The insurance industry will remember 30 November as a red letter day. As of midnight, the Financial Services and Markets Act (FSMA) comes into force and, with it, the Financial Services Authority (FSA ...

The insurance industry will remember 30 November as a red letter day. As of midnight, the Financial Services and Markets Act (FSMA) comes into force and, with it, the Financial Services Authority (FSA) finally finds its teeth.

After months of criticism, culminating this month with the Baird Report findings on the collapse of Equitable Life, a new regime is about to begin, headed by a relaxed and enthusiastic John Tiner.

As managing director of FSA UK, responsible for consumers, investment and insurance, he will become the industry's watchdog.

"One of my objectives is to be more visible - people must understand what we are doing and why we are here. Not many will have read the FSMA so you have to explain it and spread the message," he says.

He is aware that the industry's image is tarnished after high-profile collapses in the life and general insurance sectors and both the consumer and the industries are looking for someone to tackle the problems head-on.

"For the insurance sector, it's certainly going to be different from the past. We have tools and powers and we will use all of them. Our underlying concept of risk-based supervision will be a newish one for the industry and its application will be very different.

"We are going to want to understand much more about the range of risks being run in an insurance firm - not just the financial risks and the actuarial side of the business, but the broader risks, such as operational risks, processing risks, technological risks and management control risks. All these broader issues have not been looked at in the past," he says.

Risk review teams
Specialist risk-based teams have been established to gather information and analyse market intelligence. They will be mobilised if a company has not adhered to the new regulations.

"Our people will be engaging much more with the insurance industry at top level, as well as other levels. Where there are risks we feel need to be investigated, we can send in risk review teams with experts in the particular area."

Tiner hopes potential whistleblowers will approach the FSA directly in the future, ostensibly to use these hit squads more effectively.

Many of the ideas are taken from his own experience in the consulting and banking sector. After the Barings Bank debacle in 1995, powers were given to the FSA to appoint "skills persons" who could act independently and report directly to the regulator.

"We may appoint accountants over concerns about the claims processing system. It may not just be auditors - a skills person can mean an actuary or an IT specialist. We will interrogate the accountants about what they found and then judge whether anything further needs to be done. There are now rules to prove the auditor is truly independent.

"If we feel the company had too close a relationship with its auditors, we might ask another firm to go in to get a fresh view," he said.

FSA's powers
Massive fines against individuals and companies can be levied if they have not upheld their responsibility to shareholders or policyholders. However, the FSA will not be able to freeze a director's bonus and add it to the new Financial Services Compensation Scheme (FSCS), which replaces the Policy-holders' Protection Board (PPB) on the same date.

"What we have is the opportunity for the consumer to seek redress," says Tiner.

Though the FSA's stringent risk assessments are ultimately to protect the consumer, Tiner says it cannot prevent a company from failing. "Fundamentally, it would distort competition. Consumers need to make choices about where they go for their financial services based on their assessment on the suitability of the company, their risk appetite and what firm they are comfortable with - that would be changed completely if they knew the FSA would bail them out.

"I would like the industry to think that the regime will create a stronger insurance industry. We see it as good for consumers and good for the market as a whole."

The FSA's history
May 1997 New Labour announces its intention to create a new, single regulator for the financial services industry, to be headed by Howard Davies, then deputy governor of the Bank of England

October 1997 Financial Services Authority (FSA) is christened

January 1998 Insurance regulation passes from the DTI to the Treasury, in preparation for being integrated into the FSA

June 1998 N1: Banking supervision transferred from the Bank of England to the FSA. The FSA takes on staff of the old regulators - SFA, PIA and IMRO - and undertakes regulatory services for them

June 1998 The Treasury issues draft Financial Services and Markets Bill for consultation

January 1999 Insurance regulation transferred to the FSA, under powers delegated by the Treasury

June 1999 The Treasury introduces Financial Services and Markets Bill into Parliament for first reading.

January 2000 The FSA publishes "A New Regulator for the New Millennium", setting out its new, risk-based approach to regulation. An update is published in December 2000

May 2000 Listing Authority powers transferred to FSA from the London Stock Exchange

May/June 2000 FSA Handbook of Rules and Guidance for post-N2 mostly finalised

June 2000 Financial Services and Markets Act (FSMA) receives royal assent

April 2001 Actuaries dealing with insurance from the government actuary's department join the FSA

December 2001 N2: Main provisions of FSMA to take effect, giving the FSA its full powers and responsibilities. This sweeps away all the predecessor regulators and the main pieces of legislation associated with them.

It creates a single statute within which the FSA will apply a single approach to the regulation of the whole financial services sector.

FSA's objectives under the Financial Services and Markets Act 2000

  • market confidence
  • public awareness
  • the protection of consumers
  • reducing financial crime

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