There may be trouble ahead

Small brokers could be forgiven for feeling more than a little confused by the FSA’s supervision strategy. The regulator appears to have changed its plans for monitoring smaller firms, prompting some to question the clarity of what the FSA is saying.

This comes as the FSA warns that many firms could fail to meet its year-end target for implementing the treating customers fairly initiative and threatened enforcement action against those that do not come up to scratch.

It could be a difficult year ahead for brokers on the regulatory front.

In its business plan for the forthcoming year, the regulator outlined its so-called enhanced supervision strategy, describing the series of rolling assessments that smaller brokers would receive. But the small print appeared to suggest a scaling down of the plans, limiting the assessments to general insurance brokers that sell certain higher-risk products.

The FSA business plan reads: “In October 2007, we announced new measures to increase our contact with small intermediaries (investment advisers, mortgage brokers and those general insurance brokers advising on higher-risk protection products) to provide direct benefits to those firms that are trying to do the right thing and treat their customers fairly.”

The text appears to say that only brokers advising on higher-risk protection products, such as critical illness cover, will fall within the supervision strategy.

Rewind to last October and the FSA’s plans are couched in much broader terms. “The FSA today announced it is introducing news measures to increase its contact with small firms,” proclaimed the regulator’s press statement.

The FSA’s chief executive Hector Sants made reference to “small firms” three times in his two paragraph statement in the release, without any attempt to define which small firms would be the subject of the strategy. The implication then was that all small firms would fall within the new supervisory measures. The FSA said that 90% of firms regulated were small.

The FSA’s change of stance has caused some confusion. One compliance expert said: “All brokers were anticipating a treating customers fairly (TCF) assessment. Now only if they sell protection policies will they be in the first wave of the enhanced strategy.”

He added: “What does that mean for other brokers not selling protection policies? A few months ago the FSA said all brokers would be assessed. Does that mean they will be let off?” The FSA insists there has been no change of plan. A spokesman said that the FSA had indicated that its enhanced strategy would focus on brokers selling higher risk products in its February newsletter.

“The enhanced strategy is targeted at some firms. We will include insurance intermediaries selling 'protection products' in these assessments. Those selling lower-risk general insurance products will not be included in our enhanced strategy assessments, but will continue to receive the normal FSA supervision,” the spokesman said. “We will run a special project later this year to measure how the 'lower-risk product' firms are meeting our TCF requirements.”

Biba head of compliance and training, Steve White says the business plan does not indicate a change of strategy but confirms what the FSA has been saying privately for some time.

“The FSA has made it clear which firms they are targeting. They are interested in all brokers, but the main focus will be on general insurance (GI)?brokers selling higher risk products. The FSA has given another level of detail in its business plan.”

“The FSA has made it clear they are interested in all brokers, but the main focus will be on general insurance brokers selling high risk products

Steve White, Biba

White said brokers selling lower risk products, such as home, motor and commercial insurance products, would be the subject of thematic work. “No one is under the radar,” he said.

He added that some people had expressed surprise to him that the FSA’s focus was not on all general insurance intermediaries.

Regulating fair treatment

The confusion over its supervisory plans comes at a crucial time for broker regulation.

The FSA this week warned that it was likely that many firms would fail to meet the December deadline for implementing the TCF initiative.

Brokers must demonstrate by the end of the year that they consistently treat their customers fairly. This includes demonstrating that the fair treatment of customers is embedded within their corporate culture, that products sold meet the needs of the firm’s customers and that advice is suitable.

The FSA said in its business plan: “Our assessment so far is that, while many firms have made progress on building the fair treatment of customers into their culture, there is less evidence that their work on TCF is translating into improved outcomes for consumers. This suggests a clear possibility that many firms will not meet the December 2008 deadline.”

It is thought to be the first time that the regulator has painted such a pessimistic view of regulated firms’ progress in meeting the TCF requirements. Firms are also required to have the necessary management information in place by the end of March.

The FSA said it expected firms to make undertake significant further work to ensure the targets are met. “We will use our full range of regulatory tools to help firms implement TCF by the December deadline and beyond.

“Where firms continue to fall short of the TCF principle we will increase supervisory attention and, where we find significant actual or potential consumer detriment, consider enforcement.”

Biba’s Steve White said his impression was that general insurance brokers were implementing the TCF requirements. “My feeling is that GI brokers are getting on with it. The smaller insurance brokers are better than the smaller mortgage brokers”

The regulator said progress reports for the March and December deadlines would be published in the second quarter of 2008 and the second quarter of 2009.