Regulation therapy

Andrew Tjaardstra: Subject to a further period of consultation, the Financial Services Authority will become responsible for the regulation of all travel insurance sold by travel agents from January 2009. Of course, brokers are already subject to the same level of regulation. What was your reaction to the news when you first heard it?

Steve White: You won't be surprised to hear that the British Insurance Brokers' Association was delighted. We did not agree with the original decision in Brussels to exempt travel insurance when sold as part of a package and we did not agree with the Treasury when they copied that through into the FSA regulation. They gave a five-year timetable and reviewed it ahead of the timetable, because of pressure coming through, not just from us but from the consumer lobby. This is a significant win as far as lobbying goes in our sector. We were up against the Association of British Travel Agents, and its lobbying reputation is, or rather, was second to none.

Andrea Nelson: Following the Treasury's enquiry last year, it emerged that, out of 20 million people who bought travel insurance, 10 million who travelled out of the country last year did not have enough coverage for medical expenses or appropriate cover. We welcome the regulation of travel insurance as it creates a level playing field. And it also champions the protection of consumers.

Oliver Lodge: The FSA is not at all delighted at the thought of regulating many thousands of extra firms. The effectiveness of that regulation will be mixed at best because of the stretch of resources that is going to result from this. And, of course, the FSA will again have to grow having tried to digest the expansion that it experienced a year or two ago. So there we are. But the FSA is the servant in this matter and it is not supposed to be calling the tune and it isn't. And I am sure that it is right that, for consumers, this is good news. I just hope that it actually delivers rather than merely being promising.

Andrew Tjaardstra: Do you feel that this causes a lot more work for the insurers as well in terms of compliance and paperwork?

Oliver Lodge: Only up to a point. Because if they take them on as appointed representatives, that has regulatory implications for the insurers. But if they are actually dealing with other authorised persons in the shape of the travel agents, then that can be quite comforting for the insurers, knowing that those that they are dealing with are themselves subject to regulation, and standards that are common to all.

Andrew Tjaardstra: What will Jelf be doing to prepare for when the regulation comes in?

Andrea Nelson: What we will see with the advent of regulation is that the vast majority of the smaller players in the market will be looking to perhaps pass the responsibility for regulation on to somebody else. So, we are more likely to see a higher influx of introduced or appointed representatives and pick up the smaller end of the market. The larger end of the market may find the resources to do the regulation themselves.

Andrew Tjaardstra: Steve, how should brokers be preparing for this?

Steve White: Many brokers are already preparing. There are brokers having conversations with travel agents about how they can work together for everyone's mutual benefit in the future. There are a number of options - travel agents can sit behind an exemption, provided their activity is restricted simply to passing information to the customer. They can just give contact details or a leaflet for example. If they want to do a bit more than that, then there is the option of maybe the introducer or the appointed representative routes or going fully authorised. There are plenty of travel agents around that make a significant amount of money out of selling insurance who would have no problem, in meeting most of the FSA's requirements. So there are plenty of choices.

Andrew Tjaardstra: A question from Daryl Henniwell, managing director of Travel Insurance Facilities, asks: "Would the sales functions be best performed through specialist travel industry websites by both high street brokers and travel agents?"

Oliver Lodge: Of course, there is a bit of irony in that because the whole point about this move is that it is spreading out the authorisation and regulation to those who are selling travel products as opposed to insurance. So is this going to move people away from buying their insurance from travel agents? I don't see that it should, because logically they would then find themselves buying from someone who is regulated to sell it, rather than someone who isn't. And from a consumer's point of view, that must be better news. Is the market going to evolve? Of course. That may mean that it becomes increasingly specialised, as perhaps a very significant number of travel agents who currently sell travel insurance decide that they are going to desist from that rather than getting involved in FSA regulation.

Steve White: I think it is another example of brokers already looking ahead and working out how it is that they can perform in however the new world looks. I think if we look at it from the consumer's perspective, I would still think that consumers are likely to buy their travel insurance probably around the same time, and probably in the same medium in which they are buying the main travel arrangements. If they are buying their travel arrangement face-to-face, it is quite likely that they might want to buy their insurance by the same route.

Andrew Tjaardstra: Will the onset of FSA regulation for travel insurance make the market more competitive? If so will regulation benefit smaller brokers or the bigger players?

Oliver Lodge: It is definitely going to be easier for bigger players to deal with the cost of regulation. That is always the case. However, the regulators argue that what they set out is going to be manageable by small players, it is always clear that it is difficult for really small firms to deal with regulatory issues. So, in that respect, small players are in for a comparatively tough time. But is it going to make the market more competitive? I don't see that. I think it is going to push up costs marginally, not massively, but a bit. I think it will remove some players from the markets, because the number of people who are prepared to engage in it is bound to fall. Do I see that making it more competitive? No, I don't.

Steve White: It might mean more competition, whether that necessarily makes the market itself more competitive is for a more philosophical debate. Will it favour the big players against the small players? It will certainly favour the entrepreneurs. Remember, the smaller firms are perhaps by their size more nimble, if you are smaller and entrepreneurial, then there are certainly going to be opportunities open to you in the same way that there will be opportunities open to bigger players.

Andrew Tjaardstra: What have been the advantages of regulation from your perspective?

Andrea Nelson: I think they are twofold. The advantage for the consumer is that they get what they want and they know what they are buying. The advantage for us is that by regulating general insurance, we are able to support the sales to our customers so that if there are any altercations further down the line, or any complaints that come in, we have got a clear audit trail of what actually went on. And so, from a business purpose as well as treating customers fairly, we are also able to defend the business.

Andrew Tjaardstra: And is there ever any confusion between the insurance content of a contract and the regulatory content?

Andrea Nelson: Not in my experience but then I am not as close to it as perhaps our advisers are. I think that they complement each other quite nicely and you know, there are some areas where regulation is perhaps a little bit, or has been accused of being over the top. But I think they dovetail well together.

Steve White: I think firms have put a lot of time into formalising processes and procedures - more into planning. Remember, the FSA is looking for firms to succeed by design, not by default. We said right at the start of regulation that what we thought we would end up with was firms being leaner, meaner, fitter and cleaner.

Andrew Tjaardstra: Let's turn now to the passporting in of certain insurers from outside the UK. There are concerns that some brokers have binding authority agreements with insurers that are not directly authorised by the FSA, or do not have passporting rights into the UK.

Steve White: The FSA published a list of those insurers that they are aware about from overseas that are trying to operate in the UK without a licence on their website. That link is again available on the BIBA web site. By the same token, there are more than 700 EEA-based insurers that have a passport into the UK. There are, from memory, less than 20 that have volunteered to join the Financial Ombudsman Service. We believe this is such a strong issue and have written to the FSA saying it owes it to the sector and to consumers to have a special part of the website that lists those insurers that have a passport and their position under the jurisdiction of FOS.

Oliver Lodge: Consumers should take a view, hopefully with sound advice, on the nationality of the organisation they are dealing with. Just because there is a right to passport into this country, does not automatically mean that there is a good sound level of regulation of that entity. I personally would see it as almost perverse to decide to deal outside this country unless you have a good strong reason for doing so.

Steve White: The FSA says it is looking at it.

Andrea Nelson: One way of controlling that and protecting yourselves from unwittingly doing business with an insurer that is not authorised in the UK is by having a list of approved insurers and a solvency committee. And if anybody wants to use it, an insurer outside of that list, it first has to get approval. So, obviously, we would have to go through checking that, authorising it and making sure that it was okay before enabling them to carry on business with that insurer.

Listen the full 45-minute debate by visiting www.brokermanagementforum.com, where you will also find an archive of all previous debates including:

- Winning the war for talent

- Managing client expectations across market cycles

- Broker remuneration

- Broking in a soft market

- Spitzer - one year on and many more.

THE PANEL

- Andrew Tjaardstra, Editor, Professional Broking

- Oliver Lodge, Partner, Kinetic Partners

- Andrea Nelson, Group compliance manager, Jelf Group

- Steve White, Head of compliance and training, British Insurance Brokers' Association.