While the Retail Distribution Review does not cover general insurance brokers, Jane Bernstein discovers that this sector is already putting in place efforts to raise professional standards.
The Financial Services Authority's Retail Distribution Review focuses on the professionalism of independent financial advisers and does not encompass general insurance intermediaries, but it raises some important questions for the sector.
In particular, there are parallels to be drawn between the RDR's focus on raising professional standards and the GI industry's recognition of the need for professionalism. In the drive to raise professional standards, one key question is should brokers step firmly on the accelerator now, before they too face formal intervention?
Opinions are mixed over what impact the RDR (see box, right) will ultimately have. There is a sense that it will help reinforce advances that have already been made in the life sector and some industry experts also believe it will play a part in improving the consumer's perception.
Richard Howells, intermediary sales director at Zurich UK Life, comments: "As a passionate supporter of the value of advice, I have always believed that the vast majority of advisers have already been operating to very high professional standards. That said, anything that raises the profile and perception of advice with the general public must be a good thing."
For Ken Davy, chairman at Simply Biz Group, the intention to improve professionalism within the independent financial services sector is a positive one. However, he adds: "We feel that some of the expectations and deadlines set for IFAs are unrealistic."
Steve Jenkins, director of financial services and insurance markets for the Chartered Insurance Institute, observes that while inevitably some firms will only take action because the FSA has intervened, there are large numbers of IFAs that have embraced the need for greater professionalism anyway. In particular, he points out that many already appreciate the fact that a professional approach is critical in a competitive environment. "As products become more commoditised, and as customers become more demanding, the proposition that advisory firms are selling is themselves," he explains. "So, there is certainly an advance party of organisations that are focusing on the relevant issues already."
A tricky concept
An important part of the RDR is to increase professional standards. But professionalism can be a tricky concept and can mean different things to different people. Mr Jenkins outlines some of the key issues. "If you are going to create a profession, it needs to have different component parts to it. Those component parts might include factors like qualifications. But, equally, ongoing education is important — for example, through continuing professional development programmes. Another area that is critically important is universally ethical standards — that is to say people conducting themselves in an ethical, transparent way that is free of conflict of interest."
Mr Jenkins adds: "If you can draw all of those factors together — from qualifications and CPD to ethical standards — then you can start to build up the component parts of a profession."
As far as commercial lines are concerned, David Williams, claims and underwriting director at Axa Commercial, agrees qualifications are a vital part of the professionalism equation. "That is not to say that professional qualifications will provide any guarantees but certainly without them there will inevitably be gaps in knowledge and understanding," he observes.
GI brokers currently fall outside the RDR but with the FSA putting the professionalism wheels in motion in other sectors, should brokers be making renewed efforts on issues like professionalism, before they are forced to do so? Ashwin Mistry, chairman of Brokerbility, asserts: "It is most definitely the time. We must learn lessons from the life side, as it will surely come in one shape or another."
While there are no signs from the regulator that it has any intention of extending the RDR, there is a consensus that if brokers are not taking the initiative when it comes to professionalism, then they should do so now, rather than waiting for regulatory or other intervention. Mr Jenkins observes: "If the general insurance market can drive a solution itself, then that is inevitably going to be much more powerful than reacting to an outside force."
The good news is that the drive towards professionalism has already been gaining momentum. Mr Mistry asserts: "The vast majority of brokers have improved their methods of trading — not driven in my opinion by regulatory requirements but more so by the changing landscape of client needs and expectations."
As far as anecdotal evidence is concerned, the topic was certainly widely mentioned at this year's British Insurance Brokers' Association conference, both in the seminar sessions and, informally, in the halls and over coffee. Ian Jerrum, managing director at Searchlight Insurance Training, points in particular to the groundswell of support for the Aldermanbury Declaration — the CII's initiative that requires firms to commit to certain professional standards (see box, above) — and believes this has done much to galvanise the broker and insurer market towards professionalism.
Fiona Andrews, Towergate's head of HR and people development, also points to the significance of the declaration and believes the industry response to this has demonstrated that there is a "huge desire collectively" to drive up professional standards.
She explains: "We are raising professional standards and can demonstrate to the FSA that we can do this ourselves — that we know what is good for our business and we know what good service looks like for our clients."
Training and development is, of course, an integral part of the professionalism process, and Mr Jerrum identifies some firm evidence that brokers are increasingly keen to invest in the relevant training. He explains: "We administer and deliver the Broker Academy training programme on behalf of the CII and Biba. And, for the first quarter of this year, we've taken twice as many delegate bookings as we did for the same period last year. Also, in May, we ran a record 26 Broker Academy courses up and down the country."
He adds: "There is certainly evidence that brokers are taking professionalism — and training and development of their staff — seriously."
In order to ensure this momentum continues, there could be an opportunity for the regulator to offer incentives to brokers in return for a demonstrable focus on professionalism and many feel a lighter regulatory touch would be a fair reward for a well-run brokerage. Mr Williams suggests that while no one can feel they have a natural right to avoid Arrow visits or audits, it would be fair for a broker with good standards of service and quality to see fewer visits from the regulator.
It is, of course, in the interests of insurers as well as brokers that high professional standards are in place in the broking community. Asked whether it would be relevant for insurers to provide incentives to brokers, the response from both sides tends to be that it is a question of working together, rather than offering rewards.
In fact, the most effective approach from insurers is often to provide training and development support. Simon McGinn, director of commercial broker markets at Allianz Commercial, explains: "We have actively engaged with brokers for a number of years to support the technical development of their own employees, with the aim of helping to improve service standards and professionalism in our industry. In 2007, Allianz Commercial set up a Key Partnership Academy following extensive research with our key brokers, which highlighted a need in the market to offer tailored broker training."
A huge incentive for all is that professionalism is good for business. And there is some consensus that neither the life nor the general sectors necessarily need regulatory help to recognise that good customer service requires high professional standards.
Asked if there is enough determination in the sector to drive professionalism forwards without the regulator's intervention, Mr Howells responds: "I believe professionalism across the industry has improved as the needs of consumers have changed. Regulatory or legislative change always seems to accelerate the change, but fundamentally the real effect that the end consumer will feel comes from the improved business models and service propositions that the advisory community will offer to them."
Equally, Mr Davy observes: "Standards have consistently been improving over the past 40 years and would have continued to do so for reasons of sound business practice," adding that: "Most IFAs are continually looking to improve their knowledge and client service."
In addition, there is widespread recognition among general insurance brokers that a professional approach will help in the retention of customers. Mr Mistry asserts: "The simple answer is, if brokers are going to retain their clients, they have to move up the professional behaviour chain. The market demands it, so deliver, or someone else will."
And again, there is a sense that if brokers can prove they are committed to professionalism, the odds are that they will benefit from less outside intervention. Mr Jerrum observes: "If brokers can see an overt benefit — such as perhaps a lighter touch from the regulator — then the vast majority will strive for professionalism, if they are not already doing so."
Philip Gee, director at Astbury Wren, believes that in terms of public perception, the terminology around broking is often misguided. He explains: "We don't do ourselves any favours by continually referring to ourselves as an industry rather than as a profession. Equally, I don't like to call clients 'customers', as that is a more industrial rather than professional term. We should be bracketing ourselves with lawyers and accountants but the wordings have become entrenched — even the FSA refers to 'customers' under 'treating customers fairly'."
As far as public perception of the industry is concerned, the issue of commissions is often under the spotlight. But it seems unlikely that moving away from commissions would make any fundamental difference to professionalism, or that it would keep the regulator from the door. "The focus," observes Mr Gee, "should be on ensuring transparency."
While Malcolm Lee, managing director of broker network Ten Insurance, asserts that getting rid of commissions would be a "knee jerk reaction," adding that it would not "treat the cause of the problem of the industry's poor reputation."
Mr Lee believes the key is: "A commitment to professional development combined with savvy marketing supported by the weight of an effective and highly vocal industry body. Brokers should be demanding more of their networks and their trade bodies, which carry more weight and marketing budget to speak out on their behalf and spread the word of the benefits of using a broker."
An important message is that professionalism brings its own rewards, and that brokers are not, in fact, looking for 'incentives' from insurers or the FSA. As Mr Davy asserts: "Delivering quality service to clients in an open and transparent manner is good business sense regardless of any regulatory requirements."
It is clear a firm awareness that brokers need to conduct their business with high professional standards already exists — not simply to ward off potential regulatory intervention but in order to achieve success in a competitive environment, so hopefully there will be no need for the FSA to consider expanding the RDR to include GI intermediaries.
Retail Distribution Review — A Summary
The Financial Services Authority launched the Retail Distribution Review in June 2006 to "address the many persistent problems we had observed in what is now, more than 21 years of regulation of the retail investment market. Insufficient consumer trust and confidence in the products and services supplied by the market lie at the root of what we are seeking to address".
The FSA says the RDR is, therefore, one of the core strands of its consumer protection strategy. "It complements our aims to improve consumer capability and further ensures firms deliver fair outcomes for consumers. It is essential for promoting a resilient, effective and attractive retail investment market. The RDR will modernise the industry, giving more consumers confidence and trust in the market at a time when they need more help and advice with their retirement and savings planning."
The RDR has sought input from a wide range of industry practitioners, consumer representatives and other stakeholders to get their views on the issues to be addressed and to identify potential solutions.
In CP09/18 the FSA set out three measures that it described as fundamental to delivering the desired market outcomes and which will materially alter and improve the interactions between consumers and the industry. These are to:
improve the clarity with which firms describe their services to consumers;
address the potential for adviser remuneration to distort consumer; outcomes; and
increase the professional standards of investment advisers.
The new framework will come into effect at the end of 2012 and will apply to all advisers in the retail investment market, regardless of the type of firm they work for — for example banks, product providers, independent financial advisers or wealth managers.
The Aldermanbury Declaration
On 4 March 2010, the insurance profession task force published the Aldermanbury Declaration. The task force, chaired by the then Chartered Insurance Institute president Barry Smith, comprised senior individuals from the general insurance sector, and spent many months shaping a common framework for professional standards.
It requires that firms signing up to it commit to meet common professional standards covering:
commitment to excellence;
training and development;
professionalism within insurers;
professionalism within brokers; and
broking, underwriting, claims and management standards.
Taken as a package, the task force argued these standards would lead to important improvements to the sector, including:
better outcomes for customers;
improved standards of risk management;
a more confident, trusted profession;
more talented people attracted to a career in insurance;
increasingly rewarding careers for those within insurance; and
reinforcing the reputation of the London wholesale market.
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