Stephen Bland - Regulatory reservations

Stephen Bland has recently filled the shoes of Sarah Wilson as director of the Financial Services Authority's small firms division. But, unlike Wilson, who is now the director of the retail firms division, Bland will supervising small firms, not preparing them. He is also the FSA's retail intermediaries sector leader.

His priorities will be to ensure FSA firms are treating customers fairly, he says predictably, and that consumers are protected. "We will use information on product sales from the providers, and also the electronic returns from brokers," he explains, elaborating further: "And we will announce our priorities for next year in January. The focus will be on delivery and firms should not be surprised if we follow up a number of areas such as disclosure, higher-risk products, controls in firms and networks and claims handling."

When asked about the discrepancy between larger firms' access to a regular contact at the FSA and smaller firms having to rely on its call centre, Bland denies there are any issues that need to be resolved. "This is the fairest way," he exclaims, adding, "There are 9600 smaller insurance intermediaries and, if each firm had a direct contact, the fees we charge firms would go through the roof. The call centre handles the same questions and provides the same answers as a dedicated contact. We use our newsletters, website, e-mails, roadshows and surgeries to communicate and we will soon be circulating a survey to a group of smaller firms, asking their opinion on how we are doing."

Bland, who joined the FSA at its inception in 1998, warns of a host of issues the regulator has unearthed as a result of conducting Arrow visits. "We were very concerned with the poor selling practices of payment protection insurance and the lack of adequate compliance controls." Bland also says that, in the firms with the most serious problems, further investigations will be made with the possibility of taking enforcement action. He continues: "We also found problems with the general disclosure documents given to consumers. We have asked insurers to make improvements and want brokers to improve their practice as well, in particular, to ensure they only include what our rules require and do not leave out what should be included."

He is also concerned about senior management responsibilities. "Firms' governance arrangements are often inadequate. For example, we have observed instances where board meetings are not documented. Board deliberations are often too narrowly focused and confined to performance against sales targets, with no consideration of the financial performance of the business, the key risks it faces, compliance matters or how they are treating their customers. Management information is often insufficient to facilitate discussion in these areas.

"We have found several instances of dominant influence from an individual, with a lack of adequate challenge to counter that dominant influence. Also, we observed a number of cases where compliance, risk management, internal audit and finance functions were inadequate. Those functions were often underresourced, giving rise to a poor control environment."

Elaborating on comments that the FSA was not happy with the treatment of appointed representatives, made by Retail Markets' managing director Clive Briault earlier this year, Bland says: "We have established three main areas where network firms may not be acting in line with our rules or where common practice can be improved. First, the pre-registration vetting of a prospective AR is the responsibility of the regulated network, not the FSA. Our rules indicate the various areas we expect to be assessed before an AR is appointed. Second, firms should assess whether they have adequate compliance resources in place and whether their monitoring programme is sufficiently effective in identifying and mitigating risks. Third, firms need to consider the ways in which they are able to demonstrate compliance with the regulatory regime. The senior management of these firms should identify whether additional time and money needs to be devoted to their ARs."

Commenting on the wobbling Retail Mediation Activities Return reporting system, Bland blames the market for rushing at the last minute. He comments: "It is true there were some teething problems, but we upgraded the system at the beginning of October. Many firms have similar year ends, so peaks are inevitable and there will be slow downs if hundreds of users upload their returns at the same time. Early indications are encouraging, 85% of firms due to report have submitted returns for the first main reporting period. We are taking a tough line with the others, including a £250 non-submission charge. The next large submission of returns took place recently - 7500 firms were due to submit by 11 November."

Commenting on the fact that awaiting FSA approval in an acquisition situation seems to slow the process down, Bland says: "We have a statutory time limit of three months to approve changes in control and we have met this limit on all cases so far this year - 70% are turned around in under a month."

While the UK steams ahead with regulation, certain EU Member States, such as France and Germany, have yet to set the Insurance Mediation Directive in motion. Bland reassures UK intermediaries that they have the right to set up a branch in all European Economic Area states or operate there on a cross-border basis even if the country has not yet implemented the directive. He says: "While our rules require UK firms to use the services of intermediaries in other EEA states only where these are registered under the IMD, we have in place a transitional rule allowing them to continue to use the services of intermediaries in non-compliant EEA states provided they are competent and of sufficient financial standing. Intermediaries based in EEA states yet to implement the IMD do not have access to IMD passporting rights to set up a branch here or operate here on a cross-border basis."

Concerning contract certainty, Bland says January will be significant. "We will establish whether we believe the market is on track or whether we need to intervene using regulatory tools and powers by January," he states, adding: "As the market moves forward in implementing its solution, we continue to develop our plan for regulatory intervention."