The bright side

The Financial Services Authority took over the job of regulating the general insurance market a little over a year ago, on 14 January 2005. Since that date there has been a lot of criticism levelled at the FSA over the length of its rule book, the apparent complexity of its rules, and the cost effectiveness of the whole regime.

However, the picture is not all black. In addition to the most obvious benefit - clarity and better protection for clients - brokers have benefited from closer monitoring of those operating on periphery of the market and greater power over those operating illegally. Client money requirements, although problematic at first, have eventually led to improvements in credit control.

The greater emphasis on systems and controls has led to improved efficiency, plus the authorisation process and high level 'fit and proper' requirements for firms and individuals have triggered an increase in quality and professionalism.

The FSA has been keen to 'monitor the perimeter', and this means ensuring those that sell general insurance products are regulated. This has meant that certain businesses, which sold insurance as an ancillary to their main activity, needed to be authorised or were required to stop trading.

While this may have brought about a reduction in the number of those undertaking the activity - those that decided the income they generated was insufficient to justify the burden of regulation - it has left fewer but more professional sellers of general insurance products.

Prior to the FSA becoming the regulator, the industry was voluntarily regulated by the General Insurance Standards Council. This was largely regarded as a benign regime with little bite or power. The FSA, on the other hand, does have power and, if the circumstances demand, will not be afraid to use it.

Those that work within the regulated framework can take comfort from the fact that action will be taken against operators that trade illegally, ensuring that there is a level playing field for all those who wish to operate in the market.

Credit control

The FSA has brought about the requirement, that where a broker handles client money, it is segregated into designated client accounts. There is also the requirement that brokers cannot remove their brokerage from the client accounts until they have received the brokerage from the client.

Historically, brokers had effectively worked on an accruals basis where they used other clients' money to withdraw brokerage. Whilst this initially caused brokers a problem with cash flow and some of them were forced to seek funds from their bankers, the general consensus is that brokers are now much more focused on credit control and ensuring that clients pay within credit terms.

Greater clarity

On the whole, the FSA's capital resource requirements have not been onerous to the below market and are seen to be set at a realistic level for the risks associated with a broking business. Arrangements with clients have also been clarified as a result of terms of business agreements, which must be a good thing from both parties point of view. The TOBA regime also goes for insurers as well.

Although there were many complaints about the plethora of documentation that swamped brokers as a result of the regulation, there is also the view that it in fact resulting in a more professional industry, with clients receiving documentation that is relevant to their insurance needs enabling them to make informed decisions. For the most part, there has been improved product exposure and greater transparency since FSA regulation.

The key facts documentation and statements of terms and needs introduced by the FSA are seen as providing clearer information for customers, enabling them to compare insurance policies more easily. Brokers have also become more aware not only of the importance of documentation but also the need for this it to be produced in a timely manner.

Customers are not the only ones to benefit from this increased proficiency; brokers are now experiencing the positive effects as well. Documentary requirements, for example, are reportedly making life easier in terms of staff supervision and control. There are significantly less grey areas and more precise processes to follow. In addition, the FSA has required these to be recorded and turned into procedure and control manuals.

It is accepted that brokers were not always the best at documenting procedures, and when there was turnover of staff there was often little guidance for the incoming team member as to how things should be done. Now, it is all documented for them. This has resulted in new members of staff being up-and-running in a shorter period of time and needing less hands-on support, which will ultimately reduce costs for the broker.

Another area where regulation can result in cost-reductions is professional indemnity cover costs and, hopefully, in the number of claims made against the broker. A successful PI claim against a broker does not just have a financial cost - it also has a hidden management time cost, which can in reality be even more expensive as it takes brokers away from developing the business and forces them to look back into the past.

If the FSA's focus on systems and procedures results in a reduction in PI claims activity then everyone wins.

The FSA's approach to regulation embraces as a fundamental the need to "treat customers fairly". This is at its broadest, an obvious way of ensuring both the retention of customers and the development of a business by turning existing customers into advocates.

The CPD factor

The attention focused on treating customers fairly has made brokers pay attention to this area in a way they have not done previously. It has enabled them to consider how they deliver fair treatment to their customers, and allowed them to align this delivery with their commercial objectives.

There has also been much emphasis placed on the need for competent, well-trained staff doing the right job, with ongoing support to ensure that this is maintained. Training has not always been seen as a key business area for brokers - traditionally it was a bit of a poor relation when you looked at the amount a broker was prepared to spend on its staff. Now that attitude has changed, and staff training and development is significantly higher up the agenda of most broker boardrooms.

Regulation requires the documentation of training procedures, but is additionally looking for evidence that they work in practice and that individuals are receiving the adequate level of training for the job they are undertaking. Some brokers are reporting this has resulted in an improvement in the advice being given to clients.

Moreover, at the commercial level, the shortage of talented young people entering the industry is a key issue - so something that encourages a culture of development and a more professional must be a good thing for its long-term prospects.

More often than not, brokers are of the view that the FSA's push on contract certainty is a good thing. They understand that customers having full policy details and wordings at inception is appropriate for the twenty first century. Those dissenting from this view do so not because of the principle but more because they consider the burden has fallen too much on the broker and not enough effort is being made by the insurers to solve the problem.

Such initiatives by the FSA also have a secondary benefit of making businesses ask themselves "how are we going to achieve that?" Often the answer is to turn to better technology and that is usually not a bad solution, especially as the insurance industry is often regarded as being slow to make use of new technologies.

In terms of the bigger picture, the application process made the boards of many small and medium sized brokers think about issues that are often left unconsidered.

The FSA's focus on management succession and disaster reaction planning are two such examples. They meet an FSA objective of encouraging, as John Tiner puts it "good business practice throughout the financial services sector" and should be on the agendas of all well run businesses.

Succession planning is one of those issues which is often not addressed until it is too late and the only option is sale. By making owners/managers consider this issue it has given a number of companies the opportunity to plan which will probably result in a better out-come for the business in the long term.

Optimistic reflections

Looking back, it always seemed slightly strange that for people in the risk business there was a reluctance to focus and plan for the issue of continuity or disaster planning. Again, the FSA required plans to be documented and put in place. There also now appears to be a trend for these to be regularly reviewed and tested, indicating that management teams value them as part of their system of control.

Of course, there is no denying that above and beyond these optimistic reflections, many brokers will continue to express genuine concerns about the negative impacts of regulation on their businesses. Unfortunately however regulation is not going to go away any time soon, and building on these initial signs of encouragement could see further benefits emerge.

- Mark Grice, Partner and head of broker services, Mazars.