Sitting in his Canary Wharf office on the morning after the Christmas office party, the FSA's director of small firms, Stephen Bland, reflects on the first year of regulation and confesses: "We still have a way to go."

It is clear that the Christmas spirit hasn't affected his mood or focus.

And such a statement could well send worrying shudders down the spines of many a broker.

Bland makes clear that if firms don't raise standards in priority areas "we will have a crack down". Fighting talk.

To emphasise the point, Bland says the last 12 months has been a time of purely "bedding down" regulation.

It was a year of 'Dear CEO' letters and fact sheets, of treating customers fairly (TCF) and talk of commission disclosure. And a year where payment protection insurance (PPI) became a hot topic, contract certainty made headlines, and client money was put under the spotlight.

But this year the industry should expect to hear more about commission disclosure. It is set to become the number one issue.

Damage reputations
Brokers are digging their trenches ready to do battle with the FSA over disclosure. With some justification, they say consumers do not want to know how much they are paid by the insurer, and transparency is the desire of direct writers, only serving to damage broker reputations.

The FSA is ready to take a stand to confront broker opposition. Bland refuses to acknowledge that consumers are not interested in who is paying what for which service. "It may take a while for the consumer to be educated about disclosure," he says.

"We will look at whether there is a need for disclosure so the customer can make an informed choice."

He recognises that "there is some good stuff happening in the market". But he warns: "It is important for firms not to be too risk averse."

Looking at the broker market as a whole over the past year, the nightmare scenario of a mass exodus of brokers - feared and predicted by some as a result of the introduction of regulation - has not materialised.

And despite Bland's strong stance of a "crackdown" the good news is that the FSA's policy of introducing guideline principles rather than implementing strict rules on its key priority areas is here to stay.

In a more conciliatory tone, Bland says the policy allows firms the flexibility to adapt the rules for the benefit of their businesses. In each of its priority areas the FSA has given guidance and examples of good and bad practice.

Within the past year, the closest the FSA came to wielding its big stick was issuing a warning to PPI providers. Bland says PPI is a "big priority".

He says: "Our concern is whether these products are detrimental to consumers. Are consumers getting a product they won't be able to claim on? It is about opening up the markets and educating the consumer on what is available."

Product quality
The coming year could drastically change the PPI market place. Bland talks of opening up the market so that more insurers can enter it, and there will be stronger competition between providers. Premiums will be driven down, while there will be an improvement in the quality of products available on the market.

It is the consumer, after all, who lies at the heart of the FSA world. It was because of concerns that insurers were not properly handling claims that the FSA made this area a key priority. Although some within the industry will scoff at such a suggestion.

Bland says the industry should expect the results of its investigation in March. "The last year has been spent writing to firms, looking at their systems and controls, and looking at different standards in the industry.

"Are they justified or is there some way firms aren't doing the right thing? We will decide what the biggest risk is and look to address that."

And firms with appointed representatives (ARs) have been told to put their house in order. "We have found that firms are not always controlling appointed representatives. This is not a surprise to us," Bland says.

There are concerns that firms are failing to check that their ARs are fully compliant. "The control is not always happening," he says. "We want to know whether that is affecting the customer. Firms have to do more to meet their responsibilities to the customer."

Bland says that initially it will be looking at individual firms rather than an industry-wide crackdown. But if companies fail to heed the advice of the fact-sheet sent out by the regulator, there could be a wider investigation.

This is a far cry from the beginning of 2005 when the FSA had to make sure the right firms were being properly regulated. "We began by making sure our regulatory perimeter was in good shape. We visited 1,700 firms. Only 14 were acting outside the perimeter," says Bland.

"This was not a high figure, and we were quite pleased that the majority had put some effort into understanding the rules."

And as Bland highlights, the coming year is likely to be more eventful than the last in terms of regulation. The "bedding down" process is coming to a close.

There is the internal review to consider which will focus on whether the consumer really is benefiting from regulation.

The FSA must also be sure that regulated companies are appropriately following the guidelines issued throughout 2005.

There can be a collective sigh of relief that the first year is over, but 2006 will have a new set of challenges for the industry to face. It holds in its hands the ability to avoid the worst excesses of an FSA crackdown. IT

The FSA's year of enforcement

January 2005
As GI day looms there are fears that there could be a mass exodus of brokers from the market. There are complaints that the financial burden of compliance could force the small broker out of the high street.

The FSA announces it will target unauthorised motor dealers as part of its mission to 'police the perimeter' during 2005.

The Financial Services & Markets Tribunal publicly criticises the FSA's regulatory decisions committee (RDC) over its handling of a Legal & General (L&G) endowment mis-selling case. The FSA says it will review its investigation and enforcement procedures.

Conflicts of interest move up the regulatory agenda when it warns brokers to check undisclosed commission agreements for potential conflicts.

The first of many FSA fact sheets advises intermediaries to ensure inducement are not structured to influence the placement of business in a way that is contrary to the customer's interest.

FSA chief executive John Tiner gives the London market until the end of 2006 to come up with a workable solution to contract certainty.

Speaking at an Insurance Times conference, the FSA announces it will examine wholesale brokers' handling of client money and their management of binding authorities in 2005.

"It reflects our intention to remove reliance on unwritten and implied agency terms and arrangements," says FSA head of wholesale insurance firms Julian Adams.

The FSA's acting director of small firms Stephen Bland says the regulator will begin a crackdown on non-compliant brokers.

Following pressure from brokers the FSA says it will produce best practice notes for insurers on the make-up and content of policy summaries.

Complaints from brokers, backed up by Biba, about the size and inconsistency of the documents being produced by insurers provokes an investigation by FSA supervisors.

Brokers are warned of their duty to account for pension deficits in their regulatory returns and solvency calculations.

Meanwhile, steps are taken to prevent the market from softening. The regulator says it will investigate how insurers set premiums.

The probe will look at whether insurers are writing business too cheaply, have insufficient capital or poor underwriting controls and whether communication between boardroom managers and underwriters at the sharp end is failing.

In the same month, the spotlight is turned on to London market brokers which are given one month to show they are compliant with client money rules.

Following thematic reviews and risk assessments of brokers earlier in the year, the FSA says it uncovered "a large number of failures in the systems and controls" in brokers' handling of client money.

The FSA is forced to delay the deadline for brokers to make their retail mediation activities returns (RMAR) because of "teething problems" with the online system.

Retail brokers are next to feel the wrath of the FSA over the handling of client money. It says a crackdown will be launched in September.

A review of the run-off market is announced by the regulator. The review will cover insurance firms in run-off, run-off service providers, trade associations, and professional advisors.

It is announced that the FSA will launch an internal review of its own effectiveness in 2006.

Payment protection insurance (PPI) sellers are told to raise their game or face hefty fines. The FSA makes its clearest signal yet that commission disclosure will become mandatory. In a 'Dear CEO' letter issued to the market, the regulator says it will take a closer look at commission disclosure if intermediaries fail to show they are improving their management of conflicts of interest. Brokers are given until 20 January to respond.

After uncovering shortcomings in how principal firms are working with appointed representatives (ARs) the FSA issues a fact sheet detailing examples of good practice.

January 2006
The FSA will begin to assess how brokers are managing conflicts of interest on 20 January.