Talk about the FSA and this insurance intermediary’s anger rises. Its demands have, he says, forced him to give up running his business and instead turn himself into a compliance officer. Worst of all, there’s not a thing he can do about it …
Paul Hudson has had enough. After a lifetime in insurance, and more than a decade running his own underwriting business, in 2005 the Yorkshire-born entrepreneur, like thousands of other insurance intermediaries, was brought under the remit of the FSA. Since then, he has experienced one time-consuming and unnecessary problem after another.
Hudson has come to Insurance Times’s offices to tell his story; one that that will ring true across the UK. He believes the problem is that the regulator does not understand intermediaries; that it has goldplated the regulation required by the European Insurance Mediation Directive (IMD); that is too expensive; and that it fails to communicate properly with small businesses. Not surprisingly, he’s pretty angry. “We have no recourse whatsoever,” complains the 60-year-old. “We are totally in the hands of the FSA.”
For Hudson – whose leisure underwriting business, Leisure Insure, is based in Witney, Oxfordshire – setting up on his own was a no-brainer. After a career in Lloyd’s brokers and underwriters, and senior positions in a number of small businesses, he headed for Witney in 1996. “I started up when it was unregulated. It was easy; all you needed was market knowledge,” he recalls. “I came down to London, met up with the people I needed to see, got the binding authorities and got on with it.”
The niche business, underwritten first by QBE and then by Australian firm Sports Cover, flourished, moving from Hudson’s back bedroom to town centre offices, where he now employs a staff of four.
Things became more complicated in 2005, when regulation of insurance intermediaries was introduced at the behest of the European Commission, with the IMD. “When the EC directive was brought in, the government decided it was handing the UK side of it to the FSA. The FSA did what it always does and goldplated it,” Hudson says. As the most senior member of his firm, he took on the crucial role of compliance officer – and found that it took so much time that he had to withdraw from the day-to-day running of his business.
“Small businesses like mine can’t afford to employ compliance officers; you’ve got to do it yourself,” he says. “I had to shut myself off and familiarise myself with the regulations, and then impose them on the firm. The cost of that in terms of lost fees is incalculable.”
Couldn’t he have entrusted the compliance to a staff member? “It is my cash on the line if the FSA comes in and fines us – you don’t want to put that burden on your staff.”
It didn’t stop there. A year after the initial time and effort of bringing his business in line with the new regulations, Hudson realised the implications of the FSA’s inclusion of cross-subsidy in the Financial Services Compensation Scheme. It’s complicated, but essentially it means that intermediaries could have to pay out in the event of an insurer or a bank failing – all the more alarming in the face of the recent banking troubles.
“I thought, ‘Christ, if another Independent happens, they’re going to take my house’,” Hudson says. So he did what many other brokers are doing and changed his business to a limited liability partnership (LLP). Now the partners keep the bare minimum of capital required by the FSA in the business, so protecting their personal assets. “It weakens the balance sheet, but it keeps you out of the hands of the FSCS if someone suddenly goes belly-up,” he says.
The catalogue of problems goes on. Luckily for him, Hudson can laugh at the more nonsensical failures of communication and examples of bureaucracy gone mad, but it’s easy to see how it could grind you down.
He has a host of tales. Recently, for example, the business’s three partners – Hudson, his wife and stepson, the managing director – decided to add a fourth, the MD’s wife. She was to take on a non-executive role, with no decision-making powers. Hudson registered the change at Companies House, informed the FSA and filled in the necessary 12-page form.
A few weeks later, he received an email informing him that as long as the new partner met certain criteria – which she did – he need take no further action. Job done.
Two weeks later. Ping! Another email arrives, telling him that she could not be accepted, and more paperwork had to be done. He replied attaching the first email – which had come from a different person, with a different reference number – and has heard nothing since.
So has she been accepted or not? Your guess is as good as his.
There are other numerous other examples of bureaucracy gone mad. Take GABRIEL – the FSA’s optimistically named “Gathering Better Regulatory Information Electronically” system. It has set forms that do not allow for the entry of an LLP, as opposed to a registered company. Nor do they allow users to enter “unlimited” as a number. So when Hudson was asked to enter the aggregate limit of his professional indemnity insurance – unlimited – he left it blank.
Six months later, he received a letter telling him he was in breach of the regulations and had two days to fix it. When he called to explain, the contact centre told him that he should “enter as many nines as he could”, and that this time, the FSA “would take no further action”.
The lack of personal contact is arguably the most frustrating element. When he has a problem, Hudson has to call the small businesses contact centre, each time speaking to someone new. “You get different answers every time,” he says. “I’m sure the bigger businesses who have one-to-one relationships have a better idea of what’s going on.”
And for all this frustration, he has to pay through the nose. Like most intermediaries, he has seen a hike in fees this year as the FSA gears up to employ more staff following the banking crisis. His charges have increased 40%, while his turnover has increased between 10% and 15%.
“It’s particularly galling in the light of the bonuses they have paid themselves and the fact they’ve made it clear that the fee increase was to take on hundreds of extra staff to regulate the banks. I find it unacceptable that the regulators are paying themselves multimillion-pound bonuses and then hitting me with the cost of it when they have singularly failed in their duties.”
Hudson is convinced that his peers share his anger and frustration, but thinks many are scared to speak out for fear of reprisals from the powerful regulator. For him, retirement beckons and he is leaving the future growth of the business increasingly in the hands of his MD – who, he knows only too well, faces a very different set of challenges from those long ago days starting up in the back bedroom. IT