As we move on towards 18 months of FSA regulation, Martin French asks where the insurance industry will be further down the regulatory road
It's nearly the end of March and many of us have already forgotten those New Year's resolutions. We're back on the wine, the fatty (but nice) food and we've hung up those brand new trainers which will be good for gardening when the summer eventually comes.
However lax we are with our personal resolutions, I have no doubt that following the first New Year of FSA regulation, the insurance industry will be even more committed to longer term and ongoing goals with regards torunning a compliant and profitable business.
I use both "compliant" and "profitable" in one sentence as I feel that they are both equally achievable.
But how much has changed for the general insurance broker, and what still lies ahead?
In the past 18 months, I've received a deluge of requests to build initial disclosure document (IDD) material for the then forthcoming regulation on the 14 January 2005.
The initial disclosure document is the key to providing clear information to your clients.
If you are also involved in investments, however, you may choose to offer the combined version and a menu.
Or, you may choose not to provide the IDD but to offer the required information in a terms of business agreement (Toba). So much for clarity.
I believe the Toba should be the preferred route as it allows you to offer all of the other FSA required information such as acting as agent of the insurer, how you hold client monies and gaining informed consent to hold monies in a non-statutory trust, as well as covering contract issues, duty of disclosure, data protection and other legal matters. This is all important information which is not allowed in the IDD.
Of course, everyone already knows this. Or do they? Are you making disclosure or reference to information held in ICOB4.2.8R (which states information must be provided before conclusion of the contract or immediately after conclusion of the contract) or gaining the explicit consent required by insurance conduct of business regulations?
It may be argued that any member of the public who saves money while shopping around for a better quote would not be concerned about the above matters, but what if that caller was a mystery shopper? Would you be able to defend your firm if your customer wasn't aware of other documentation available, or their right to ask for further verbal disclosure?
Every day I spot shopfronts, newspaper and magazine advertisements and flyers that I receive which have incorrect regulatory statements - 'Regulated by the FSA' is my favourite.
Many more contain the FSA logo which can only be used for letters or electronic equivalents. It cannot be used on business cards, compliment slips, advertisements or signage.
Conflicts of interest
Back in January, everyone should have made their return to the FSA on their 'conflicts of interest' strategy which confirmed that they have identified any conflict, real or potential, and have either removed or identified and mitigated them.
Just as topical is Treating Customers Fairly (TCF), which seems to be prompting the reaction from most brokers that they are either already doing this, or they are concerned there is no prescribed route in which to prove you meet or exceed TCF.
There are many insurance and life companies running workshops on TCF which only require the expense of a broker's time to attend.
Some courses have even been passed under the watchful eye of the FSA, which, while not actually giving approval, has made comment and suggested alterations.
The TCF exercise is a valuable tool to enable you to step back and look at your business as though you were starting from 'day one'.
If you were to start again, what would you do differently? How would your style change? What would your customer base look like?
Asking your staff how they feel the business is operating and, as importantly, how they believe the firm treats its customers can be a real eye opener.
No business (I believe) is perfect but this exercise, treated properly, will help you take a step closer to that 'nirvana' and potentially make you more profitable.
Delegates at a recent event were told to "expect to see an increased focus on individuals and senior management".
The FSA is promising heavier fines for those who see the current penalty structure as simply one of the costs of doing business.
Senior management staff must take an active part in the regulation of their firms.
We can't argue about a tightening of controls when some firms continue to err more than 12 months into regulation.
If we cannot issue correct documentation, be it status disclosure or business cards, then we really cannot complain if someone holds us to account.
As we move on towards 18 months into regulation, where will we be further down the regulatory road?
There will undoubtedly be casualties of regulation who will be fined or de-authorised over their failings or inconsistencies.
I believe there will be a move towards proving competence in the form of someone providing non-investment advice, even if to start with it is only seen as best practice.
The breadth of insurance covered by this market is immense and most will state that they specialise in specific areas. So how do we prove this expertise?
The Institute of Financial Services and CII both offer a base exam in general insurance. Can we avoid examinations when a financial or mortgage adviser giving advice in their specialist areas are not?
Disclosure is a very emotive subject and seen by most as an unnecessary and heavy-handed approach. I've often heard people comment that supermarkets and electrical stores don't show their costs on their bills, so why should they. This view was voiced by financial advisers in 1995 and 1997 when disclosure was introduced for life, pension products and packaged products respectively.
It was thought to be the death knell for the industry, yet they are still going strong.
How do we cope with the ever increasing pull on our time to be not just compliant, but being open in our methods and demonstrating that we are treating our customers fairly?
Technology used correctly will help to streamline processes and build in certain levels of compliance. All firms will have to continue to take regulation seriously, and I've seen many larger firms recruiting compliance and training and compliance managers into full-time roles.
Many smaller firms and sole traders are also realising that it's not time or cost effective to try to complete all of the requirements themselves and are using outsourcing services.
Much of my own time is now spent supporting general brokers and IFAs through the regulation of general insurance, as well as maintaining compliance and competence within the rules of compliance regulations.
Biba members, of course, have access to these services at preferential rates via the Biba Compliance Initiative.
There is no doubt that regulation will continue to grow.
Surprisingly - and also encouragingly - where the FSA has tried to relax procedures, it has been the major players who are actually resisting this change and are calling for an even playing field for both retail and commercial customers.
Taking this attitude forward can only be seen positively by both the industry and our customers alike.
' Martin French is compliance and training manager at Hugh James Solicitors