Getting the regulator's priorities in order

Several points about the Financial Services Authority's approach to supervision, which are likely to shape the way it goes about this, are already known.

The FSA is increasingly refining its risk-based approach. This informs the allocation of resources to supervision, both between sectors, for example, banking, retail investment and general insurance, and within sectors, for example, underwriters rather than brokers and pricing rather than claims handling.

The FSA has already opined that GI products pose, on average, less risk to consumers than investments or mortgages. This suggests that regulatory oversight will, on average, be less than that for other sectors.

In terms of the FSA's priorities, one differentiating factor is claims incidence. On life and pensions products there is normally only one claim - death or maturity. But GI will produce more claims over a comparable period. If the FSA's mailbag shows claims handling to be an issue, this is likely to attract the FSA's attention.

The FSA has historically maintained strong control over the handling of client monies and will not be amused by unmatched claims and premiums money.

It will wish to understand how GI intermediaries work. It will study governance and how senior management responsibilities are discharged and will want to learn about market practice in Lloyd's and the London Market.

Investigations into Marsh and others by the New York State Attorney General, Eliot Spitzer, may well have caused the FSA to switch its priorities towards market conduct in 2005. The FSA will not have known whether the alleged practices existed in the UK until it assumed responsibility for regulating insurance business. But, it will be under pressure from quarters such as the Treasury Select Committee to investigate and either find practices requiring action, or to clear the industry.

The FSA will probably have added this theme to its discovery visit programme and will scale up or down its attention to it, as its knowledge develops.

Of the 11 FSA principles for business, the practices complained about are liable to breach more than half. The principles are rules themselves, so breaching them would invoke all the FSA's disciplinary powers. By spring we should begin to know what the FSA is actually doing on the ground.

Richard Hobbs, Managing director, Beachcroft Wansbroughs Consulting.