John Quigley says the FSA is on the ball

' Better structured and better funded firms have taken many positive steps on compliance. Some are alert to the issues and progress has already been made in the protection of the stakeholders in the industry as policyholders, shareholders and employees.

Not surprisingly brokers continue to be very concerned with the perceived costs associated with regulatory change and ongoing compliance.

For them this additional operating overhead comes off the bottom line and directly impacts profitability. Unlike some other professionals there is currently no palatable opportunity to pass this additional cost on to clients or principals.

The FSA has made noises that it is disappointed with the progress intermediaries have made.

There is an assumption that this is primarily referring to the smaller retail and personal lines brokers where the FSA is keen to stem problems or concerns in the area of handling of client money and risk transfer, as well as achieve a sea-change in culture.

The FSA is planning and is already carrying out the first round of long anticipated 'arrow visits'.

The experiences related by some early candidates would suggest that the corporate eye should definitely remain firmly on the proverbial ball for the foreseeable future and ongoing implementation of your plans should be pursued with vigour.

The recently press reported explanation by the FSA of the 'themed' approach and style of 'arrow visits' is positive and proactive.

There is a slight danger though that this guidance may be interpreted too literally by the reader who may conclude that with such visits being targeted in specific and themed areas the FSA will ignore the undertakings of the regulatory business plan, the management controls, delegation of duties and responsibilities and infusion of a good corporate governance culture. In my view this would be to misunderstand what is being said.

Thematic risk
The hot topics for the FSA besides client monies in all markets are in the London and international markets. Contract certainty is setting a substantial set of challenges for practitioners in some of the more complicated classes of business.

The FSA advises that within its thematic risk initiative it is "focusing on an initial set of key priorities". These include particular products that might pose a higher risk to consumers, such as linked payment protection insurance (PPI).

PPI is usually sold on the back of another transaction, such as a mortgage or loan. The Financial Ombudsman Service, consumer bodies and the media have all expressed concerns about the aggressive sales practices, lack of suitability, value, profit margins and complex terms of PPI.

Over the coming year, the FSA will be assessing sales of PPI. It will focus on compliance with the rules, in particular on selling practices and the information provided to customers.

This will enable it to identify good and bad sales practices and will cover a broad range of intermediaries and providers."

The FSA identifies thematic risks in a number of ways, including:

  • Market data
  • Current trends and developments in the markets
  • Financial promotions
  • Issues identified through our discussions with firms
  • Risks identified by our sector teams, supervisors, and contact centres, and by other stakeholders.
  • It will look for flags like new or unexpected developments. For example, a surge in retail sales of a product, which seems unusual given market conditions, might prompt it to make further inquiries.

    Monitoring of financial promotions is an important source of intelligence, as well as a significant monitoring and supervisory tool. And the FSA is developing new tools to help to focus on product risk.

    The FSA will use a risk-based approach to prioritise its workload to focus on the most significant risks. These guys are not asleep and because you do not hear from them you should not assume they are not looking. IT

    ' John Quigley is a specialist in risk and regulatory Control at Loddon Consulting.