Second reading

Next spring, the Financial Services Authority will begin a review of its regulation of the insurance industry. For many insurers and brokers tangled up in red tape and frustrated by the rulebook, it cannot come soon enough, says Rachel Gordon

Unnecessary, expensive and unfair - these are the polite words used to describe statutory regulation. Although insurers, and many brokers, choose to put on a brave face and claim all is rosy, there is no doubt that beneath the surface the regulator is sometimes bitterly resented.

Many are finding the required new procedures a huge hassle. Meanwhile, there is the risk that customers are failing to appreciate their increased level of protection and could even be turned off the sector even more.

Next April, the Financial Services Authority will begin a regulatory review of the general insurance industry. This will be more than a year since statutory regulation was first imposed and, therefore, time to see what is and is not working. So are the insurance experts calling for the regulator to change its tune simply whistling in the wind, or is there a genuine prospect of amended rules and guidance following this review?

Clive Briault, the FSA's managing director of retail markets, has said the review will be three-pronged: the regulator will seek feedback on what is effective and ineffective; undertake consumer research to find out their attitude and understanding towards regulation; as well as continuing to check that regulated firms are compliant.

Depending on whether an individual is an optimist or pessimist, they can approach this review in two ways. Those who are positive will anticipate the FSA making changes where it can, bearing in mind that the core rules laid out in the Insurance Mediation Directive will remain set in stone and thus limit the extent to which amendments can be made. Those who are more negative will see the review as a pointless exercise that will result in yet more jargon-filled e-mails and letters that few have time to read.

Disclosure debate

One current issue that has set sparks flying is already out in the public domain. The announcement in the FSA's quarterly consultation paper last month on changing the Insurance Conduct of Business rules on disclosure requirements has set the British Insurance Brokers' Association on the warpath.

The paper proposes removing the status disclosure requirements for insurers in relation to retail customers. It is also intending to remove the requirement for insurers to provide a 'demands and needs' statement for non-advised sales to retail customers.

Basically, this means direct insurers will have a far easier ride than brokers. It is feared that consumers will not be aware that using a broker might mean securing a better deal and that the direct players will unfairly benefit from a swifter sales process.

The December deadline for responses to this consultation paper is a tight one but Biba's head of compliance and training, Steve White, believes this issue will resurface as part of the review. He is urging brokers to make their views felt now - or pay the consequences.

He comments: "Because of the IMD, I would not have expected ICOB or client money rules to be changed so this proposal has shocked us. Customers are often not clear on the difference between buying from, say, the AA or Direct Line, and should this change occur I would challenge the FSA on whether it is failing in its duties under the Financial Services and Markets Act."

Mr White says he is baffled as to why the FSA has made the proposal in the first place. "I would ask the regulator: where is the evidence for this change? The aim is to protect consumers, and this certainly won't happen if we lose disclosure requirements. Why try to fix something that isn't broken?"

Some suggest that several direct insurers have been leaning heavily on the FSA, and that, for all its supposed steely resolve, the regulator has listened. Whether or not it gets approval, this issue is at the crux of the 'level playing field' concept, which remains crucial to the broking industry.

Adrian Tink, Norwich Union's regulatory affairs manager, says: "We have a foot in both camps but there is an argument to say that giving advice needs to more regulated, as it's selling on a more advanced basis. Our direct sales employees operate on an advised basis as they may up-sell or cross-sell but there are calls for greater simplification from what we have now."

He argues that the FSA needs to look at the Financial Ombudsman Service's requirement that says policy summaries - which are meant to be easily readable - spell out all exclusions, rather than having these in the formal contract of the policy booklet.


Michael Wainwright, partner with law firm Eversheds, believes the FSA has already gone beyond what might have been expected, as the IMD applies only to intermediaries. Instead, the regulator felt requiring direct insurers to make a disclosure to customers and supply them with demands and needs statements would assist consumers.

This was initially put forward in consultation paper CP 160 and is described as an example of the FSA 'gold-plating' the directive in the name of consumer protection. "It could be argued that the Treasury went completely over the top," he says. Mr Wainwright argues that the real issue is that disclosure is so complicated that it is failing consumers, and steps should be taken to produce material that meets requirements but is more accessible.

Fellow legal eagle Simon Gleeson, partner with Allen and Overy, believes brokers should not hold out hope for the FSA to be supportive of their channel. "The FSA does not believe in market-based solutions and I can sense brokers would have felt more than a little frustration when Clive Briault warned recently that brokers were getting documentation wrong. The big issue should be finding out whether their clients are being mis-sold to or misled. It seems there has been limited evidence of this to date."

Mr Gleeson is referring to findings from the FSA that nearly two-thirds of small and medium-sized brokers are failing to comply with the regulator's rules on the provision of initial disclosure documents. These include omitting the FSA's key facts logo and making minor changes to prescribed wordings.

"This is all very similar to the experiences of independent financial advisers in the early days when they first faced regulation. It led to a fossilisation of the industry and the same could happen to brokers, with some of the smaller ones being on a knife-edge of profitability. They are now forcing rules on insurance brokers that many feel did not need to be regulated in the first place. This forthcoming review, however, is not going to change any of that."

Spitzer impact

He adds that evidence from the Spitzer investigation in the US will continue to filter through to the FSA and will influence its investigation into client money issues. "There is still a lot of confusion with brokers finding client money rules a nightmare - there needs to be further guidance."

Since insurers have large regulatory teams, the pressures of the review are likely to fall more heavily on brokers, many of which may already feel under the cosh as a result of the FSA's Arrow visits.

At the recent UK Insurance and Financial Services conference, Mark Cliff, Axa's commercial distribution director, revealed that his company conducted 22 health checks on brokers only to find not one was fully compliant.

Axa used an independent consulting company to check out the brokers and, while the results look bad on paper, Mr Cliff says that no breaches were linked to mishandling of client money, which would have been most serious.

"The results are still being compiled but among the most common were problems with training and competence and the way this is recorded."

He says there are no plans to name and shame brokers that failed the health check and adds that "the idea is to help and support brokers and to ensure they get through Arrow visits. We need to provide a partnership and that means putting action plans in place for brokers that need them".

Jo Smart, senior consultant for Winchester White, comments: "Insurers are clued up when they talk about supporting brokers. The more they help brokers deal with Arrow visits and regulation in general, the more those intermediaries are likely to stay in business."

She adds that, following its review, the FSA is unlikely to be looking at making life easier for brokers. "It has already given an extension on the client money rules and I think the regulator will expect brokers to get up to speed, if they are not already. In my view, the FSA will be looking closely at the role networks are playing and also appointed representatives."

Sue Bull, compliance manager for broker Keelan Westall, was recently at the sharp end of an Arrow visit from the FSA. While her company passed, she says she found the experience useful and is convinced that there are other brokers not abiding by the rules.

"I want the FSA to look closely at wholesaling in its review. While its knowledge has improved lately, I do know there was confusion from the regulator at what this involved."

Keelan Westall specialises in the property owners' market and accepts business direct from managing agents and also other brokers. "We will only deal with those who are appropriately regulated, but there are other brokers that are not checking this out. We get a bad name by insisting on an intermediary being regulated when others are telling them they don't need to be; and, secondly, it can be complex to explain to them why, never mind how."

She says there are many who are ignorant - or who feign ignorance - of introducer and appointed representative status. "They don't want to know the rules because they don't see it as a big part of their business, although they want to continue earning the commission from it."

A further aspect Ms Bull would like to see tackled is clarity on definitions of retail and commercial customers, and she states: "The General Insurance Standards Council's rule was much clearer but the FSA seems to have complicated this unnecessarily to the extent that, while there are various definitions around the market, we have had to adopt our own interpretation based on a simple business definition."

Like many others, Ms Bull argues that detailed rules for the Treating Customer Fairly principle would be welcome. "It is not always clear where responsibility lies when you have an insured, broker and insurer chain.

The broker may be in contact with the client but have little or no control over what documentation and information is produced. In terms of commercial clients, I would like to see more work in this area on what rules should be appropriate for them."

The secondary market

The whole issue of secondary intermediaries is complex, not least because there are so many of them. Charles Meade-King, compliance director for Auto Network UK, which is FSA-authorised and specialises in advising secondary intermediaries in the motor trade, is urging the FSA to simplify its documentation requirements. And across the board, he says, there remains uncertainty about the Retail Mediation Activities Return. This is a set of data that will form the basis of regulatory reporting to the FSA. The RMAR is being implemented on a phased basis, but many would welcome better explanations.

And, Mr Meade-King adds: "In the Republic of Ireland, application forms for secondary intermediaries are simpler and I believe this is the right approach. The FSA does not speak the same language as most people and does not seem to realise that there may be no synergy between someone running a garage and a mortgage or insurance broker. Its rules surrounding them make sense, but a recent letter to CEOs on this was eight pages with appendices. It needs to look at a lighter touch where appropriate."


Alison Hewitt, the Financial Services Authority's head of department within its retail firms division, recently announced it was launching a review into claims handling (PM, 6 October, p1).

This will entail an insurer questionnaire to ascertain service standards, followed by visits to selected insurers. The review will also include investigation into outsourced claims handlers, to see if their service standards are acceptable.

Adrian Tink, Norwich Union's regulatory affairs manager, says: "I don't think we can argue against this review from a customer service point of view and we must participate in the most helpful way we can." Nevertheless, he says his message to the FSA is to realise that there is little evidence of consumer detriment. "Customers vote with their feet - competition is rabid and if you get it wrong, an insurer can expect to be hauled across the tabloids."

Joe Pendle, director of client services for technology provider ISO, adds: "The important thing for claims handling is for companies to ensure they have strong best practices in place, and that their claims handlers are well-trained and proficient. This in itself will provide the relevant audit trails to ensure compliance with the new FSA regulations.

"A key area where some form of best practice is needed is in assessing medical reports on personal injuries. It is important that there is a high level of objectivity in the assessment of the injuries, not just to ensure customer satisfaction but also to satisfy the FSA that the insurers' claims employees are adequately trained." As to investigations into outsourcing, Simon Gleeson, partner with Allen and Overy, says this may turn out to be a damp squib, since most insurers will keep a tight rein on the companies they work with, adding: "The FSA is likely to produce some guidelines and will want to know that an outsourced company is being properly policed and that areas of responsibility are clear."

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