Mind the gap

As of 31 March 2004, Sarah Wilson, director of high-street firms at the Financial Services Authority, confirmed that it had received a total of 13 210 registrations for application packs, of which 5945 were from firms in the mortgage market and 7265 were from general insurance firms. It also received 4229 applications for authorisation, of which around 80% were received electronically. As a very high proportion of these applications arrived at the end of March, not all had been categorised - yet at least 70% are from the mortgage market.

In addition, 3545 existing authorised firms have so far informed the FSA that they plan to apply to vary their permission to include mortgage and general insurance activities (or both) and 2811 have thus far submitted applications to do so.

What the figures are saying

The FSA, having received only around 1200 applications from insurance intermediaries, raises the question of whether brokers are waiting for something else to happen. Firms will know about the deadline of 31 May 2004 to apply at the discounted rate, with all applications to be submitted by 13 July. With only 7265 registrations received so far, are firms thinking that this will all disappear or that staying with the General Insurance Standards Council is a legitimate option?

A recent survey of 160 brokers by Grant Thornton found that 11% of respondents intended to continue trading without authorisation. If representative, this would mean a considerable number of UK brokers intend to attempt the same short-sighted feat, in the hope that the FSA will not have the resources to find them out. This is an incredibly dangerous rationale to adopt as no insurer will be able to deal with a broker unless the relevant authorisation details have been submitted to the FSA. Also, if sub-broker or wholesaler agreements are in place, brokers must undertake an exercise to validate whether those in the distribution chain are authorised or exempt, or whether they have become an appointed representative.

FSA rules will prohibit anything else, so those brokers thinking that everything will be all right will see the loss of business that has taken many years to build up - and what will happen to the staff?

Having spent nearly six years in compliance, carrying out over 400 intermediary audits at PricewaterhouseCoopers and leading workshops to over 2500 firms at the GISC, I have observed a reluctance among intermediaries when it comes to compliance. Firms joined the GISC without opening the rule book, resulting in many not knowing what they had to do in key areas, be it personal and commercial lines selling, e-commerce, finance, complaints or training and competence. Firms must seize regulation as an everyday reality in modern business and it is better to try this than to approach it fresh and unprepared.

For the GISC to have been able to monitor all firms would have been ideal, but all GISC members are capable of reading the rules and copious guidance notes and implementing compliant practices. They will have to do the same for the FSA, which has just published some very helpful guidance on its website at http://www.fsa.gov.uk/mgi/guide.html

With regard to networks as a possible solution, there are some that are actually offering a total package such as marketing, documentation, agency facilities, better commissions and quicker turnaround, plus substantial compliance help. However, these tend to be very selective as to which brokers gain membership.

Brokers ought to ensure that they are satisfied with the whole package being offered as this may involve sacrificing independence. It is a two-way relationship that must be mutually beneficial. Having said that, few networks are offering appointed representative status, which means that brokers will still have responsibility for being compliant. The network may support brokers but they are still responsible to the FSA and for the fines that may be levied.

Recommended reading

With the end of May approaching and the final date a further six weeks beyond that, there is a vast amount to learn and understand. Brokers would be well advised not to start reading the handbook now, as they would not be finished by the time regulation starts on 14 January 2005. Brokers should examine carefully the firm form (HSF1 Section H) to help formulate a compliance plan. This outlines what brokers must have completed by the January 2005 deadline. If brokers do not fully understand the questions or what needs to be done, they are advised to seek assistance as these are the areas in which they must be compliant.

Firms with a brokerage exceeding £1m have two detailed annexes to produce and should exercise care when completing these. These brokers should project the firm in the very best light possible. However, brokers should also take heed of the fact that the FSA is sampling applications even from very small firms and will ensure that brokers are actually doing all that they claim to be doing.