Interview: Sarah Wilson - The future lies in the hands of the industry

The Financial Services Authority recently published figures on the number of applications received for authorisation, citing almost 10,000 applications, which splits into 5151 from primary brokers and 4408 from the secondary sector.

Commenting generally on whether the process is going to plan, FSA director, high-street firms division, Sarah Wilson, says: "Some firms will not meet the required standards or, when complete, won't meet the threshold conditions at the final stage. At that stage, the Regulatory Decisions Committee will contact these firms to notify them that they will not be authorised.

"Some firms have withdrawn their applications, which happens in all sectors, although I cannot say how many. We are pleased that we have been able to process the high volume of applications that we have, although we are concerned about the low number of firms that have applied from the secondary sector."

Wilson would not be drawn on the specifics of how many secondary firms the FSA had expected would apply, compared with the 4500 firms that have applied so far. While she also would not confirm suggestions of between 20,000 and 25,000 secondary intermediaries in the UK, she added: "While initially we had to produce our own estimates on this, for internal purposes such establishing fee levels, they were only ever estimates; there is no database that can be consulted to ascertain this information exactly.

However, our research shows that many firms in the secondary market heard about regulation under the FSA through their insurer suppliers.

"We are working closely with insurers to address the issues with this important area of distribution, as some secondary providers either do not know what is required of them or do not understand fully the ramifications of not being compliant. This really is the point as far as we are concerned - that this is a commercial issue and the insurance market has its future in its own hands."

Concerning the possible regulatory implications for the UK market with regard to Eliot Spitzer's investigation into Marsh and others in the US, and following FSA managing director John Tiner's visit to meet Spitzer, Wilson reiterates the FSA's previously stated line - insisting it will not change its rules as a result. "Obviously we do not condone what has been alleged to be happening in the US, but we have taken the view that we will not ban volume overriders or inducements, however, there is a responsibility on firms to ensure these do not conflict with customer interest. So, there is some judgement required here by firms to ensure this conflict does not occur as a result of remuneration structures.

"We have looked at all forms of payment, such as volume overriders but, beyond this, the rules distinguish between retail and commercial, requiring customer disclosure on the latter when requested but we have chosen not to do so in retail because we think it inappropriate. We are confident that we will have in place a robust regime for general insurance that will, if embraced, ensure the fitness and propriety of UK firms."

Given the magnitude of the task facing the FSA in supervising the great number of companies under its auspices in the UK, Wilson gives an indication of how this will work in practice, including areas where there will be early visible evidence of supervision activity.

"The new supervision constituency splits into size and complexity of firms and our style with larger firms will be relationship management, but this will not be the case for smaller firms."

Although Wilson would not comment on whether initially the regulator would be looking for particular scenarios - situations that, historically, have led to customer detriment - she continues: "As part of assessing if there is, or likely to be, any consumer detriment, we will be looking at firms that have had difficulties in the past and those that are perhaps being innovative. Unsurprisingly, early on we will pick up on firms that we have noticed during the authorisation process. By this, I mean what we call 'firms on the perimeter'; those that have not made enough or no effort to become authorised. But we will be talking to firms regardless of size - looking at the internal controls of all firms from (appointed representative and introducer) networks to national and regional companies."

She adds: "We have an evolving view, have collated a lot of data and learnt a lot and I believe there will be great consumer benefits, such as improved information about products, services and exclusions, as a result. Insurance is a market that has traditionally relied on custom and practice, however, this has meant a great variation of standards for customers."

Concerning the enforcement action and approach the FSA may take with insurers found to be continuing to deal with unauthorised brokers, Wilson says: "We would have to establish the extent to which the insurer concerned had made the effort to comply. Obviously some insurers will find that, despite all reasonable efforts to comply, some brokers with which they deal may be found to be lacking. However, other insurers may simply have not asked the right questions, or have just acted too late and we would take a dimmer view in this case. And this comes back to what I said about the industry's future resting in its own hands - it is in insurer's interest to ensure now that the brokers they deal with will not put them at risk in future."

Travel agents and warranty sellers

With regard to the future possibility of regulation of travel agents and warranty sellers by the FSA, Wilson refers to the government's decision to review the situation for travel agents in January 2007.

And, regarding warranty sellers, she also opted to refer to the Competition Commission and the Department for Trade and Industry's decision to exclude warranty sellers, meaning there is no recourse set for review. However, she adds: "There is now enhanced DTI regulation regarding the disclosure and cancellation rights for customers as a result of the government's investigation and consultation on the matter."

With reference to the growing trend of insurers and brokers offshoring processes and functions overseas, notably to India, Wilson indicates that the FSA has little intention of paying offshore sites a visit. "This is just one type of outsourcing, which just happens to be abroad. The FSA is satisfied that this is a legitimate commercial decision, providing the necessary systems and controls are in place. However, from a regulatory point of view, this does put an additional stretch on a company's operations and we may decide to visit in future - we certainly have not ruled it out."

Broker clubs

Concerning the standing of broker clubs, in an era where greater transparency is required, Wilson again throws the emphasis back to the market. "Brokers and insurers principally must, in this case, satisfy themselves that the practices within brokers' clubs do not conflict with their obligations to the customer. The onus is on those operating in the market - not just when selling insurance but also when handling claims."

In response to suspicion in the market that shortly after the industry has settled into the new regime the FSA will 'ratchet-up' its requirements, Wilson emphatically denies this. "We have no hidden agenda to increase standards by the back door," she states, adding: "We may come back to look at certain issues, such as we did with disclosure on retail transactions as part of ongoing monitoring of how the regime is performing."

Wilson also sticks to the FSA's previously stated line on the possibility of making qualifications compulsory in future. "There are no plans for compulsory qualifications to be introduced for the insurance sector. The reason for this is that there is a huge diversity and breadth of firms within this market and it would be impossible to prescribe set exams for everyone that were appropriate in all circumstances.

Vocational training

"However, that is not to say we do not think exams are a good thing. Vocational training can obviously be greatly beneficial to a business and for ensuring individuals are competent in the tasks they perform. This approach can be bring benefits but there is no single insurance exam applicable to all; it is just a fact that the insurance industry is the most diverse within the financial services sector."

Other widespread industry speculation concerns how the FSA will effectively supervise such a complex and diverse market - particularly regarding the quality of staff the FSA will use to carry out Arrow visits. Specifically, this concern involves those brokers that may have approached regulation on a 'tick-box' basis being visited by inexperienced staff from the FSA who aminister the supervisory role on a similar basis.

Wilson responds: "Every effort is being made to ensure supervision is carried out in a correct and proper manner, which involves thorough training for those that will be in the field spending much of their time visiting firms. Having gone to great lengths to establish the framework for regulation, we will also work hard to ensure firms within it are supervised appropriately. But, overall, I am confident we will have achieved a robust regulatory regime for the general insurance industry."