Principles into procedures

FSA regulation of general insurance is often spoken of in the same breath as mortgage regulation, with issues covering both products often banded together under the label "mortgage and general insurance" or MGI.

The two regimes came into force within four months of each other, but are also linked in a very practical sense. This is because an important cluster of GI products - including payment protection, buildings and contents insurance - are often sold at the same time as a mortgage loan and by the same intermediary. This also means that many MGI firms will use the same compliance system - whatever form that may take - for both types of advice and sales process.

As time moves on, we are starting to see FSA enforcement action against MGI firms being more frequently announced, and this is a good indication that the honeymoon is over and enough leeway has been granted for this regulated sector to be fully compliant.

In a breakthrough case in July, we saw the first occasion on which the FSA has disciplined a senior manager of a mortgage and general insurance broker that failed to pass on the accident, sickness and unemployment insurance premiums of at least 350 customers to their insurers, leaving them without any cover and exposing them to the risk of significant financial loss if they needed to make a claim.

The reprimand was for failing to ensure that adequate systems and resources were in place, in violation of the FSA's statements of principle for approved persons, No 5 and No 6. These are the ones that stipulate proper control and due skill, care and diligence.

Another, slightly earlier, enforcement action centred on MGI firms that failed to file their statutory reporting - an instance of non-compliance with the FSA's principle No 5, which entails observing proper standards of market conduct. As more such enforcement actions in this market sector come to the fore senior managers will be well advised to review their compliance systems and upgrade if necessary.

As a firm that brought a fully functional MGI advice and sales compliance system to market at a very early stage in the run up to FSA regulation, Home Buyer Systems was frequently greeted in the early days by comments such as: "Compliance is not rocket science and a broker should not need an extra piece of software to help him achieve it." This viewpoint is becoming increasing untenable, and it never did make any sense. This is because it is based on two misconceptions.

The first is that FSA compliance is a simple bolt-on addition that can be achieved very easily by people who do not possess the top level of scientific sophistication. The second misconception is that employing software to do a job rather than operate a manual system is an optional "extra" that can quite easily be dispensed with.

As events are starting to prove, adopting an integrated sales process and compliance system is a far superior solution to manual systems, and a far more reliable safety net when called to account by the FSA.

Business principles
The easiest way to understand how regulatory compliance lies at the heart of all our business processes, and is not simply a wrapper pasted over the top, is to go right back to the 11 principles for business that form part of the FSA's high level standards and, in particular, principles No 3, No 6, No 7 and No 9. Just in case you don't know them off by heart, here is a summary.

No 3 says that firms must take care to organise and control their affairs responsibly and effectively, with adequate risk management. No 6 says firms must treat their customers fairly and No 7 says that firms must communicate with their customers in a way that is clear, fair and not misleading. No 9 is all about taking care to ensure the suitability of advice given to customers.

From these four principles spring many of the day-to-day regulatory requirements: initial disclosure document (IDD), factfind, statement of demands and needs, key facts illustration (KFI), complaints procedure, and signing off financial promotions.

They are also the basis of the big overarching themes, such as treating customers fairly (TCF) and adopting a risk based approach, which have come to dominate the FSA's approach to making sure that regulation is working properly.

To support the other five principles, other areas of the regulatory framework include training and competence, regulatory reporting, supervision, and systems and controls. It follows, then, that a compliance system is not just about IDDs and KFIs - it needs to link up all the elements of compliance, covering all eleven principles in a coherent and effective way.

Keeping records
Principles, by their very nature, are intangible ideas that are subject to interpretation. Nevertheless, it's the principles that the FSA judges all regulated firms and individuals by, no matter which sector they trade in. What firms need to have in place to uphold the principles are fail-safe systems that guide advisers through a fully compliant sales process as well as creating and storing the right documentation at the right time.

After all, how else can the approved persons within a firm prove that they have carried out their regulatory duties with the proper amount of skill, care and diligence? In order to prove that something has been done, there must be a piece of paper to prove it.

To show that TCF has been upheld, for example, there must be documentation that proves all customers have been given the proper information.

For example, the demands and needs statement records the customer's attitudes to the various risks they and their home are subject to, takes into consideration their existing policies, works out what they need to be fully covered for those risks, establishes if they can afford to pay for them and then summarises the recommendations. If no system is in place to ensure this process has been followed, then the vital records could be incomplete.

While manual systems can be effective in translating the FSA's principles into day-to-day compliance procedures, they have a substantial flaw in that they are subject to human error. In addition, for these manual systems to come up to the exacting standards of completeness and accuracy demanded by the FSA, staff will have to be employed to run them properly.

On the other hand, a comprehensive and effective IT system can control the sales process and provide a full audit trail that is capable of storing records indefinitely. If the sales process (user system) is then linked to a compliance officer monitoring system that allows full and real-time checking, with early warning facilities, then you have all the essential elements to prove compliance with both the rules and the principles when called on to do so. IT

' Richard Angliss is managing director of Home Buyer Systems, an integrated advice and sales compliance system