Approachable and good-humoured, the director of the FSA's retail firms division talks in a thoughtful and relaxed manner about all things regulatory.

It is no surprise then that Strachan, as insurance sector leader, is the FSA's spokesman on insurance matters. Insiders say that the FSA is looking to demonstrate its 'softer' side, to show the market, particularly brokers, that it is a proportionate and fair regulator. Strachan is the man to present that image.

Despite speculation to the contrary, he is keen to play down suggestions that the FSA would be looking to take an "early scalp" when broker regulation begins next year.

"We can demonstrate our seriousness as a regulator in a number of ways," he says. "Enforcement action is one of them, but not the only one. I don't think enforcement is necessarily the first tool that we will reach for."

He is also at pains to point out that proportionality would be at the heart of the FSA's enforcement decision-making. "There is a clear balance (to be struck). Where enforcement is clearly justified that is the right answer. Equally, enforcement that is perceived by the community at large to be a disproportionate response is unlikely to have a particularly effective impact on the sector.

"But if we find something that meets our published criteria for enforcement action, then that's something we won't hesitate to use."

Retail business

As director of retail firms, Strachan is responsible for firms whose business is predominantly at the retail (as opposed to the wholesale) end of the market. This includes insurers, high street banks, building societies and retail intermediaries.

He took up this position, along with that of insurance sector leader, in April when the FSA's new management structure came into place.

Described as a straight talker (he "calls a spade a spade", according to one commentator), he is not afraid to rattle the FSA's sabre when necessary.

At a speech to the Institute of Economic Affairs in November last year he criticised the insurance industry for failing to manage the underwriting cycle.

He said that many insurance company staff "behave as if they do not properly understand the implications of pricing on the bottom line" and that "profit and sustainability tend to play second fiddle to sales and market share".

He warned firms to do more to impress upon their staff the need for financial discipline.

One year on, does he think that the industry is getting better at managing the cycle? He takes a more reserved view: "We clearly detected in the spring and summer months softening in some lines, both here and in the US. But the messages I get from the past few weeks are that events, particularly the hurricanes in Florida and the Caribbean, have focused attention again on rates."

Brokers have come in for criticism - from both insurers and the broking community itself - for their role in pushing down rates. Does he think they should have a regulatory duty to keep prices stable? He says not: "Ultimately, insurance companies are responsible for the management of their balance sheet and the terms on which they do business. I would not want to impose a regulatory burden on the brokers."

Like many at the FSA, Strachan comes from a banking background. He previously worked for the Bank of England, where he was responsible for banking supervision and market operations. While the banking sector is seen as more advanced than the insurance industry when it comes to regulation, Strachan says the FSA is not trying to "shoehorn" the insurance industry into a banking framework.

"There are techniques that we can follow and adapt that work well on the banking side and should work well on the insurance side, provided we use them sensibly.

"You'd expect that from an integrated regulator. But we are very conscious that we are applying these techniques to a completely different business."

He points to a more active dialogue with top management and the use of variable capital requirements and individual capital assessments as techniques from the banking side that are now employed on insurance firms.

Strachan highlights risk management as an area where the insurance industry lags behind the banking industry. This is, and will continue to be, a major focus for the FSA, he says.

"We have been raising the temperature on risk management generally. Risk management is now much more at the front of insurance companies' minds, from a regulatory perspective, than it probably has been at any time in the recent past."

Capital standard

From the end of the year, insurance companies will face a number of big regulatory hurdles: the new capital adequacy standards come into effect, along with the integrated prudential sourcebook. Over the past year insurers have been busy preparing themselves for the new regime, putting in new systems and investing large amounts of money.

Strachan says he is pleased at the industry's progress to date on the implementation of the new capital regime. "We have general endorsement for a move to a more risk sensitive approach, but we' have some important work to do around the detail of that capital framework."

A number of insurers have been running projects on the individual capital requirement calculation, which Strachan describes as being "instructive" and "constructive".

"The basic framework is clearly working," he says. "It's delivering the sort of things that it was intended to deliver, and the discussions and feedback we've been having with a small number of firms suggests that they've found it a useful and valuable experience.

"The experience from the pilots has been very good and, of course, now having done a small number of pilots, we have the prospect of beginning to roll that out over the whole population over the next couple of years."

He dismisses concerns that the new regime will require smaller insurers to invest large sums on cutting edge risk management technology.

"If you have a simple business, then you ought to be able to demonstrate as a management team that you have fairly straightforward techniques for managing those risks," he says.

David Strachan on...

Insurers bringing forward the date by which their brokers must have received minded to authorise letters in order to maintain their agencies:

"That is a matter for the insurance company's management. The FSA cannot force the company to take a different view. It is a commercial decision"

Misleading advertising in the general insurance sector

"It is a priority. We will be looking at the financial promotions of insurance companies very carefully"

On the FSA's principle of treating customers fairly

"It doesn't present the same immediate issue as it does for the life and investment sectors".