Insurance industry journalist of the year Christine Seib takes a look at what's in the Treasury's consultation on the intermediary Directive
In the second half of 2004, the FSA will take over regulation of insurance intermediaries in response to the EU's Insurance Mediation Directive.
Between now and that as-yet unspecified D-Day, consultation papers will be issued by the Treasury and the FSA. Reams of responses will have been received from interested parties, draft legislation released and consulted upon, legislation passed, rules published and authorisations given.
This week the Treasury was expected to take the first step to formal regulation by issuing a consultation document setting out its intended approach to the regulation of the sale of general insurance products.
Interested individuals and groups will have until January to respond. A copy of the document is available at
Who will be regulated?
The Treasury will extend the Financial Services and Markets Act (FSMA) 2000 (Regulated Activities) Order 2001 to encompass "most contracts of general insurance". It divides these contracts into two types: arranging and introducing.
Arranging is defined as: "arranging for a person to enter a particular insurance contract with an insurer [and] making arrangements with a view to another person who takes part in these arrangements buying an unspecified insurance contact."
The FSA will be left to determine on a case-by-case basis what constitutes introducing, but the consultation document says it is likely to have an "active element".
"For example, speaking to a client to recommend an insurer or their product," the consultation document says.
"But merely displaying leaflets with details about a particular insurer will probably not be regarded as introducing and therefore would not be a regulated activity."
Advising on specific contracts of insurance will also be covered by regulation, but claims handling, expert appraisal and loss adjusting will not.
It will be left to the FSA to consider whether reinsurance intermediaries will come under the same regulatory regime as insurance intermediaries, or have their own regime.
Importantly, under the FSMA, regulation only applies to those carrying out regulated activities "by way of business". The Treasury says it intends to apply this test to help it decide which groups will come within the scope of regulation.
It says the existence of remuneration is a key part of the test.
"It should be noted that remuneration need not be pecuniary and may take any form of economic benefit," the document says.
Other test factors are the nature and frequency of the activity and whether the person is acting "in the course of a trade or profession".
Appointed representatives will not need authorisation
Although only individuals authorised by the FSA will able to carry out regulated activities, the Treasury suggests that an exemption be allowed under the FSMA, for "appointed representatives".
Unauthorised representatives will be allowed to carry out regulated activities under the auspices of the authorised person, as long as there is a contract between the two.
However, the authorised individual must accept responsibility, in writing, for the conduct of the appointed representative.
The Treasury says that it will require the FSA to maintain a register of these representatives, with powers to deregister them.
Managing agents are already regulated under the (Regulated Activities) Order 2001, which will be extended to cover general insurance.
Lloyd's brokers will be treated the same as all other insurance intermediaries.
Mediation outside the UK
The Treasury avoids making suggestions on the territorial scope of the regulation.
"It can often be difficult to determine where an insurance mediation activity takes place, where the intermediary and potential policy holder are in different countries," the consultation paper says.
"It is for the FSA and, ultimately, for the courts to resolve these difficult issues."
Intermediaries in the European Economic Area (EEA) who are registered in their own state will be allowed to carry out mediation within the UK. They will only require authorisation if they wish to open a branch in the UK.
The Treasury's intention to make mediation a regulated activity under the FSMA will make it a criminal offence for individuals to do mediation business without being authorised.
The FSMA sets out two criminal offences with regard to financial products and services: knowingly or recklessly making a false statement that robs an individual of their rights; and engaging in conduct that creates a false or misleading impression about a product's value.
The Treasury says it intends to extend these offences to all insurance mediation activities.
The sale of insurance by other professionals
The FSMA allows members of "designated professional bodies" (DPBs) to carry out regulated activities without FSA authorisation, as long as they comply with the rules of their own DPB.
The Treasury says it will extend this regime to general insurance sales. The FSA will keep a register of DPB members.
A broad framework to be detailed by the FSA
The Treasury only sets the main regulatory requirements - the FSA will define the detail later.
In the consultation document, it says the FSA will set "fitness and properness" requirements that individuals will need to fulfil in order to be authorised.
The FSA will also set out which information is to be supplied by intermediaries. As a minimum, they will have to supply customers with their name, address, details of any parent or subsidiary companies and their complaints procedure.
The FSA will implement the Directive's requirement for customers to be able to complain about authorised individuals and their appointed representatives. But individuals doing mediation business as members of a professional body must abide by the body's complaints procedure.
The Treasury says the FSA will implement the Directive's requirement for a compensation scheme. It has been suggested that this might become part of the Financial Services Compensation Scheme.
Risks outside the European Community (EC)
Although the Directive excludes risks outside the European Community from regulation, the Treasury says it does not intend to exclude non-commercial risks.
"So mediation of a travel insurance policy not sold with the holiday which provides cover while the policy for travel in Brazil would be caught by regulation," the consultation document says.
However, the Treasury intends to exclude large risks outside the EC, as is permitted under the (Regulated Activities) Order 2001.
"[For example] insuring a chain of American hotels via a UK intermediary where the policyholder is a large company would not be caught by regulation," it says.