The FSA's Approach - Unwritten rules

As the countdown to regulation continues, those intermediaries aimingto continue trading after the January 2005 deadline will already beplanning for FSA authorisation with a root-and-branch re-evaluation oftheir businesses.

The challenge for many - especially the smaller firms - will be a stiffone, throwing a harsh spotlight on every aspect of their business.

A fallout rate for independent intermediaries of between 25% and 40% iswidely predicted as a result of regulation. Of special concern, therefore,is the question: are regulators concerned with the many practical issuesfaced by smaller firms in their efforts to survive? Or, in effect, howfair and open is the FSA's role as regulator; and will its approach put upunnecessary hurdles?

"Expect broad acceptance from consumer groups and opposition from somequarters of the financial services industry," predicts Philip Middleton ofErnst & Young. "Criticism will focus in particular on the practicality ofsome of the recommendations, and doubts over Government commitment todrive them through." This had bred widespread uncertainty, which the FSAnow has its work cut out to disperse.

The approach

The FSA has four objectives under the Financial Services and Markets Act2000: maintaining market confidence; promoting understanding of thefinancial system; securing protection for consumers; and fightingfinancial crime. But its approach is proving unfamiliar to many in theinsurance industry, where regulation in recent years has been the role ofthe General Insurance Standards Council (Gisc).

John Gorham is head of compliance at intermediary Deacon InsuranceServices, and formerly worked at the Gisc. He advises that it ismisleading to try to gauge the activities of the FSA against itspredecessor: "The Gisc was a voluntary regulator whose membership ruleswere endorsed by a Government not yet set on a statutory route. Itssuccessor, the FSA, is now both lawmaker and law-enforcer, and set on anapproach already tested in the banking and investment sectors."

'The consumer at risk' is the keystone of the regulatory approach, aroundwhich is constructed a comprehensive risk-assessment framework applied toall organisations seeking authorisation. The statutory route to achievingthe FSA's goals has been to institute a tested process of widespreadconsultation within the insurance industry.

James Dean, regulatory partner at Ernst & Young, explains: "Riskassessment continues to be applied to insurers - with every indicationthat the same will follow for intermediaries. Various consultation papershave indicated to firms the basis on which the FSA will evaluatehigh-level systems and controls, together with their views ondistribution, methods and product ranges." The concepts of riskmanagement, which are at the centre of the new regime, should be familiarto the insurance industry. However, response from the various sectors ofthe industry to FSA proposals has been hesitant, particularly from smallerorganisations - their argument often being: 'Who has been the majorculprit in pensions and mortgages mis-selling scandals? Not the smallindependent but the big institutions! Yet the small man must now pay.'

In fact, few see the role of the FSA as 'punitive' in its approach to thesmall operator. Responding to an obvious need, for example, the authorityestablished a specialist high-street firms division, eased professionalindemnity (PI) requirements for independent financial advisers andrecently extended its authorisation deadline. And in March it fined onelarger player, DBS Financial Management, a hefty £100,000 for misleadingadvertising.

The benefits

Jim Evans, senior manager of Deloitte Consulting (soon to be Braxton),highlights a number of positive features of FSA regulation, including arobust approach persistent offenders: "Some companies have welcomed theFSA's adoption of a more practical approach - in terms of risk assessmentto identify areas to monitor, and in applying a lighter touch for firmsthat have managed their businesses to a high standard," he says.

Loss-adjusters Crawford & Co recognise the positive impact regulation willhave generally on the claims process. Crawford's George Moss, the outgoingpresident of the Chartered Institute of Loss Adjusters, believes that theprocess of consultation has generated real dialogue and trust - albeitthat, as yet, the detail of regulation remains to be seen. "We needclarity to plan ahead," he says; something echoed by insurers concernedfor future distribution channels.

The concerns

Adjusters as a sector are concerned that they may be regulated directly,rather than indirectly via insurers. The FSA has yet to clarify the rules;but one can speculate that, for cost reasons, it believes the fewerdirectly regulated organisations, the better.

Deloitte's Jim Evans identifies some other common worries: "The morenegative perceptions of the process go like this: 'rules are made in avacuum'; 'little explanation of changes are made between the consultationphase and the publication of rules'; and 'the rules are created to satisfya political agenda rather than benefiting either the consumer or theindustry'."

But Mike North of compliance consultants Winchester White is impressed bythe efforts made by the FSA to communicate - in personal presentations,through its website and via the consultation documents, which, he says,have "very helpful executive summaries". He believes that those continuingto doubt "are not listening properly".

"The FSA is right to stay silent on key matters until it has developed awell-thought-out position," believes Christopher Sibley, complianceofficer at Marsh. "Time is tight. Feedback to Consultation Paper 160 (thelast-but-one to be issued) is not expected from the FSA until June. But itis important to go through the full consultation process to allow allparties to have their say."