Metamorphosis

Prior to the Financial Services Authority taking over the regulation of insurance intermediaries on 14 January 2005, John Tiner, chief executive at the FSA, called for an end to the 'deal now, detail later' way of conducting business and promised to improve the reputation of the insurance industry in the eyes of the public. Mark Grice, partner at consultancy group Mazars, noted poignantly in the April 2005 edition of Professional Broking: "Regulation is the key issue for the next three years. Respondents are not convinced of the cost benefits of regulation, with more than half finding that it cost more than was budgeted."

The initial reaction to the FSA taking over from the General Insurance Standards Council was positive; 80% of brokers questioned for the January 2005 Sentiment Survey in PB said they were in favour of the move. By the end of December 2004, 17,000 firms and 19,000 appointed representatives had been authorised. The regulator wasted no time in investigating intermediaries that had failed to apply for authorisation by the January deadline, and by March the FSA had claimed its first scalp by refusing the authorisation of Ridings GB and three of its employees, Norman Deakin, Gwynneth Roe and Ivan Harrison, for having an inadequate business plan and for providing no evidence that the broker would not pose an unacceptable risk to consumers. The FSA had quickly established itself as a regulator prepared to act.

Steve White, head of compliance and training at the British Insurance Brokers' Association, commented: "We always said that regulation of insurance brokers would make them leaner, meaner, fitter and cleaner. It brought appropriate systems and controls in place and implementing them has been a positive experience, though a challenging one also."

Despite initial industry optimism, "challenging" was one of the more polite words used to describe the implementation of new regulations for insurance brokers. Not only were most brokers facing mandatory regulation for the first time, but they also had to try to understand what was meant by principles-based regulation as the previous culture of 'tick-boxes' was phased out.

Principles

The FSA had already begun to establish the idea of principles-based regulation across other areas of the financial services industry, but it was not until the summer of 2006 that the method began to be introduced into general insurance. At the time, Dan Walters, director of retail policy at the FSA, said that the shift to principles-based regulation would make the rules "easier to understand and so easier to comply with, thereby helping firms to treat their customers fairly in line with one of the FSA's core principles".

White claimed recently that TCF, along with other principles-based initiatives, were concepts that brokers struggled with initially. Tim Coles, chief executive of Howden Insurance Brokers, noted: "It is difficult to quantify the benefits (of regulation) against the increased cost we are all bearing in order to be compliant, but actually much of the FSA activity has brought greater efficiency." According to Richard Simpkin, owner of RPS Business Consultancy, those brokers that threw themselves into regulation from the beginning are now seeing the benefits. He said: "Those brokers that have grasped the nettle and are looking to use regulation as another driver towards running an efficient and effective business ... are coping far better than those adopting strategies of 'doing the minimum' and, in some cases, adopting a wait-and-see approach."

The cost of implementing regulation is a recurrent grumble that emanates from brokers. In every PB Sentiment Survey that broached the subject, the percentage of brokers complaining it had increased their costs was over 90%. Simon McDowall, general manger of Norwich-based Knowlden Titlow, said the FSA had increased his broker's costs by at least 10%: "The FSA's regulations have certainly cost us more in terms of both time and money. We're now paying £6,000 to the FSA in costs where we used to give the GISC around £600."

The question of smaller brokers paying more proportionate implementation costs by comparison to their larger counterparts has also been a cause for concern. A study published in April 2006, carried out by Biba and the Federation of Small Business, showed that while the average broker spent 3.7% of its annual income on compliance, that figure rose to 5.2% for firms making less than £100,000 a year. Conversely, larger brokers benefited as that figure dropped to just 1.1% for those with an annual income of over £100m. White said that, while there had been no further costing studies, he still believed smaller brokers were being charged more of their income than larger intermediaries proportionally.

Fair outcomes

Treating customers fairly continues to create headaches for brokers, particularly given the March and December 2008 deadlines. Mike Williams, managing director of UKGI, commented: "The problem with TCF is that brokers find it difficult to transfer principles into actions. The FSA needs to offer a template that firms can follow easily. Presently, it is up to the broker to firstly understand what the principles demand and then translate that into their business environment." Williams' point is echoed by Knowlden Titlow's McDowall, who noted: "It's still difficult to ascertain exactly what the FSA would define as an outcome. Even though we're happy with the outcomes we've got, we're not sure if it's what the regulator wants."

While the bigger brokers and networks may have the benefit of greater resources to fund compliance departments, they too can struggle to meet regulatory requirements, particularly when providing regular commentary as a part of their management information packs. Finding time to ask thousands of employees for updates on their customer problems and solutions is time consuming and costly and it can be hard for larger firms to find the miscreants that cause problems in implementing TCF. The challenge of ensuring that decisions made at board level permeate down to the shopfloor is also far greater for large brokers.

Simpkin suggested that the costs and time-consuming efforts needed to ensure compliance might have contributed to the number of smaller independent brokers that are choosing to join networks. He added that regulation could also be cited as one of the main drivers towards market consolidation. "Regulatory costs have clearly contributed to the shrinkage of broker firm numbers over the last five years," he added.

One of the major issues still affecting insurance is client money, with many firms still struggling over areas such as commission withdrawal. Norman Hughes, managing director at Compliance Management, insisted that many of the firms he had dealt with were found to be in breach of regulation initially when it came to client money.

"The rules require withdrawal within 25 business days of the commission becoming due and payable but, three years into statutory regulation, I would maintain that significant numbers of firms are still in breach because they do not know when the clock starts ticking," he said.

However, a spokesman for the regulator believes the system is in good shape. "We're finding that brokers of all kinds are pretty well adapted now, even the Retail Mediation Activities Returns are all working pretty smoothly," stated Robin Gordon-Walker, press officer for the FSA. On client money, Gordon-Walker admitted that the matter was a complex one, "not because of our regulations I hasten to add, but because of the fact that (brokers) have to comply with other regulations and rules".

Streamlining

There are positives however, as Gordon-Walker confirmed that reassessments to streamline some of the paperwork as part of an Insurance Conduct of Business efficiency review are ongoing. He said: "We've found that policies such as home, pet, household and so on - showed the customers to be getting a good deal, so we're looking at streamlining (the paperwork). However, when it comes to more complex issues like critical illness cover and payment protection insurance, we've had more problems, so there's a need for more prescriptive rules to protect the consumer."

Several brokers complained that the conferences held by the FSA to explain regulatory issues, such as November's TCF conference in London, were too capital-centric and cost too much money to attend. Gordon-Walker responded that the events had to be self-financed before highlighting the regional conferences held with Biba and other trade organisations in addition to the contact centre as means of keeping regional brokers up to date.

Regulation has cost brokers time and money. The shift to principles-based regulation resulted in some brokers expressing annoyance that all of the work carried out in the first 18 months of regulation was now irrelevant, but the ultimate question is whether or not it was worthwhile; namely if regulation has improved the customer experience.

If TCF dominated 2007 then next year will undoubtedly be the year of commission disclosure. Whatever your view, industry members are likely to agree that, after three years' of consultation, the entire industry is keen to have this issue resolved. Gordon-Walker said we should expect a result by the end of the year. However 2008 develops, regulation will remain one of the top concerns for insurance brokers for the foreseeable future.

FROM THEN UNTIL NOW - A BRIEF HISTORY OF THE FSA'S IMPACT ON INSURANCE BROKING

- 14 January 2005

FSA takes over regulation of insurance industry from General Insurance Standards Council

- March 05

FSA issues first major refusal of authorisation to Ridings GB

- April 05

Mazars/Biba survey shows brokers are struggling with the cost of implementing regulation

- August 05

FSA client money deadline is 31 August

- November 05

EU Commission launches proceedings against 10 member states for failing to implement the Insurance Mediation Directive

- January 06

Biba claims FSA's disclosure proposals go against its statutory objectives

- May 06

FSA pilot into client money review reveals "a worrying level of failure"

- July 06

Arrow visits reviewed after analysis shows they are viewed as interrogatory, confrontational and antagonistic

- August/September 06

FSA launches treating customers fairly drive

- February/March 2007

FSA fines Capital One for payment protection insurance mis-selling. Rules later introduced for PPI sellers.

- May 07

FSA issues factsheet on goodwill and reiterates end of 2007 compliance deadline

- Aug 07

IMD active across all member states

- Nov 2007

FSA announces visits to one-third of firms to assess TCF.