The set-up outlined last week at Rabid Insurance Intermediaries should have rung a few alarm bells. Waltham Pitglow examines its regulatory shortcomings

Going Places

Although some elements of last week's CPD case study were rather extreme, I sought to highlight how such an exercise can be used to assess knowledge and understanding.

The first point is the suggestion that Rabid might refuse to join the Financial Services Authority (FSA).

This is something of an inconsistency as Rabid will not be asked to join the FSA, but will have to apply for permission to trade. Without such authority it is likely that it will be a criminal offence to transact general insurance business as an independent intermediary. Rabid would do well to get itself prepared for FSA regulation now and a study of the circumstances outlined would indicate that all is not well.

Andy is making a fortune from `property developers' (sic) who, in fact, could well be laundering money through Rabid's bank account. The developers are clearly paying a premium in full for a year and quite happy that Andy keeps a full year's commission.

Suspicious circumstances
This is suspicious. The money is in the account for a relatively short time (as it never goes to the insurer) is paid from one account and the return is by cheque from Rabid's account. The situation may be innocent, but are the circumstances not sufficiently suspicious that the authorities should be notified? A prison sentence could await Andy and the directors of Rabid if it turns out that all is not what it seems.

Marissa's overseas clients compound the situation. High performance cars lead to high premiums and any `churning' of insurance monies such as this must be monitored closely.

A good example is a £2,000 premium for a high-performance car with the policy cancelled and a full return of premium within a cooling-off period. Paid in cash or from a little known offshore bank to Rabid, the money returns to the banking system via a cheque from a reputable (sic) UK insurance intermediary. Fifty of those a year and a fair amount of ill-gotten gains are laundered.

Whether or not the FSA instigates prescriptive competence assessment rules -the General Insurance Standards Council (GISC) requires assessment at least once every year - insurers are becoming more ruthless in reducing or rejecting claims for breaches of policy conditions or non-disclosure.

If the insurer is not responsible in law then the intermediary is the next port of call with an allegation of negligence. Rabid would do well to instigate a formal training and competence scheme for all staff irrespective of experience or length of service.

The same concerns apply with Rabid's paperless office concept. Consider the information you have:

Andy arranges commercial insurance, but does not visit the premises.

He is limited to a 20-question fact find. Electronic proposals typically have limited scope for non-standard information. This is a disaster waiting to happen.

Information gathering
An independent intermediary is not expected to be a Sherlock Holmes in gathering information and can assume that the customer is telling the truth. But in a world where visits to client premises are becoming less common, it is vital that the information gathering process is robust and does not leave the practitioner open to the accusation that "a reasonably competent adviser should have known to ask that".

The suggestion that electronic proposals are partly completed and hanging around for a month or so is an obvious cause for concern. Customers will often assume (and who can blame them?) that, once the information is given, cover will be automatic and swift.

Supervision also seems pretty shoddy. Lunch once a year may have been the old way of dealing with things, but these days, regular supervision and monitoring are expected.

Some advantages
It is also interesting to note that Rabid resigned from the GISC on hearing the news of the FSA regulation to come. In an empirical sense there will be no difference in a non-regulated and a regulated independent intermediary applying to the FSA, but there would seem to be some advantages to the intermediary firm with the latter because: the current regulator will have considerable information on the firm which, with authority, can be passed to the FSA; and two years of regulation and a monitoring visit would seem to be a first class discipline for getting ready for statutory regulation.

Finally (you may have found more) there is the matter of a key performance indicator called "the attitude of the member of staff". Can this person actually fulfil the ultimate requirement of modern business... caring for the customer?

On the positive side, Rabid has appointed a compliance officer.

There are two obvious major threats to Rabid. The growing tide of litigation and complaints against intermediaries and inability to meet FSA requirements when required.

But there is another that will swiftly erode the value of the Rabid business to its owners.

Who will want to buy a business that is nowhere near compliant?

Without run-off provisions for firms that do not wish to trade under FSA regulation, as on the day that such regulation comes into force, Rabid will have no value. Rabid's agencies will be cancelled and all its business will be up for grabs.

Last week I asked you to refer to you professional indemnity (PI) policy. Did it include a clause that allowed the underwriter to avoid granting an indemnity in the event that you were to act in a reckless or wilful manner? Or was there a mitigation of loss clause? Or are you expected to take all reasonable steps to avoid loss?

This week's question is slightly rhetorical, but encapsulates the possible result of an independent intermediary that ignores the standards that are being set for the industry.

Which of these might a PI insurer reasonably consider to be circumstances where a PI claim could be rejected or feel sufficiently strongly to refuse to insure under FSA regulation?

a Accepting a binding authority from non-authorised insurer and holding risks covered with no confirmation of the authority and its terms in writing

b Ignoring money laundering regulations

c Employing a member of staff without making reasonable checks on the information supplied by the individual, that individual turning out to be a drug runner with a string of convictions

d Not visiting a risk and failing to gather reasonable information from the client

e Acting in breach of a code of conduct.

How to use CPD
This free Insurance Times reader service is intended to help you improve your skills and understanding from the comfort of your office or home. All you have to do is read the text and answer the multiple-choice questions. The answers will appear in next week's issue.

Why CPD is important
The Financial Services National Training Organisation (FSNTO)'s mission is to improve the quality and skills of the workforce as a fundamental requirement for the sustainable competitiveness of the industry. We fully support the practice of continuing professional development (CPD) as a major contributor to achieving this aim. Many people across the sector are required to undertake CPD by virtue of the work they do or the professional body to which they belong, but everyone can benefit from continuing to develop their knowledge and skills.