FSA Q&A - It's 14 January - what happens now?

What benefits will the consumer see following Financial Services Authority regulation?

The FSA's new regime introduces important new consumer protection measures throughout the life of consumers' policies. Consumers will get clear information on significant and unusual exclusions from their insurance policy before they buy it, as well as clear information on premiums and any fees. Consumers will also have the right to cancel the policy after they have taken it out.

Where advice is given, firms must ensure the product recommended is suitable and meets the needs of the consumer. All general insurance intermediaries have to meet the FSA's standards for authorisation, including capital adequacy, professional indemnity cover, protection of client money and approved-persons status for key personnel.

How will the FSA deal with firms that are not authorised by 14 January?

An early priority for the FSA will be to enforce the perimeter of the new regime and crack down on any firms that may consider continuing with unauthorised and illegal general insurance business.

How does the FSA intend to go about checking that authorised general insurance brokers meet its requirements?

The FSA's approach to supervision is risk-based. It weighs up the level of risk posed by each regulated firm and also the risks presented by certain areas of the market, products or practices. An important factor in assessing these risks and targeting our supervision activity will be the data returns made by firms (the 'Retail Mediation Activities Return') and the information gathered through the FSA's monitoring of the market (product sales data).

In addition, the FSA has a raft of supervisory tools that it can use depending on the size of the firm and the potential risks it poses. These include mystery shopping, intelligence gathering and, in some cases, firm visits. For larger brokers, there will be a dedicated FSA supervisor who will be responsible for the supervision of the firm.

Where firms do not comply, the FSA will initially give an opportunity to remedy the situation. However, where that does not happen, or the issue is more serious, it will move to the issue of warnings and, ultimately, enforcement action where necessary.

How should general insurance brokers prepare for a visit from the FSA?

A firm should ensure that it complies with FSA requirements, including the Insurance: Conduct Of Business Rules and the Integrated Prudential Sourcebook. During a visit, the FSA expects firms to be open and co-operative, and able to demonstrate that they have robust systems and controls in place. The FSA also expects firms to have adequate records - for example, to demonstrate suitability of advice given as required by the ICOB Rules.

With regard to profit overriders and incentives/inducements, the FSA has laid down some guidelines. Will the FSA assess incentives on a case-by-case basis and does it plan to provide further clarification and advice?

FSA rules prevent firms from offering or accepting inducements if they are likely to conflict to a material extent with any duty the firm providing the inducement or the recipient firm owes its customers. This rule applies to financial as well as non-financial inducements.

The ICOB sourcebook contains general guidance on what this rule covers.

Firms should have in place appropriate systems and controls to identify any inducements that are likely to give rise to material conflicts and to avoid giving or receiving inducements in these circumstances. The FSA can provide firms with individual guidance on the application of its rules - see Chapter 9 of the supervision manual. Firms are expected to have taken reasonable steps to research and analyse the topic before approaching the FSA.

If insurers make additional payments to brokers or accept higher loss ratios connected with volume leverage, does the FSA consider such payments could lead to the intermediary being less impartial and thereby not offering a good deal for the customer?

The FSA has not prohibited volume overriders in the general insurance market. However, if such inducements create the likelihood of a material conflict in the duty of care that the intermediary owes its customers, then both the intermediary and the firm providing the inducement would be in breach of the rule on unfair inducements.

Whether or not a volume overrider creates the likelihood of a material conflict may depend on the internal systems and controls that the intermediary has in place. For example, FSA guidance explains that an inducement that operates remotely from the sales process may not be unfair if it does not have any impact on the staff involved in carrying out mediation. Material conflicts can arise in the sales process as a result of inducements; they can also arise if the intermediary is involved in the settlement of claims.

TRAINING - A MANAGEMENT CLINIC SPECIAL

Q. Is it important to be aware of gaps in knowledge and to demonstrate the ability to bring in the correct adviser where appropriate?

The training rule requires a firm to determine (at appropriate intervals) the training needs of employees advising retail customers and to organise appropriate training to address those needs. Guidance to this rule is given in Section 2.3 of the Training and Competence Sourcebook.

It is vital for broking staff only to give advice in areas where they are deemed to be competent. This brings us on to another key component of the training and competence scheme - supervision and monitoring. This is an area often overlooked or misunderstood.

The traditional concept of the 'supervisor' was perhaps the person in the office who made sure that staff came back from lunch on time. But a supervisor's role is not about catching people out; it is about teaching them to do things correctly. It is not for the benefit of the regulator, but for the benefit of both the customer and staff. The role of the supervisor is key, as it is he or she who ensures that service, sales and technical information delivered to the client takes place in a compliant manner.

Brokers underestimate the significance of the role of the supervisor at their peril. A competent supervisor should possess technical knowledge, assessment skills and coaching skills, and these should be maintained.

No matter how satisfied a firm may feel with its training programme, if the message has not got through, serious rule breaches could take place if a proper supervisory regime is not in place.

Ian Ritchie

Q. With no 'approved' qualifications, how can brokers ensure that they meet the FSA training and competence requirements?

General insurance intermediaries should comply with the commitments on training and competence set out in Chapter 1 of the Training and Competence Sourcebook for employees associated with a regulated activity, but who do not give advice to retail customers. General insurance intermediaries should comply with Chapters 1 and 2 for those employees who do give advice to retail customers. Chapter 2 includes detailed rules about recruitment, training, attaining and maintaining competence, supervising and monitoring and record-keeping.

It is the responsibility of the firm to read and understand the rules and decide how best to comply. A firm must decide what level of competence is necessary for its employees to perform their role effectively and to comply with the relevant regulatory requirements. The firm should assess their employees as competent before they give advice to retail customers without supervision.

The first step is to understand what the requirements of a particular job are. In order to do this, a job specification is needed. But job specifications for this purpose are not just about giving a vague description of the duties attached to a role. A specification is intended to state exactly what tasks the job entails and, most importantly, what specific knowledge and skills are needed to carry out those tasks competently.

It is, therefore, essential to recognise the particular insurance knowledge that is required for a particular role by identifying what classes of insurance the individual deals with; what depth of knowledge is required within those classes; what other supporting knowledge is required (eg a knowledge of the underlying legal principle of insurance and knowledge of the regulations and rules that apply); and the individual's ability to apply that knowledge in a real situation.

By assessing the skills and knowledge possessed by the individual against the requirement of the post, any gaps can be identified, and additional, targeted remedial training carried out.

Ian Ritchie

Q. Brokers are required to continually assess their employees' levels of competence. What does this mean in practice?

Where competent employees are giving advice to retail customers, a firm must ensure it maintains its competence. It is up to firms to decide what arrangements are appropriate to achieve this, though we have provided guidance to this rule in Section 2.6 of the Training and Competence Sourcebook.

There are a number of ways of doing this, including observation, role-play and verbal or written testing.

Online assessment is available. For instance, the Chartered Insurance Institute, in conjunction with the British Insurance Brokers' Association, has developed BrokerASSESS, which includes a vast library of multiple-choice questions on various classes of insurance and related regulatory and management topics. Largely, the questions are based on market practice and the types of situation that may confront a practitioner on a daily basis.

The employee's answers to these questions, measured against the benchmark set by the firm, will give a good indication as to whether the individual has not only the knowledge, but also the understanding and the ability to apply it in a given 'real-life' situation. Any training needs identified by such a process can then be met accurately.

It is important to recognise that regular assessment is vital to ensure that knowledge is being kept up to date and good record-keeping will enable the firm to demonstrate this to the regulator if called upon to do so.

Ian Ritchie.