishes to sponsor this new club, then that is its own business. None of the other regulators (the Insurance Brokers' Regulatory Council (IBRC), the General Insurance Standards Council (GISC)) have asked for commitment until a reasonably full set of rules has been available. Why should the IIBRC be different?

If, via the due process of consultation with the industry, a new regulator for insurance brokers emanates, that may be a good thing.

But for the time being, this seems to be a trade association seeking to regulate and define rules for its own members. If I were a non-IIB member, I would have reservations about putting my scratch to this until I knew more.

Surely it would be prudent to let the GISC do the regulating and let Paddick represent his members in that environment. On that basis, the IIB can get on and sell its first-class wares without any suggestion of conflict.

Andrew Paddick
The IIB has always advocated the statutory regulation of all those who advise upon and arrange policies of insurance. However, representations made by the Association of British Insurers (ABI) and Lloyd's, that the sector should be permitted to self-regulate, were accepted by the Treasury and the Insurance Brokers' (Registration) Act 1977 was repealed.

Shortly after the announcement to repeal the Act, the IIB held an extraordinary general meeting (attended by hundreds of members) at which it resolved, by overwhelming majority, to self-regulate to high standards in the public interest once the IBRC had ceased to function. This is exactly what we are doing and it has the support of a substantial number of previous IBRC registrants.

The IIB, by taking on the regulatory role, in addition to its new broker education programme, will in future look more like the Law Society and Accountancy Institutes - something truly professional insurance brokers have wanted for years.

I agree with Robin Wood when he says modern regulation is about defining market practice. But he must acknowledge the role of the broker is very different to that of the risk carrier, tied agent or retailer who sells insurance as a sideline. The IIB will, because of its exclusively insurance broking community, be better equipped to specifically define acceptable practices - especially when compared with the GISC and the miscellaneous membership it seeks to attract.

Wood is also correct when he talks about financial reporting to protect the public.

This is something the IIBRC will take very seriously, like its predecessor the IBRC, only with a more modern and practical accounting emphasis. Many GISC member firms have misapplied premiums collected to support their businesses and personal lifestyles and have not been required to submit meaningful fiscal information. I know several brokers who are looking to buy intermediary firms, but when they conduct an audit as part of their due diligence process, all is revealed.

Last word
No IIB main board director will be permitted to sit on the Regulatory Council, because it is acknowledged that representation and regulation are different functions within professional bodies. The IIB, as a professional association, will reserve the right to defend a member who is subject to disciplinary proceedings and make representations to the Regulatory Council regarding rules, etc. However, the Regulatory Council will properly have the last word in all such matters. This will be no different to the relationship we had with the statutory IBRC.

It should also be recognised that, counting the independent chairman and six public interest councillors, actual practitioners will be in a minority. This will be no "cosy club", as Wood suggests.

Individual accountability and competence is considered extremely important by the IIBRC. One cannot discipline certificates of incorporation. The GISC (unlike the Personal Investment Authority (PIA) and the IBRC) has no individual registration and proper competence requirements.

We have adopted the core tried and tested IBRC standards as a short-term interim measure, until such time as the Regulatory Council has been democratically elected. This is something the GISC never did, with its board of mutually self-appointed individuals who have all the voting rights.

It is not for me to speculate what the IIBRC's rule book will say when it is published. But it will be put together in consultation with practitioners. Much drafting has been done over the past two years by our lawyers, which will kick-start the deliberations.

Therefore, matters such as the solvency margin (inherited from the IBRC), discipline, training and competence, compensation and so on will be a matter for the council to decide upon themselves.

Regarding fees, the fee scale has been published to all brokers.

The institute will provide the IIBRC with administrative support, just as it did for the IBRC. Specialist staff will be employed to conduct investigations and monitoring.

IIB is funding the formation of the IIBRC as a division - just like that of the professional bodies mentioned earlier. The IIB does not distribute profits - it is a company limited by guarantee and any surplus carried forward is used solely to the benefit of the members, funding further initiatives. Unlike the GISC, we will not be paying millions of pounds to accountancy firms to conduct monitoring visits and enormous profits to their partners.

We are going to do a first-class job in the public interest, make no mistake about that. Professional brokers will be justly proud of their IIBRC badge, instead of sharing the meaningless GISC logo with all and sundry.