The science of compliance

"Where do I start?" After reading almost 700 pages of FSA consultation, it is little wonder that brokers wanting to become FSA compliant rather than shut up shop are now scratching their heads. With the FSA's draft rules for regulation not expected to begin appearing until late summer, many brokers may be inclined to sit on their hands until then and do nothing.

However, there are many things brokers can be doing now to move their businesses towards compliance.

Answer back
Insurance practice partner at accountancy firm Moore Stephens Michael Butler says that the first thing brokers must do is respond to the FSA's consultation papers.

"If you really don't like it, stand up and say so now," he says.

Compliance Solutions managing director Gary Dixon says that brokers should be working towards being compliant in early 2004 so that they can register with the FSA by its early application deadline of 31 May, 2004 and take advantage of the discounted application fees. He says that the first thing brokers should do is make sure they have all aspects of their business documented.

"The central premise of FSA regulation is documentation," he says. "If it's not written down it doesn't exist."

Butler agrees: "They'll want to see things evidenced."

Plan ahead
Brokers will need to submit written business plans, organisational charts and job descriptions to the FSA in order to illustrate what the business does and who has responsibility for what, and Dixon says that brokers should look at writing or updating these documents now. He says brokers will also need to have formal, written complaints handling procedures in place, as the FSA will require half yearly returns of complaints records.

Mark Grice, head of broking at accountancy firm Mazars, says another measure brokers can take now is to examine thoroughly their client list. He says the FSA's proposal that small businesses be treated like personal clients will increase the cost of dealing with these clients, and may make some clients unprofitable for brokers. Dixon says brokers should also look at the profitability of each area of their business and decide whether it might make more sense to exit some areas of business that are currently unprofitable or operating on small margins.

Another area brokers can begin to address is the potential need to change accounting methods. Butler says that if the proposal that prevents brokers from drawing commission before it is received is implemented, all brokers who used accrued accounting will need to change to received accounting. Dixon says that making the transition will impact on cashflow, and he recommends that brokers work out the cashflow implication now and make the transition at the earliest practical time or spread out the impact over a number of accounting months.

Grice says brokers can also begin to re-budget, based on some of the FSA's proposed figures, to calculate the cost of regulation to their business. He says that those brokers without professional indemnity (PI) insurance, or who will require more cover, can begin investigating and budgeting for the cost of cover.

Think impact
Brokers can also adjust their budgets, taking into account FSA application fees and solvency reserving requirements.

Now is the time to consider the impact of regulation on staffing requirements and IT systems. Every firm will need to nominate someone who has responsibility for compliance, but Dixon says that he does not expect firms will need to hire new staff to fulfil this function. "I don't think high street brokers will need to have a full-time compliance person," he says.

Dixon says brokers should also consider whether their IT systems can help with compliance. He says having good IT systems in place will be crucial in helping provide regular financial updates.

Butler says those who are waiting for the draft rules to be published are wasting valuable time.

He says that brokers should assume that most of the proposals in CP174 will be implemented. "It's described as a CP [consultation paper], but it is pretty prescriptive."

"The reason the FSA gave two years' notice is because they're going to say, 'You knew this was coming, you've got to be ready now'," he says.

"You can't afford to ignore it."

Ten steps to compliance
1 Read the FSA's consultation papers and respond to them. This is the only opportunity brokers have to shape the way regulation is imposed

2 Make sure you have written and up-to-date business plans, organisational charts and job descriptions so you can clearly demonstrate who is responsible for what

3 Establish formal and documented complaints handling procedures as the FSA will require half-yearly reports on complaints management.

4 Examine each area of the business from a profitability point of view as it might make more sense to exit some areas of business that are currently unprofitable or operating on small margins

5 Examine the business on a client by client basis. If the FSA's proposal to treat small businesses like personal clients is implemented, some business may become unprofitable

6 If you need to change accounting systems from received to accrued, you should budget for the impact this transition will have on cashflow. You should make the transition as soon as is practical

7 The FSA requires that each broker must have a designated compliance person, so consider the staffing requirements and internal time cost of compliance

8 Consider which staff member will be responsible for compliance, and if this will be a full-or part-time function. If someone needs to be hired to handle compliance, do this now

9 Brokers should be able to rebudget based on some of the known costs such as FSA registration fees, the cost of PI cover and solvency reserving

10 Look for IT solutions which will make compliance easier. Consider the capability of existing IT systems and providers to do this.