Regulation - Managing regulation

The overriding message emanating from specialists when discussing regulatory issues and their effects on general insurance brokers is one of compliance as an enabler rather than a hurdle. Of course, this kind of can-do attitude is not easy for the owner manager or the company director with operations, sales targets and investor confidence to maintain. In fact, the reverse can often seem true.

However, cutting through the information overload and drilling down to the aspects of regulation that affect insurance brokers need not be the daunting task that many perceive it to be. Most compliance experts, having dealt with statutory regulation of the sector since 2005, take a pragmatic view of the rules and are always keen to deal with the obvious reminders first to avoid panic.

Steve White, head of compliance and training at the British Insurance Brokers' Association, says: "It's important to note, for example, the FSA's current TCF validation process concentrates on those intermediaries selling the higher risk products: payment protection insurance, critical illness, term life assurance and so on. The vast majority of visits have been for those areas. Some firms outside this group will be contacted and there is a large amount of help available."

The key tenets of the TCF initiative (principles two, three, six and seven) require that an organisation communicates comprehensive information to clients; organises and controls its affairs responsibly and with adequate risk management systems; and conducts its business with due skill, care and diligence. The FSA then reviews the expected outcomes on how the organisation conducts itself and performs its business, requiring an organisation to provide indicators and measurement on how it achieves the outcomes.

Ian Ritchie, director at compliance experts RWA Group, deals primarily with small and medium-size, owner-managed general insurance brokers and explains that his clients need to pay attention to training and competence: "Training and compliance in all its aspects is highly important: making sure all the staff are competent to handle the business that they are charged with. If I went to work for a broker tomorrow, how competent am I to handle home insurance or marine? Until they've checked that out, they don't know."

Fair treatment

Ashley Prebble - a partner at London law firm Norton Rose and a member of its corporate and regulatory insurance team - says that it is key to prove your actions are for the benefit of the customer: "The FSA is keeping an eye on brokers' systems and controls and complying with TCF is all about demonstrating to the regulator that you have appropriate ones in place and you are following good practice. Brokers will have to demonstrate a robust renewal process to ensure that the firm contacts customers ahead of renewal to check for any change in circumstances and to re-broke the policy each year to ensure the customer has the best deal."

Branko Bjelobaba, director of compliance consultants at Branko, is an advocate of TCF and sees it as a framework for the successful management of a well-oiled business. However, he explains that, for the larger businesses with a direct line to the FSA, TCF compliance is a far greater obligation. "The same rulebook applies to everyone," he says, "but what you are required to do if you are a large firm is significantly more. TCF has to be really good, management needs to be up to speed and the management information needs to be very good."

Typically, the larger firms are relationship managed - approximately 2% of the regulated total - and these have a close and continuous dialogue with the FSA. "Smaller firms don't have that luxury; I use this term loosely because it is always good to know where you stand," Bjelobaba remarks.

He continues: "The FSA decides whether the firm should be small or large. In total, 560 firms are relationship managed: banks, building societies, insurers and the largest brokers in the UK, yet it's hard to say precisely what gets you into this group. People say you become relationship managed when your commission income exceeds £5m, though I know firms that are larger than that which aren't relationship managed. It depends what risk your firm poses to the FSA and what would happen if your firm collapsed.

"General insurance is perceived by the FSA to be lower risk and therefore the attention from them isn't the same as for independent financial advisers or mortgage brokers that sell higher-risk products."

The relationship management process manifests itself in the form of Arrow visits: "Either the full whack or a thematic visit," adds Bjelobaba. "Most firms will undergo a full Arrow every two to four years; the better you are, the longer that particular time line is. Some firms that are very good are moved from this group and are subsequently not managed by the FSA on a one-to-one basis but overseen by a huge division that will go out to see you from time to time."

However, without reserves of compliance resources in-house, Ritchie says that smaller broking houses need a little guidance. The FSA's TCF validation process has seen a series of regional road shows take place around the country since the project started in early 2008 and Ritchie explains how some of his clients have experienced the passing regulator's glances.

"We've had a number of brokers - firstly in the South-west and now in the central south - that have been contacted by the FSA that are essentially saying 'come to one of our road shows, you really ought to because following that we will either talk to you in terms of a phone interview or we may see you face to face and check your progress on TCF'.

"With TCF, it's probably us leading the brokers, making sure they gather the management information that the FSA expects of them. This can be difficult for a small firm; the FSA assumes that every firm runs like a well-oiled machine and there is loads of MI to play with and analyse. The reality is that somebody running a small firm doesn't have this and his initial standard answer might be 'treating customers fairly? If I didn't, they wouldn't come back'. The FSA is looking for more than this, so a lot of what we are doing is helping it to set up systems whereby it can recognise how much business it is retaining, how much business it is re-broking at renewal, how many complaints it has and the results of any customer satisfaction surveys that it might do."

Fairness and satisfaction

Where some brokers have come unstuck, say a number of commentators, is by confusing satisfaction and fairness. Biba's White explains that some common areas of misunderstanding have emerged from the FSA's TCF visits so far: "Firstly, there is an over-reliance on customer satisfaction surveys. Satisfaction doesn't necessarily go hand-in-hand with fair treatment; there is a role for it but not at the point of sale. For example, satisfaction surveys work well either post-complaint or post-claim and the results might give you a better example of fair treatment."

White continues: "Post-sale, rather than test satisfaction you could test understanding. If you are a PMI broker and you sell on a moratorium basis - a policy that says 'we'll give you no cover in the next two years for any condition that you've had in the last five'. You can go back to the customer at the point of sale or shortly afterwards and ask them if they understand the exclusions. If they say 'yes, of course, your sales staff explained it perfectly' then that probably indicates you don't have a problem. Conversely, if the customer says 'that's news to me' then you probably have a problem that needs ironing out."

A key to demonstrating fairness at point of sale under TCF is in a broker's approach to training and competence. Ritchie points out that this is not about examinations, so waving your staff's resumes in the air probably won't do: "Exams focus more on theory but TCF is about competence. For instance, if you talk to a broker and say 'I'm a freelance writer working from home and I have some computer equipment and people visiting me - am I ok with my home insurance?' This is the everyday stuff that is thrown at brokers all the time and proves a great deal more than a piece of paper saying you sat in an exam hall for three hours."

Most compliance experts encourage brokers to avail their staff of the plethora of online training tools available, such as the Chartered Insurance Institute and Biba's Broker Assess. However, Tim Lacey, business development director at Application Lynx - a provider of human resource technology solutions - says that there is an increased uptake among his broking clients for tools that support these and many other requirements. He comments: "Training compliance forms part of the TCF requirements to ensure that customer-facing staff are correctly trained to give the best service and the appropriate advice. With a suitable human resources solution, alerts can be raised when staff training is due, although it would be best practise for the HR department to be ahead of a triggered report. This allows management to highlight potential issues and rectify them in a timely manner."

Enforcement

One of the best ways to understand your responsibilities is to analyse the FSA's enforcement activity. Prebble argues that - while an extreme example - Aon's £5.2m fine for failure in its anti-bribery and corruption systems and controls contains within it some good advice for brokers about their approach to training and competence. He says: "There's a bit of a guide as to what the FSA is expecting on training. If you look at its final notice in the Aon bribery and corruption case, there it says that the fine was reduced by 30% because Aon mitigated the risk through putting in place what it sees as almost a gold standard for dealing with these issues.

"You have a pretty clear idea of what the FSA would deem good training on this particular subject. In this case, it was about demonstrating that Aon had trained all existing and new staff, given them refresher courses and tests them regularly on their key competencies. If someone says 'I don't know what it means when I'm asked to demonstrate good training and competence', I would point them to that final notice."

Management information

The key to principles-based regulation is always in the use of information rather than data collection. FSA guidance in achieving the desired outcomes on TCF includes principles on management information that seeks proof on information or evidence that is collected during a period of business activity. White at Biba says that brokers have often misunderstood this concept: "The FSA is finding that firms collect TCF MI but don't do anything with it; they stick it in a folder, label it and hide it away. The requirement is to know what it tells you and how you should utilise it."

By this, White says that the FSA is asking brokers to inform them of what problems they have spotted, what have they done to put them right and then what happened when they remeasured it.

He remarks: "For example, you have collected your complaints data and just printed it and stuck it in a file. Perhaps there is a trend or problem with an individual, product or insurer? If you studied the MI, something can be done. When you are making changes as a result of this, document what you have done so you can show the FSA."

Biba itself issued a paper in September 2007 on TCF MI to detail the sorts of areas that brokers could measure. "The FSA wants to know that you are meeting each of the six outcomes that it has set for consumers. When I worked at the General Insurance Standards Council, documenting what you were doing for training and compliance was always something that brokers struggled to meet GISC requirements on.

"Firms have to be a little bit cuter. We are four years into the regime and firms should know that the FSA mantra is, 'if it's not written down, it doesn't exist."

Most general insurance brokers use one of a small number of broking applications and White says that your provider can aid you in collecting and using management information. "Firms will look at the indicators they are measuring and they will look to their software house to ask how much of this they are actually generating. The problem is that there is no hard-and-fast rule saying 'you must measure this'. It's up to the firms to understand what is prudent."

"The amount of time you invest in compliance is directly related to the size of your business," says Bjelobaba. "Systems are built to ensure that compliance happens automatically, so in a call centre the scripts pop up, their letters have already been checked and devised for clarity and fairness, and they are Insurance Conduct of Business compliant. The organisation needs to train and monitor its staff to make sure they are doing a proper job, though brokers can't rely totally on these tools. For example, if they aren't entirely happy with the standard letters or documents provided by the software house then they need to tweak it themselves."

Nick Jackson - business consultant at broking software house CDL - agrees, pointing out that it is not the software that has to be compliant rather than the organisation: "As much as 80% of regulation is really nothing to do with systems at all, though we have been able to provide firms with tools that can help if they are applied properly.

"We developed a range of tools, some of which were for very specific requirements such as categorising your customers as retail or commercial or if a sale is advised or non-advised. These are straightforward things that software systems can help a broker to manage. Recording customers' demands and needs cropped up from our user groups but the problem with FSA regulation for a software provider is that it is not very prescriptive; these are guidelines that can be interpreted in many different ways. Some organisations wanted us to help them religiously record precisely what the customer wanted in terms of demands and needs from an insurance contract, though to be fair, a lot of customers are only seeking the cheapest quotes, so being led through that process may have turned off some clients."

Jackson says that the measurements and management information brokers are issues such as cancellations and business placed with particular insurers. You can produce a report but are people reviewing it, looking for trends and making improvements to the business?"

Future issues

With TCF validation well and truly underway, the regulator recently hinted at its plans for general insurance brokers in the future. In the 2009-10 FSA Business Plan and the Financial Risk Outlook, some targets for regulatory action have been revealed with retail brokers still in the firing line.

Prebble explains: "One of the key FSA obligations is the protection of consumers and that will be its main target as opposed to protecting businesses. There is a significant issue within TCF on unfair terms in consumer contracts; this needs to be challenged and considered by management - wordings need to be looked at. The key ones are where terms operate to the detriment of consumers, principally, unclear exclusions in general insurance products, which has been highlighted in the PMI and critical illness markets, though you even find this in travel policies. There can be some surprising results."

The FSA's business plan itself reads: "We have highlighted in the past the significant risks faced by consumers and firms when consumer contracts contain unfair terms. We are still finding that some firms are failing to comply with the Unfair Terms in Consumer Contracts Regulations (1999). We will continue to work with consumers and the industry and use our powers to stop the use of unfair terms where we identify them through our monitoring and consumer alerts."

Prebble adds: "I would expect more enforcement actions relating to TCF during 2009-10. There are a number of Arrow visits targeted this year, about one quarter of these firms are to receive follow-up visits and if they haven't put things right then the FSA will take action."

The FSA's other significant publication, the Financial Risk Outlook, warns brokers to keep a keen eye on compliance as they battle to maintain revenues during the economic downturn. "It explains that lower levels of income will put firms under significant pressure so, reading between the lines, the FSA is saying that brokers will be selling harder," says Prebble. "It adds that firms need to ensure they treat customers fairly and not cut important resources in a bid to retain capital. The FSA will increase its focus on consumer outcomes and that means more enforcement actions."

Bjelobaba sees the FSA's 2009-10 budget quoting £415m as the levy on all regulated businesses and comments: "Being a regulated firm is going to be expensive but the FSA says that, for 10,000 small firms, what they pay is going to be less.

"We've had the retail distribution review on financial services," he continues. "The general insurance sector should embrace parts of that voluntarily: commit to higher professional standards, to membership of a professional body and to a basic level of competence and examination for everyone that's employed in a face-to-face role."

With the FSA guidance on commission disclosure announced already (see p.19), brokers are facing an evolving landscape for their businesses. The guiding message should be about quality not quantity and, if your firm is ever called upon to demonstrate its compliance with TCF guidelines, it is time to start thinking like the FSA.