Winning the paper chase

Despite earlier pronouncements by the regulator that the broking industry posed more of a problem than it originally thought, and claims that it was going to toughen its regulatory regime, the Financial Services Authority recently insisted at a seminar that it was not 'enforcement led'. The FSA said it could not be expected to police all 25,000 firms under its authority but was expecting directors to take responsibility for ensuring that their firms are complying with all aspects of the regulatory regime.

This is some good news for an industry that is already feeling smothered by regulation. In a recent survey of insurance brokers by Mazars, 85% of respondents said that the process of regulation had required more work than they had anticipated and 40% thought the requirements were too onerous.

As part of their preparation for regulation in January this year, intermediaries were required to supply the FSA with vast quantities of information in response to a questionnaire. This process covered a range of procedures, systems and controls, including accounting, work flow and disaster recovery procedures, plus training, competence requirements and complaints handling.

Brokers are now required to maintain and keep this information up to date, which is a challenge, and this is where many of the problems will begin for an industry still weighed down by paper-based files and processes. The responsibility for this information-management challenge lies with firms' compliance departments, which need to ensure that everything is kept current and that the responsibility for it is clearly identified and defined.

Historically, compliance is not an area in which resources have been invested and many companies have had to establish a separate compliance function for the first time. Nor is insurance an industry that has spent money on technology systems to specifically to help manage work flows and sign-off procedures.

John Tiner, chief executive of the FSA, stated recently: "While it is estimated that $40bn (£22.75bn) of capital has flooded into the insurance industry during the last three years, the infrastructure has not kept pace with developments."

The same survey also found brokers' overall experience of technology to help them solve some of these problems had been disappointing. Although technology was identified as being integral to all elements of the daily business, especially in managing documents and compliance, two-thirds said that it was not delivering the expected business benefits, or that it was difficult to implement.

Much of what the FSA expects from the brokers it regulates is nothing other than best practice and good business management. The creation of the right processes and checks and balances should not just be seen as a compliance burden but as an opportunity to make an investment from which there will be significant business benefits (see box below).

Whether it is in a file in someone's desk drawer or scanned and saved in an electronic document management system, it is imperative that the compliance department knows where key documents are stored. In addition, version control - as documents are updated - along with a clear audit trail are crucially important. For example, if the compliance manual is updated with new information, there needs to be a system in place that ensures that the new content is sent out and that the receipt of that information is tracked.

Clearly, a single repository that can log documents, manage version control and allow access and updating by the right people is a powerful tool to help ensure accurate document management.

As well as knowing the whereabouts and status of thousands of documents, brokers also have to trade knowing exactly how the regulatory regime will develop and what the regulator may want to know going forward.

One of the principles of business that encapsulates the fundamental obligations of firms under the regulatory system is that firms must manage conflicts of interest fairly. This is probably the highest-profile current issue for the FSA for 2005 and the FSA is contacting brokers to obtain information on their systems of managing potential conflicts, both in placing business and in the administration of claims. Where a firm's systems and controls do not operate effectively, action for breach of Principle Eight is to be expected.

Recently, the FSA announced that the document-based element of the Arrow process had begun and this will determine which companies will receive Arrow visits. Tiner confirmed that this process would be rolled out over the coming year. For brokers, clearly, this is uncharted territory and will require close attention from senior management to ensure a satisfactory outcome.

Companies can see the ongoing regulatory requirements as a burden or as an opportunity to add value to their existing business organisation, processes and systems. If they see it as the latter, then any investment of time, people or money in new systems and processes should recoup that investment several times over in future.

- Mark Birrell, Chief executive officer, Wildnet

BUSINESS BENEFITS

- Additional business benefits of investment made for compliance reasons:

- A long-term culture of business performance improvement for the firm can be created, with staff and management taking ownership of information and building a 'sign-off' mentality.

- Better business planning, more cost-effective implementation, a sense of measurement, improved servicing and increased profitability.

- The risk of business failure can be reduced by understanding the vital risks and creating transparency.

- Good corporate governance through the right controls creates a much stronger image with shareholders, as well as possibly reducing the cost of professional liability insurance for management.