Lloyd's brokers have been regulated by the market itself and the GISC, but as of 2004 they will be under FSA scrutiny. Michael Connor reports
Since 2000 Lloyd's brokers have been presented with a changing regulatory framework and, consequently, shifting regulatory goalposts. Until July 2000, they had been regulated by Lloyd's itself under the powers granted by the Lloyd's Act . Lloyd's closely analysed the financial strength of its brokers, the suitability of senior management and the firms' internal compliance environments.But in an effort to widen its distribution network, the market revised its approach from July 2000, removing many regulatory requirements, seeking to rely on the GISC to act as the baseline regulator and as a filter for any broker that wished to operate in Lloyd's. The market required managing agents to establish robust internal procedures to monitor their business arrangements with Lloyd's brokers and other intermediaries.This is all about to change again, the comfort being, however, that this is likely to be the only change for the foreseeable future.In December 2001, the government announced that, as a result of the EU's desire to establish a uniform set of rules for insurance brokers applicable across the whole of the EU, the regulation of the selling and administration of general insurance would be brought within the FSA's remit. The EU Directive on Insurance Mediation of October 2002 was followed by consultation papers from the Treasury and the FSA. The Treasury paper sets the scope of regulation for all general insurance products and the FSA's CP160: Insurance selling and administration: the FSA's high- level approach to regulation provides details of the regulatory framework within which brokers will operate.So what can Lloyd's brokers expect under the proposed FSA regime? Many regulatory processes will be familiar from both the Lloyd's and GISC regimes, but it is likely that a number of the conduct of business requirements will be novel concepts.The regulatory processes are:1. Authorisation: all firms must be authorised by the FSA, as must individuals carrying out what the FSA considers to be controlled functions. To achieve authorisation brokers must be able to satisfy the FSA that they have adequate financial resources and are suitable to be registered. Individuals must demonstrate they are honest and competent to carry out the relevant controlled functions. The FSA will give due credit to firms that are in good standing with the GISC.2. Supervision: The FSA takes a risk-based approach to supervision of regulated firms and individuals. It looks to individually tailor its approach to the risks that it considers the firm poses to its statutory objectives. 3. Enforcement: where regulated firms and individuals fail to comply with FSA requirements, the regulatory body has a number of investigatory and enforcement powers at its disposal. It can: withdraw a firm's authorisation to trade; vary conditions of registration; impose financial penalties, and in some cases prosecute for criminal offences such as insider dealing and money laundering.
Conduct changesBut it is the conduct of business requirements the FSA is proposing to implement that will require the most obvious changes in compliance culture. These proposals include:Status disclosure - this requires firms to provide information to "private customers" (individuals and small businesses) about the service they are providing. This includes: information on the companies they choose products from; the services they provide; customer payment requirements; who they are regulated by and complaints procedures. Standards for advising and selling - these will require the provision of adequate advice to meet the customers' needs. Firms will be required to make an assessment of the suitability of the product. As a minimum, firms will be required to provide a written statement detailing the customers' demands and needs and, for advised customers, a suitability statement in relation to the product.Standards for training and competence - to ensure that individuals selling and administering insurance contracts are competent. This might include the requirement for staff advising private customers in relation to higher risk products, like private medical insurance and critical illness insurance, to be required to pass approved examinations.Disclosure of key product information to private customers before entering into contracts for higher risk products. The FSA may require firms to give private customers a written policy summary containing key information for a product just bought.Measures to ensure fair treatment of customers - these may include rules on commission disclosure, unfair inducements, excessive charges and cancellation rights.Standards for claims handling - to ensure that claims are treated promptly and fairly.Proper complaints handling procedures and the provision of access to the Financial Ombudsman Service for private customers.These proposals will place the responsibility for ensuring they are properly implemented and that robust systems of control are put into place with Lloyd's brokers' senior management, as detailed in the FSA's senior management arrangements, systems and controls requirements.There are plenty of challenges ahead for brokers if these proposals become requirements. Further proposals relating to financial requirements will follow later this month with draft rules on these two areas to be issued later in 2003.Many Lloyd's brokers should already have the appropriate systems in place. But it may be necessary to consider the cultural changes that are likely to take place with regard to transparency to clients. Investment in training and competency (an area often neglected in the past) will be crucial for establishing harmonious relationships with the FSA. nMichael Connor is a solicitor specialising in insurance and reinsurance regulation at Reynolds Porter Chamberlain. Contact him on firstname.lastname@example.org