What are brokers' top concerns? Biba's Steve White reports
Three months into the new regulatory regime, what issues are intermediaries still uncertain about?
One of the major areas of uncertainty concerns the rules for handling client money. The FSA deems that unless the insurer's terms of business agreement (Toba) specifically confirms that risk transfer has been granted, the intermediary must treat monies as client money.
From the information we receive, it seems that the majority of insurers have granted risk transfer to most intermediaries that they have a direct agency relationship with. A problem arises, however, when the intermediary deals with a wholesale broker.
For risk transfer to apply down the distribution chain, the insurer has to specifically state this in his Toba, and to date we see no definite pattern emerging about insurers' appetite for passing on risk transfer.
The second client money-related issue concerns those intermediaries who hold all monies under risk transfer arrangements.
The statutory and non-statutory trust accounts required under the rules only apply in respect of the banking of client money and the co-mingling of risk transferred money with client money, where the insurer's Toba permits this.
Curently, there is no solution for the minority of intermediaries who hold no client money whatsoever (that is, all monies held are subject to risk transfer), despite Biba's best endeavours.
The insurance - conduct of business (ICOB) rules have led to some subtle changes to practices put in place under the previous GISC regime.
However, the customer classification (retail and commercial) mirrors exactly the rules put in place back in 2000 by GISC. It has disappointed many intermediaries (and maybe the FSA) that insurers still continue to classify products rather than the customers who buy them.
This has led to confusion in areas where a 'retail' customer might purchase a product classified by the insurer as 'commercial', and vice-versa. For example, a shopkeeper who lives above a shop and whose policy covers domestic contents as well as the shop.
The second ICOB-related issue concerns the retail customer's right to cancel. The cancellation rules are subtly different from the 'cooling-off period' introduced by GISC.
The cancellation rights apply to all new business and renewals for all retail customers, whether the sale was face-to-face or distance, and irrespective of whether the customer was given the full information before the sale was made.
The ICOB rules require detailed information concerning the customer's right to cancel to be given to customers and we are detecting confusion about what information is required and when it should be given.
Questions regarding the perimeter - that is who needs to be authorised and under what circumstances - are still being raised, especially in connection with introducers.
The Insurance Mediation Directive lists 'introducing' as an activity for which registration is required and so the starting point when looking at introducers should be that they will need FSA authorisation unless an exclusion is available.
The exclusions come from the regulated activities order, secondary legislation below the Financial Services and Markets Act (2000), and the most relevant exclusion for certain types of introducer can be found in article 72C of the order.
The article 72C exclusion is available to firms:
- That do not engage in regulated activities in respect of either insurance, investments or mortgages
- Whose activities are restricted to simply providing information to policyholders or potential policyholders
- Where the provision of information can reasonably be regarded as being incidental to the introducer's main business activity.
Most firms are aware that a six month transitional period has been given to allow them time to change their letterheads to reflect the new regulatory regime. But confusion still exists over exactly what can and cannot be done.
The rules require a disclosure of status to appear on all communications with retail customers or potential retail customers - the phrase 'authorised and regulated by the Financial Services Authority' should be used.
The FSA tightly controls the use of its logo. Its use is permitted on letters and electronic equivalents to customers, but only when used with the "authorised and regulated by the Financial Services Authority" statement.
The logo cannot be used on compliment slips, business cards or text messages (among others).
There has been some misunderstanding concerning the fees to be paid and their method of collection. The annual payment to the FSA will comprise of three elements:
- Periodic fee. The first year's payment will comprise two elements
- a fee for the 'stub period' 14/1/05 to 31/3/05 and then for the period 1/4/05 to 31/3/06
- Financial Ombudsman Service (FOS) levy - a flat fee of £50 applies for 2005-06
- Financial Services Compensation Scheme (FSCS) levy - the current level of levy is still awaited.
In addition to the levies, the FOS will charge a case fee of £360 per retail customer and £475 per small commercial customer complaint, but the first two chargeable complaints per firm will be free of charge.
The FSCS has a maximum contribution cap of 0.8% of a firm's eligible income (or its annual income where no eligible income has been disclosed) for the period 1/4/05 to 31/3/06.
Biba has been discussing with the FSA the possibility of arranging an instalment facility for the payment of FSA fees and levies - further details will be made available in due course.
The final area of uncertainty concerns the periodic reporting of data to the FSA and the completion of the retail mediation activities report.
At the time of writing, the content of the report return and the timing of its submission are the most frequently raised issues from callers to Biba.
The FSA is starting to issue more guidance to firms on what is required and when, and of course Biba will be providing information to assist its members.
- Steve White is regulation and compliance manager at Biba.