Compliance - the true picture

A survey of 160 general insurance brokers (of which 29 are ranked in the top 50 by income) conducted by Grant Thornton's Financial Markets Group has shown that, although over 96% of respondents expect to be ready to submit their application to the Financial Services Authority by mid-July, just over half are not expecting their corporate or personal risk to increase.

Ian Gorham, partner, Financial Markets Group at Grant Thornton, believes that brokers are - wrongly - most concerned about submitting their application rather than looking at the bigger picture. "There's a vast range of issues to consider," he says. "Most are focusing on the application and think they will be fine. Most haven't even thought about what processes they need to change, or about strategy issues concerning the company."

A new kind of authority

Although 78% said the new regime represents one of their top five business risks, many are still underestimating the impact of the risk brought by FSA regulation.

Gorham points out that there is a lack of experience of statutory compliance among brokers. "It's got much more teeth than anything they have had in the past. The General Insurance Standards Council was voluntary and had no real teeth - they haven't had discipline in the market."

Only 14% of the respondents thought that the current GISC regime was very effective. About half the firms questioned also admitted that they probably did not comply with all of the GISC's requirements.

In the survey, almost three-quarters of respondents failed to recognise key regulatory terminology when asked, and nearly 40% of the top 50 brokers had not yet worked out how much preparations would cost. However, of the larger brokers who had estimated cost, most expected to spend under £500,000, although several forecast compliance-related costs approaching £9m. This compared with estimates of about £50,000 by the average broker outside the top 50; 44% of that group expected to spend less than £10,000 (see charts).

Although many respondents said they had read the guidance, they admitted that they were finding practical issues like changing operational procedures, training staff and preparing the application for authorisation challenging, according to Gorham.

Sixty per cent of firms said they would transfer internal resources to address these issues, and 50% intended to bring in some form of consultancy expertise. Gorham warns: "Unfortunately, there is only a limited supply of high-quality regulatory expertise in the marketplace and all these firms that are leaving it late will be going after it at once. Many will be in trouble if they don't act quickly."

He is reassured, however, that senior managers appear to be involved with decision-making: "They may not be completely clear what the risks are, or fully understand what they face, but they are engaged. At least if something is going to get done, the right people are involved.

"The larger respondents have better economies of scale, so they have a better sales-to-compliance ratio. They also tend to be better-informed - but still not as much as you would hope."

According to Gorham, only 25% of all intermediaries surveyed understood the term 'Arrow Visit' (an FSA risk assessment visit), but this figure rose to 44% among the top 50 brokers, whom he believes have the benefit of better expertise.

Timetables

Timescales remain a concern. Gorham says: "Two things will happen: hopefully, the message will continue to be put forward and as a result there will be a late rush to get things sorted out in the second half of 2004. Then all the issues come into play, like lack of expertise. The other impact will be from 15 January, when disciplinary action will start to be taken. Then people will pay attention."

Worryingly, the survey suggested that some brokers still don't even know that they have to get authorised. "11% in our survey said they would continue trading without getting authorised," says Gorham, adding that there is also a serious lack of awareness among companies in the secondary market.

"In companies where financial services isn't the main business, awareness is far lower. For example, property companies whose main job is to manage property but that have insurance as an add-on aren't worrying about it and potentially won't get themselves authorised."