What happens when the FSA comes knocking

Visits from the FSA – known as Arrow visits – have got brokers worried. Those that have already been visited refuse to speak out, citing “commercial confidentiality”, and those that haven’t, don’t know what to expect.

So here’s the truth about Arrow visits. The FSA designed the programme to help it measure the risks a firm poses to market confidence and consumer protection, thus fulfilling its statutory remit to reduce financial crime and promoting public confidence in the financial system.

The Arrow programme has two strands – the Arrow Firms approach and the Arrow Themes approach.The former involves assessing risks within a firm; the latter involves studying risks across several firms.

Not every broker will be subject to an Arrow visit. An FSA official, who was involved in designing Arrow II over the past three years, says the Arrow assessment is

carried out on only five to six per cent of the 29,400 firms that come under FSA regulation. Of these, brokers represent an even smaller proportion.

“The remaining 95% are small firms that encounter sample-based assessment, known as thematic visits,” he explains.

There are 40 or so broking firms large enough to undergo an Arrow Firms assessment. These visits are planned in advance, usually with a month’s notice.

The firms already know which they are as each will have been allotted a relationship manager who is a full-time FSA employee.

It is the FSA’s policy not to name these companies, but it is known that large brokers like Aon, Marsh and Willis have had visits.

According to FSA estimates, some 40 to 45 general insurance retailers have undergone Arrow visits since March 2006, with another 15 to receive such visits in the next year.

These are the lucky ones that will experience Arrow II – a revised and improved form that was introduced last year, following concerns surrounding poor communication between the FSA and the inspected firm, and a lack of supervisory skills.

Natasha Peacock, legal consultant at Beachcroft, which provides consultation to firms preparing to undergo Arrow visits, says: “Arrow II has brought about mostly positive changes.”

To help employees of a firm understand the purpose of the visit, FSA staff now conduct a presentation on what the Arrow visit is about before they launch into the interview.

FSA staff have also been trained in how to conduct visits. They attended a two-week

residential course last year, which Peacock says will put to rest worries that the FSA won’t understand the business or the sector and, therefore, will not obtain a good picture of the firm’s operations.

Peacock adds that FSA inspectors are now more “gentle” - meaning that the visit is more like a fact finding interview than an interrogation.

A survey conducted by Beachcroft in 2005 found that more than two-thirds of firms (69%) were frustrated by the FSA’s failure to provide guidance on how they could lower their risk assessment rating under the original Arrow programme. So the FSA now conducts a feedback session to make the firm aware of the FSA’s findings before a letter is sent after the visit.

The letter should give a broad overview of what risks the FSA has identified within the firm and what the regulator would like the firm to do about it.

The letter will also mention the score for the level of risk and highlight specific areas for improvement.

Revisions to the inspection programme should mean that, for the properly prepared firm, an Arrow visit is not too much of a headache.

But, as Peacock observes, brokers tend to be nervous because the visits set the tone for their relationship with the financial services watchdog.

“The belief is that if you have had a good visit, then the FSA is likely to have a lighter touch with you. Conversely, a bad visit will mean closer scrutiny from the FSA, which will mean the costs of making your communication clearer will rise,” she explains.