The final countdown to FSA regulatory reform

What are the first elements that the Financial Services Authority (FSA) will look to develop post 14 January?

Colin S: A fairly obvious one is the application process. We are told the online facility won't be available from 14 January. I presume therefore that the standard hard-copy version for Part 4 permission will apply.

Colin D: The FSA is going to be looking at any issues they feel impact on their objectives. When you talk about application processes, they are still quite concerned about the secondary market and will look at the more convoluted distribution chains. They will also look at where secondary markets, or any applicants, have shown an interest in authorisation and actually file the applications through.

Colin S: I read something the other day saying there were still in excess of 3,000 firms who have registered and haven't yet submitted an application, and that they had followed up on those. Presumably they will follow up in a stronger way with these firms after 14 January.

Penny: And appointed reps.

Elaine: That's an area we are very interested in because we supply insurance to taxis and private hire. Many of the base offices were providing insurance for their drivers through us. We have been telling them they won't be able to do that, but I don't think they all realise the ramifications.

Steve: We've heard Sarah Wilson from the FSA talk at a couple of conferences recently saying that it will focus on the perimeters - making sure firms are authorised. And when they find them, not only will they get their collars felt, but there will be a broker or insurer in that chain that could be guilty of aiding and abetting an offence.

Elaine: We did some market research in the last couple of weeks by phoning a lot of these base offices. Many are large firms that have been dealing with insurance through a range of insurers and intermediaries and have no idea what regulation means to them. They still think they can find a way around it.

Colin: There is no excuse for anybody carrying out a regulated activity without authorisation. One presumes that brokers and insurers will be endeavouring to protect their distribution channel by contacting chain brokers.

Elaine: I don't think that's happened

Colin S: Many authorised firms who are involved in a chain will not be able to avoid aiding and abetting an illegal activity. For example, where insurance has been placed prior to 14 January, nothing illegal has occurred. Then, say, a broker down the chain decides he will shut up shop.

What about claims? If a broker has not informed his clients that he has shut up shop and continues to pass claims and be involved - just with the administration - is the FSA going to jump on either party? And if they do crack down, where can the consumer make his claim?

Penny: Do you think the FSA are going to look at what is going on with profit commission in the Spitzer case?

Colin D: I would guess it would be almost inevitable given the letter that went out in the late summer alluding anecdotally to some of these practices in the UK. The FSA has to look at it, even if to only make it publicly clear that there can be none of this going on.

Colin S: I think Colin's right, but I also think the regulations as they stand today are pretty close to adequate. Without a doubt, bid-rigging is fraud. We don't need any more regulations for that. And for contingent commissions, well, that is a practice that is common - even rife - for anyone with volume business. It's contractually supported and understood by the two parties.

Penny: There's a duty to talk to your client as well.

Colin S: And that is covered by the regulations as they stand. You need to be sure that you are not placing business just because of an unfair inducement, and that you can demonstrate that. Maybe all a firm is demonstrating is that none of the people selling a policy are aware of the contingent commissions, so how could they be doing it for that reason? If it can be demonstrated - and you can see the difficulties in doing that - then I think the rules cover it.

Colin D: I suspect that there will be much more full and open disclosure because that is really the only way around it if you want best practice - disclose everything.

Penny: But disclose it in a way that clients understand because a lot of disclosure has in fact been gobbledygook.

Colin S: It will be interesting to see what replaces profit/contingent commission. We've all read that certain large brokers have already ceased accepting it. Surely those brokers must be in negotiation to protect that significant income by some other form of payment - called something different, no doubt. There will be a financial impact if one of the larger boys ceases to accept payment in that direction.

Penny: But isn't this due to the Competition Commission not cracking down and stopping these brokers from getting so big that they have the power to demand profit commission?

Colin D: I think one of the issues that will be of interest to the FSA is potential intermediary insolvency. They will be sniffing around. The issues around client money and credit risk transfer kicked in around the regulatory dislike of intermediaries holding client money.

Steve: It has slipped off their radar. Most insurance firms are grasping risk transfer. When an intermediary fails, the loss of client money is not such an issue now. Clearly it's an issue for insurers for managing their own credit risk. And I think the fact that the FSA changed the cap from £100m down to £80m is a sign that they are not seeing so much potential for pressure, but clearly there's potential for inadequate levels of professional indemnity cover.

Colin D: I would hazard a guess that including intermediaries in the compensation scheme is not going to be a significant issue. There are not that many intermediaries going into insolvency.

Colin S: At least not in a way that impacts client money. There's the aspect of needing to be authorised to qualify for the compensation scheme and what happens if the firm hasn't been? This is where, again, the FSA has made it quite clear they are not going to remove good old caveat emptor from the client's perspective. Surely it won't be too long before all customers are aware that they should only be dealing with authorised firms - so that they will qualify for compensation subject to circumstances.

Colin D: One of the issues that the FSA will be looking at is the practical application of client money.

Colin S: They need to learn more about how it works.

Colin D: In principle, risk transfer is only what the market has always done. It's just the challenge has been the complexity of the rules and actually writing them into agreements, which has never happened before.

Penny: I think they will be better protected than under Individual Broking Accounts (IBA), where people have lost money with insolvencies in the past. Anything is better - even risk transfer - than IBA.

Robin: Answer this question, if you put the money into an account and you have risk transfer, can the broker take it out of that account?

Colin D: For legitimate purposes, yes.

Robin: So it's not going to stop anything. You are still going to have dishonest people. The industry is completely confusing the issue.

Penny: It won't stop dishonesty, but it should protect us far better than under IBA. The ideal situation for an insurer would be to say to a broker "we want all our money to go into our account in our name, which you manage and to which you are a signatory".

Colin S: This makes you wonder why intermediaries don't have to follow the FSA's anti-money-laundering requirements.

Robin: No, it's not related.

Colin S: So you believe, Robin, there are not huge money-laundering opportunities within the scope of intermediaries' money-handling?

Robin: I'm more concerned with the Proceeds of Crime Act, which affects everybody.

Colin S: We may have degrees of concern, Robin. What the FSA have said is they are going to take this one out altogether.

Robin: I don't think they have.

Colin S: Money-laundering requirements are not applicable to intermediaries, full stop.

Robin: The Proceeds of Crime Act is applicable to every broker.

Colin S: Sure. But what makes money-laundering applicable to some authorised firms and not to others? Why do insurers, in general insurance terms, have to follow these requirements?

Robin: Aren't the FSA really concerned about education on proceeds of crime? This is the issue - not the money-laundering, which doesn't exist as such any more. The Proceeds of Crime Act says every person, not just a professional person, has certain duties. What the FSA are looking to do, but don't say - and they will get around to it, Colin, I promise - is that everybody, as a professional person, must understand the Proceeds of Crime Act and what their responsibilities are. You're right Colin: with money laundering, there are certain issues on the general insurance side; but ultimately, if somebody comes into your business, gives you business and you think something nefarious is going on, you now have certain legal duties. The key message to get across to intermediaries is to say: "Look, guys, you've got to wise up to what your legal responsibilities are."

Colin S: But the FSA is giving a hugely inconsistent message. Yes it is covered by the Proceeds of Crime Act. In which case why have it at all? Why not disassociate money laundering from all aspects of their general insurance regulations? Will the FSA introduce mandatory training requirements?

Colin D: I think there's one specific thing on training and competence, talking about money laundering and proceeds of crime: recruitment will be looked at more deeply with all these stories in papers about employees being taken on who then leak information. This is one situation where a different set of rules may come in. But if you are asking whether the FSA will make qualifications mandatory, I don't think they will. I don't think there's ever been the inclination, under Gisc, to do this.

Elaine: Many of the smaller brokers I speak to have no idea where to start when it comes to T&C. They have never had to do anything like this.

Steve: T&C is not a tick in a box. It is a lifestyle change.

Elaine: There is a big problem with some of the smaller brokerages who think that all they have to do is fill in the application form.

Robin: The FSA can't say to a broker, 'if you don't pass this exam I'm going to throw you out of a job'. What they have to do is say 'you're in a job, we've agreed what you are meant to do under your job specification, and we'll watch and test you.' But the FSA cannot come in and say, 'you are going to do an exam and will lose your job if you don't pass it'.

Colin S: The more prescriptive they are the more it ties their hands.

- Penny Whitwell, head of legal, Markel International

- Elaine Banks, Compliance officer, J&M Insurance Services

- Colin Smith, Senior managing consultant, Navigant Consulting

- Steve White, regulation and compliance manager, British Insurance Brokers' Association

- Robin Wood, group chairman, RW Associates

- Colin Darmell, service quality manager, Groupama.