Branko Bjelobaba argues that confusion over compliance is understandable but ignorance isn't

' Four months into statutory regulation, it appears that general insurance practitioners can be divided into two distinct categories.

Some feel they can take their foot off the compliance accelerator. Having achieved authorisation, this group believes that a few cursory considerations towards compliance in the day to day running of the business are all that is required to keep the FSA at bay.

For others, the practical application of statutory regulation continues to dominate their working lives, and the frenzy of activity leading up to 14 January has been replaced by continuing concerns that their compliance efforts may not satisfy the sentinels at Canary Wharf.

Whichever camp you fall into, oddly, both face the same danger. Whether placing too little emphasis on compliance, or obsessing over every detail, the chances are that key regulatory requirements may be overlooked.

The issue common to all intermediaries is that compliance has to become embedded in day-to-day procedures. If this doesn't happen - either because compliance is ignored, or because too much time is spent debating over the minutiae of the FSA Handbook rather than implementing core compliance requirements - there is a risk your firm will find itself on the FSA's radar, not least because regulatory reporting has already begun.

So, what are the key rules that are being missed or misinterpreted?

Topping the list of common problem areas is the issue of handling client money. More so than in any other area, it really pays to get the basics right first so, before anything else, check that you do indeed have a record of the legal status of your client money account.

It appears some firms have been conscientiously operating their client accounts in accordance with PRU rules, but have omitted to secure written confirmation from their bank that the client money account has trust status and will remain separate from any other money held by the firm.

The FSA effectively considers statutory accounts to be the "default position". If your firm wants to offer credit facilities from client money, you need to operate a non-statutory trust account for which you will need a solicitor to draw up a deed (Biba members can get one direct from Biba or its website).

Check also that you are meeting the additional conditions required by the FSA of those operating non-statutory accounts, such as the higher capital resources requirement for money relating to transactions with retail customers (£50,000 for non-statutory trust accounts), and obtaining each client's consent for you to hold their money in this type of account.

If you don't have the necessary written confirmations, make sure you obtain them without delay (keeping written records of your communications to this end) and, in the meantime, complete your "breach record log-book" accordingly.

While not exactly a point of misunderstanding, it is certainly a point of controversy. If you don't have a breach log-book this really should be your next action point. There is some debate as to whether this is best practice, as opposed to a Handbook requirement.

What is clear, in the visits that have been undertaken with larger firms, is how they are recording and then dealing with matters relating to non-compliance. Readers should note that the Biba Compliance Manual (which is being hailed as the 'industry standard') has a convenient log for you to use.

Systems and control
The existence, and use, of a breach record log-book is essential to demonstrate to the FSA that your firm has the appropriate systems and controls. Breaches will happen, even in the most compliance-conscious of firms.

Your firm's commitment to compliance, and the effectiveness of your systems and controls, will be shown by the fact that breaches are found and, most importantly, acted upon.

Another common misunderstanding is over the classification of customers for the purposes of applying the insurance conduct of business (ICOB) rules.

The FSA defines a retail customer as an individual acting outside his business, trade or profession. All other customers are commercial customers. But in some circumstances a business buying insurance may be classified as a retail transaction. In such cases it is important to remember that the classification applies to the contract the customer is buying.

For example, a sole trader may buy motor insurance for a company vehicle that will also be driven for personal use. The classification of this risk is "retail".

The same situation for a partnership would also be considered a retail sale, except under Scottish law, where partnerships are always commercial customers .

We have become familiar with lots of new acronyms over the last couple of years courtesy of the FSA and here is another one to add to the list - RMAR, short for retail mediation activities return.You will have seen reference earlier in this article to reporting. This is the hot topic of the moment and one on which you must act now.

Authorised firms were required to begin collecting data for the RMAR from 1 April with the first submissions starting from 1 July (depending on the dates of your firm's financial year). You will need to submit information relating to:

  • Your firm's financial position (including balance sheet, profit and loss account showing commissions and fees, regulatory capital, client money accounts and professional indemnity insurance)
  • Threshold conditions (including any 'close links')
  • Training and competence
  • Insurance conduct of business (including an indication of sources of business, and information on the monitoring of any appointed representatives)
  • General insurance income (required for the calculation of fees for the FSA, FOS and FSCS)
  • Complaints.
  • The FSA will also collect "supplementary product sales data" on transactions where this is not collected by the product sales data provided by insurers.

    The full version of the RMAR in the FSA Handbook sets out all the possible items of data collected by the FSA, but the actual requirement for your firm will be tailored on the basis of the regulated activities set out in your permissions.

    Most firms will have to report twice a year. The FSA has, however, made some concessions towards smaller firms (those with an income of £60,000 or less from general insurance) who will only have to report financial data once in the first year.

    At the other end of the scale, larger firms (those with an income of £5m or more from general insurance) will be required to report financial information every quarter.

    Late penalt
    Make sure your firm is collecting the relevant data now. If your new financial year began on 1 January, your two RMAR reporting periods would be: 1 January to 30 June, and 1 July to 31 December, and your first RMAR will be expected no later than 30 July 2005 (but this first return would cover only the period 1 April to 30 June, not a full six-month period).

    If you do not submit your RMAR in time, the FSA has warned it will impose a late submission penalty of £250 after which it may take enforcement action.

    Remember that the only way of submitting your RMAR will be electronically, using the FSA Firms On-line system.

    While you won't be able to use Firms On-line to submit regulatory returns until July, you can make sure now that you are registered (see www.fsa.gov.uk/mgi and select the information on Firms On-line). As well as becoming familiar with the system, you can check the accuracy of your "firm profile", on which your tailored RMAR will be based.

    You could be forgiven for feeling that compliance has taken over your business; that your firm spends more time on this than it does on its customers and that customers are being deluged with pages and pages that they will never read.

    The fact of the matter is that compliance is your business. A compliant sale, transacted by a compliant business, is exactly what you are offering to your customers, and this is not a new phenomenon. Adapting your firm's systems and processes to meet regulatory requirements began in earnest with the introduction of the GISC rules in July 2000.

    Those firms who had already reviewed their operations methodically and diligently against GISC requirements and addressed any gaps will have had a huge advantage.

    If your firm is still daunted by compliance requirements there is a great deal of support available, via both trade and professional bodies like Biba and the CII, and commercial organisations that offer compliance assistance.

    Indeed, as well as running its own training seminars, the FSA actually offers advice to those firms seeking assistance with compliance, setting out questions and issues for firms to consider before appointing compliance consultants.

    Most importantly, remember that if you are unsure of your compliance arrangements, you are not alone. Misunderstandings and mistakes will not be uncommon, but your chances of successfully maintaining compliance are infinitely increased if you keep yourself informed. IT

    ' Branko Bjelobaba FCII is director of Branko Ltd.

    Further details at
    www.branko.org.uk

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