Brokers mustovercome a series of hurdles in the race to become compliant. Michael Faulkner talks to Joe Chiaro, of KPMG, and Imran Ahmed, of IBM, who suggest a regulatory strategy
LESSONS FROM THE IFAsKPMG director Joe Chiaro says that lessons can be learned from looking at the main problem areas for retail investment (RI) firms, such as IFAs, since the FSA became their regulator. Some of the main areas were:Weak controls of business During investigations, the FSA will look at firms' systems and controls in place - who was responsible and how were processes monitored. Chiaro says that in the case of RI firms there was often no flow of information between the board and the sales staff: as a result the board was not in control of the business. "This will be a key issue for brokers. If firms don't have the resources to put in place the necessary controls, they will need to achieve critical mass through consolidation or network membership."Inadequate information to customersThe key message is quality not quantity, says Chiaro. Firms need to take time to explain the risks - this needs to be recorded on file, otherwise there will be an exposure. It is an easy place for firms to be vulnerable, he says. "If a customer is only interested in price, will advisors be able to get away with just focusing on this without highlighting the exclusions? No."Not treating customers fairly In the RI side there are still problems with mis-selling and customers being treated unfairly, say Chiaro. Firms are still putting their interests above that of the clients. This should be addressed by having a compliance culture, he says. Treating customers fairly should be a priority over volume of sales."The RI sector is used to this way of thinking and is still getting it wrong. It may come as a shock to the general insurance industry."Complaints handling and advertising are also important areas. Brokers must ensure they take a balanced approach to complaints, arriving at an unbiased conclusion. Their adverts must also avoid being misleading. Firms must avoid too much emphasis on positive features at the expense of negative factors such as exclusions.Next month the application process will begin in earnest as the FSA begins to accept completed forms. And over the coming months and years brokers will face a number of hurdles as they tackle regulation, says KPMG regulatory compliance consulting division director Joe Chiaro.Chiaro highlights four main challenges. The first he says is to become compliant within the regulatory framework. "Firms need to ensure that their processes comply with the detailed rules and guidance. They must accurately and in a timely manner apply for authorisation or a variation of their permission. They must also establish a compliance framework and an accountability framework to appoint approved persons."The second challenge, says Chiaro, is to understand and adapt to the impact of regulation. Brokers should perform an "impact analysis" of the effect of regulation on their business and its strategies going forward.
Directly authorisedAn important part of the process is to assess where business comes from, and how regulation will affect these business channels. "At its most simple, business might come from a customer walking in off the street, but it might be far more complex, for example deriving from other business partners. In the latter case will the business partner want, or be able, to become directly authorised? If instead the partner wants to become an appointed representative, will the broker be happy to become a principal? Does it have the resources?"When coming to a decision about taking on appointed representatives, brokers need to take a broad view of the market, assessing the potential threats and opportunities, says Chiaro. "The opportunity cost of not helping a business partner become compliant may be that a competitor may do so and a business stream will be lost." Cost management must also be considered. Brokers should look at how regulation will impact upon processes and decide whether some aspects of those processes should be cut out to reduce costs. "Firms may decide that the cost benefits of moving to non-advised sales is worthwhile."Chiaro says the third challenge relates to systems and processes, a significant part of which will be to set up risk management procedures. "Brokers must have an understanding of potential risks that impact on their business and put in place appropriate systems and controls to ensure that the management is fully in control of the business. This is a significant challenge and one that will not be resolved overnight," he says. "The regulator's view of risk will chage over time. Firms will need to understand what information the regulator is currently demanding. What may be acceptable now may not be so in five years' time. The risk assessment must keep up with the regulator."
Compliance cultureOther important areas that brokers will need to address are complaints, product disclosure and regulatory reporting.Finally, the fourth challenge will be to develop a compliance culture within the company. Chiaro says that this can be addressed partly through the training and competence regime, but it also requires leadership from board level. "There must be leadership from the top, with the right message cascading down throughout the workforce."All parties involved in the value chain- insurers, brokers, loss adjusters - will face additional burdens from regulation. They will need to demonstrate compliance across a number of dimensions, including training and competence and management of operational risks such as fraud. Imran Ahmed, a partner at IBM Business Consulting Services, says that technology will play a key part in easing this burden and providing a sustainable compliance solution. Ahmed highlights insurers' core operational processes as an example of where increased use of technology would be beneficial. "These processes are already predominantly manual with little technology support. High level analysis of insurers' costs base by IBM indicates that this is likely to further add to the expense burden of regulation - potentially 3%-8% over and above current levels. "In an environment with falling investment returns and high levels of competition, we believe this will be an additional burden that insurers will be unable to absorb."
AutomationHe argues that the adoption of the correct applications and technology can provide a number of specific benefits to both the broking and insurance community. These benefits will be achieved through:
TO DO LISTKPMG's Joe Chiaro suggests the following steps for brokers developing a compliance strategy:
