Compliance - Building in conformity

Being regulated is all very well but how do insurance brokers structure themselves to ensure they act compliantly and keep the Financial Services Authority happy? From small high street operators to multinational behemoths, the broker market employs myriad structures and strategies to meet the regulator's requirements.

Regulation has made senior executives understand their businesses better than ever before. Many of these executives have complained at the burden the new requirements have placed on them, but there are commercial opportunities to be exploited with the newfound knowledge.

Compliance teams must understand the information needed to meet their obligations, as well as how to obtain and then present it to the FSA.

Mark Brown, director at Lucas Fettes & Partners, explains: "The first thing (to put in place) is a clear organisational structure for senior management responsibilities. Access to relevant and meaningful management information is key to assessing regulatory performance; it must enable the board to assess the firm's all-round performance."

It is easy for firms to assume that compliance affects only their sales processes or the products they are selling: this is not the case and Brown is under no illusions as to the central role that compliance must now play: "It extends beyond the traditional areas and you are looking at taking what is ostensibly an holistic view of the company in terms of competent business performance, IT, HR, finance, marketing and so on. The things at the top end have a bearing ultimately on how you treat your customers and manage your risks."

Lucas Fettes operates with divisional heads for each of its offices that are in turn supported by a central infrastructure for compliance, HR, IT and finance. Information from the divisional heads and the central corporate functions is then fed to several management committees and then ultimately to the board.

Common ground

This structure seems to be typical of what is used elsewhere in the market. Alec Finch, managing director at the Verlingue-owned Alec Finch Group, comments: "I have ultimate responsibility; various directors have responsibility for specific compliance and regulatory issues and then there is the compliance manager that does the day-to-day work required by regulation."

For brokers with overseas parents or subsidiaries, like Finch, understanding the need to keep UK operations working within the parameters of local national law is essential: the FSA will certainly not make exceptions for overseas management boards that have pushed their UK operations into non-compliant activity because it is the way things are done in other locations.

Iain Pickard, chief operating officer at Cooper Gay & Co, suggests how this relationship should work: "The important thing is that the regulated entity is sufficiently autonomous to make its own decisions and is not being directed from elsewhere."

There is an ongoing debate about the ideal makeup of compliance directorships. For some, the nature of regulation means that it is important for compliance directors to have a legal background.

Bobby Deegan heads the risk and compliance division at management consultancy firm Watertrace. Deegan comments that it is not unusual for compliance officers to report to heads of legal departments: "This is probably an acknowledgement of the growing paralegal nature of the role." This is a view that Pickard agrees with and he feels that the majority of compliance directors will come from a legal background as time progresses.

However, some feel the requirements are actually moving away from having a legal bent. Brown says: "The role is changing away from that and if you were to go back five or ten years then I think that would absolutely be the case. Compliance and regulation at that time was very much rules-based and about the letter of the law."

Brown says that, with the FSA's move towards principles-based regulation and the focus on treating customers fairly, the job of compliance director has become more of a skills-based position. He believes that it is therefore important to think strategically and innovatively about the integrating and reporting of compliance into the firm's core culture.

Even though Deegan and Brown may not share the same view, Deegan understands the importance of the compliance function being closely linked to commercial activity. He says: "A key responsibility will be in enabling the business to do what it needs to in respect of developing new products or distribution lines in a manner that delivers compliance in a cost-effective and proportional manner."

Communications

Whoever is responsible for compliance within a broker, a part of that role will be devoted to developing and maintaining a relationship with the regulator. This is harder to achieve for smaller firms and, as the FSA does not give such brokers a dedicated relationship manager, firms will find themselves speaking to different contacts at the regulator.

For those in this situation it is important to make sure returns are completed fully and submitted to the watchdog in good time: they must also pay close attention to any market communications sent from it.

A dedicated relationship manager should make it possible to forge closer links with the regulator for the medium- and larger-sized brokers, although this has not always been possible as Deegan explains: "In the London Market one of the often-voiced concerns is the turnover of (FSA) supervisors, meaning that firms have to start all over again in explaining their business to a new supervisor."

Despite this problem, when it comes to divulging information the burden of responsibility has moved from the regulator to the firms it oversees. Brokers need to provide timely and accurate data to the regulator rather than wait for the FSA to call. Brown comments: "The FSA does not like surprises and it expects to be kept up to date and on top of notifiable events."

AT-A-GLANCE COMPLIANCE CHECKLIST

- Firms need to have a clear understanding of the regulations and how they affect their businesses specifically

- Marrying compliance and commercial activities is key to meeting the demands of the FSA

- Corporate structures must allow senior management to understand how their businesses operate at all levels

- Compliance must be a priority rather than an afterthought in everything that firms do commercially

- Firms with overseas partners or subsidiaries should not be distracted from the requirements of operational compliance in the UK.