Legal: The lay of the land

It has been a busy few weeks down at the Financial Services Authority. The launch of its new penalties policy (which could see enforcement fines treble in size to support the principle of "credible deterrence") and consumer protection policy (which would see the FSA actively intervening for the first time in product development and design) naturally grabbed the headlines.

When the FSA starts talking about "amplifying" the deterrent effect of its penalties further (despite a year of record fines in 2009) and delivering "early intervention" and "intensive supervision", regulated firms inevitably sit up and take notice.

However, translating these concepts into tangible issues for firms to be focusing on in the year ahead can sometimes be quite difficult. We have therefore taken a closer look at some of the detail, in particular in the FSA's Financial Risk Outlook 2010 and accompanying sector digests, published on 10 March, to see what the FSA has in store for brokers in 2010.

The key message for both wholesale and retail brokers is that the pressure on revenues caused by the lower demand for insurance resulting from the recessionary conditions must not drive brokers to take more risks or find alternative ways of making money to the detriment of their clients.

Wholesale brokers should be:

• doing even more to improve transparency and manage conflicts of interest appropriately;
• making a realistic and regular assessment of the amount of capital required to run their business effectively in order to ensure they meet threshold financial conditions;
• ensuring they have appropriate controls and processes around the holding of client and insurer assets; and,
• cautious about expanding into new advisory areas where they have insufficient experience.

In this sector, the FSA clearly has particular concerns about the continued viability of the "consolidator" business model given its reliance on debt finance for acquisitions and because of the governance and control issues these complex groups create.

Retail brokers should be:

• wary of clients focusing on price over quality and insurers reducing the coverage of policies to remain competitive;
• cautious of taking zero/low commission and relying on profitable "add-ons" alongside the primary product where clients may not be in a position to make an informed decision about suitability.

The FSA has its sights on consolidation with the high number of brokers looking to become appointed representatives of networks, giving rise to concerns over the standard of compliance of those networks.

The FSA emphasises how important it is for firms' governing bodies to reflect carefully on these issues and satisfy themselves that they are addressing them appropriately. You have been warned.