Reporting for duty

Since statutory regulation came into effect in January, some general insurance practitioners feel they can take their foot off the compliance accelerator. Having achieved authorisation, this group believes that a few cursory considerations towards compliance in the day-to-day running of the business are all that is required to keep the Financial Services Authority at bay.

For others, the practical application of statutory regulation continues to dominate their working lives, and the frenzy of activity leading up to 'GI Day' on 14 January 2005 has been replaced by continuing concerns that their compliance efforts may not satisfy the sentinels at Canary Wharf.

But, oddly, both groups face the same danger. Whether placing too little emphasis on compliance or obsessing over every detail, the chances are that key regulatory requirements may be overlooked. The issue common to all intermediaries is that compliance has to become embedded in day-to-day procedures.

If this does not happen - either because compliance is ignored or because too much time is spent debating over the minutiae of the FSA Handbook rather than implementing core compliance requirements - there is a risk a firm will find itself on the FSA's radar. This is, not least because regulatory reporting, in the form of the retail mediation activities return and has already begun.

Key rules

Topping the list of common problem areas is the issue of handling client money. More so than in any other area, it really pays to get the basics right first, so, before anything else, brokers should check that they do indeed have a record of the legal status of their client money accounts. It appears that some firms have been conscientiously operating their client accounts in accordance with the FSA's Integrated Prudential Sourcebook rules, but have omitted to secure written confirmation from their bank that the client money account has trust status and will remain separate from any other money held by the firm.

The FSA effectively considers statutory accounts to be the 'default position'. If a firm wants to offer credit facility from client money, it should operate a non-statutory trust account for which it will need a solicitor to draw up a deed. Members of the British Insurance Brokers' Association can obtain one direct from the BIBA website.

A broker should also check that the additional conditions required by the FSA of those operating non-statutory accounts, such as the higher capital resources requirement for money relating to transactions with retail customers (£50,000 for non-statutory trust accounts), and obtaining each client's consent to hold their money in this type of account.

If the necessary written confirmations are not in place they should be obtained without delay, to this end, keeping written records of all communications. In the meantime, the breach record logbook should be completed accordingly.

The breach record logbook, while not exactly a point of misunderstanding, is certainly a point of controversy. For any broker that does not have one this should be prioritised as the next action point. There is some debate as to whether this is best practice, as opposed to a handbook requirement. What is clear, in the visits that have been undertaken with larger firms, is how they are recording and then dealing with matters relating to non-compliance. It is worth noting that the BIBA Compliance Manual - being hailed by many as an 'industry standard' - has a convenient log for brokers to use.

The existence and usage of a breach record logbook is essential to demonstrate to the FSA that a firm has the appropriate systems and controls. Breaches will happen, even in the most compliance-conscious of firms. A firm's commitment to compliance, and the effectiveness of its systems and controls, will be demonstrated by the fact that breaches are found and, most importantly, acted upon.

Establishing and using a breach logbook helps a firm to demonstrate that it is mindful of the FSA's Principles for Business, particularly Principle 3 (to organise and control affairs effectively) and Principle 11 (to deal with regulators in an open way).

A matter of class

Another common misunderstanding is over the classification of customers for the purposes of applying the Insurance Conduct of Business Rules.

The FSA defines a retail customer as an individual acting outside of their business, trade or profession. All other customers are commercial customers. Sometimes, the lines are blurred so, in some circumstances a business buying insurance may be classified as a retail transaction. In such cases it is important to remember that the classification applies to the contract the customer is buying.

For example, a sole trader may buy motor insurance for a company vehicle that will also be driven for personal use. The classification of this risk is 'retail'. The same situation for a partnership would also be considered a retail sale, except under Scottish law, where partnerships are always commercial customers because its partners are deemed to be separate entities from the business. Similarly, a limited company is, by definition, always a commercial customer.

Reporting

Reporting is the hot topic of the moment and one on which firms must act immediately.

Authorised firms were required to begin collecting data for the RMAR from 1 April 2005, with the first submissions starting from 1 July (or depending on the dates of individual firm's financial year). The box (below) provides a list of the information that firms will need to submit to the FSA.

The regulator will also collect 'supplementary product sales data' on transactions where this is not collected by the product sales data provided by insurers.

The full version of the RMAR in the FSA Handbook sets out all the possible items of data collected by the FSA, but the actual requirement for a given firm will be tailored on the basis of the regulated activities set out in its permissions. Most firms will have to report twice a year. The FSA has, however, made some concessions towards smaller firms (those with an income of £60,000 or less from general insurance), which will only have to report financial data once in the first year. At the other end of the scale, larger firms (those with an income of £5m or more from general insurance) will be required to report financial information every quarter.

Brokers need to ensure their firm is collecting the relevant data now. For example, if a firm's financial year commenced on 1 January, its two RMAR reporting periods would be: 1 January to 30 June and 1 July to 31 December, with the first RMAR expected no later than 30 July 2005 However, this first return would cover only the period 1 April to 30 June, not a full six-month period. If a firm does not submit its RMAR in time, the FSA has warned it may first impose a late submission penalty of £250 after which it may take enforcement action.

The only way of submitting an RMAR will be electronically, using the FSA's online system. This should actually prove helpful to firms because they will not have to concern themselves with how they present the data, or worry about omitting important facts. While brokers will not be able to use firms online to submit regulatory returns until July, they can make sure now they are registered at www.fsa.gov.uk/mgi. As well as becoming familiar with the system, brokers can check the accuracy of their firm profile, on which its tailored RMAR will be based.

The impact of regulation

Regulated firms could be forgiven for feeling that compliance has taken over the business as staff spend more time on compliance than they do on customers and that customers are being deluged with pages and pages that they will never read.

The fact of the matter is that compliance is your business. A compliant sale, transacted by a compliant business, is exactly what you are offering to your customers, and this is not a new phenomenon. Adapting the firm's systems and processes to meet regulatory requirements began in earnest with the introduction of the General Insurance Standards Council's rules in July 2000. Those firms that had already reviewed their operations methodically and diligently against GISC requirements and addressed any gaps will have had a huge advantage. For these firms, most of the impact of regulation has been in the time taken to interpret FSA requirements, rather than having to turn business processes upside down.

If brokers are still daunted by compliance requirements there is a great deal of support available, via both trade and professional bodies such as BIBA and the Chartered Insurance Institute and commercial organisations that offer compliance assistance. Indeed, as well as running its own training seminars, the FSA offers advice to those firms seeking assistance with compliance, setting out questions and issues for firms to consider before appointing compliance consultants.

Most importantly, it should be remembered that, if brokers are unsure of their compliance arrangements, they are not alone. Misunderstandings and mistakes will not be uncommon, but the chances of successfully maintaining compliance are infinitely increased if you keep yourself informed. Visit the FSA website regularly, exchange experiences with fellow practitioners and, of course, continue to read trade magazines.

Rachel Maidment, Senior consultant, Branko

Required information for submission to the Financial Services Authority

The firm's financial position, including balance sheets, profit and loss accounts showing commissions and fees, regulatory capital, client money accounts and professional indemnity insurance.

- Threshold conditions, including any 'close links'.

- Training and competence.

- Insurance conduct of business, including an indication of sources of business, and information on the monitoring of any appointed representatives.

- General insurance income required for the calculation of fees for the FSA, Financial Ombudsman Service and Financial Services Compensation Scheme.

- Complaints.