The retail customer is at the heart of the FSA' s regulatory requirements, so staff training and competency are vital, says Colin Rawlings

In January this year, the FSA published its final Insurance: Conduct of Business (ICOB) rules, which will have a direct impact on the insurance sales process. While these rules are not scheduled to come into effect until 14 January 2005, they incorporate much of the Distance Marketing Directive (DMD) regulations which firms will be subject to from the earlier date of 9 October 2004.

Given this, firms should take action now to allow sufficient time to ensure the compliance of their sales processes with the DMD and the FSA handbook rules.

There are a number of key requirements contained in ICOB affecting the sales process that firms need to consider carefully.

The first of these is customer classification. The challenge for firms is to avoid the risk that retail customers are incorrectly classified as commercial customers and as a result do not receive the required disclosure information.

For example, imagine a situation where the proprietor of a small business calls and asks to extend the policy covering his motor policy to allow the vehicle to be used for private use. Some firms may wish to apply the requirements for retail customers to all customers where personal lines could be attached to avoid the risk of incorrect classification and the consequences of it.

ICOB imposes significant disclosure requirements on firms around status and product information, which in most instances must be provided to customers in a durable medium either before or immediately after the insurance contract is concluded.

Firms need to ensure that their systems are adapted to generate compliant disclosure documentation in time for FSA regulation and consider the cost implications.

Some firms are concerned at the requirement to use first class post. While going up a postage category might not sound a lot, it will certainly add up during the course of the year. Firms will also need to ensure that there are controls in place to monitor that documentation is being issued to customers within the specified time constraints.

In the past it has been nice to meet internal targets for dealing with customers in a timely fashion. In future, management will need to know all clients are being dealt with on time, every time. For telephone sales, scripts will need to be rewritten and checked to ensure they meet the oral disclosure requirements.

ICOB rules differ depending on whether advice is given in the form of a personal recommendation or not. The risk here is that customer-facing staff may give personal recommendations when they are not authorised to do so.

A firm's procedures must clearly document what constitutes giving a personal recommendation – staff will have to be trained and regularly monitored by an appropriately qualified supervisor.

When a firm makes a personal recommendation, it must ensure that it is suitable for the customer's demands and needs. There are further pitfalls here. For example, there is the risk that a customer's demands and needs are inadequately documented.

The investment business market has been widely criticised by the FSA for this inadequacy in relation to sales of its products.

Having in place a robust training and competence scheme is vital to addressing the root cause of many mis-selling claims. Upfront training is essential as a preventative measure and customer files should be regularly reviewed as a detection control.

Firms must carefully consider all the requirements within ICOB and other parts of the FSA handbook and assess the impact that such requirements will have on current sales processes. The best will ensure the changes add value to their customer offering rather than just cost to their business.

  • Colin Rawlings is a partner at Deloitte.
  • Email: