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British Insurance Brokers Association Conference
20 May 2004
Speech by Sarah Wilson

1. We are all, of course, heavily involved in preparations for general insurance regulation from 15 January next year. My intention this morning is to provide a sense of what the next twelve months will hold – for you as soon-to-be-regulated firms; and for the FSA.
   
   
2. For firms, there are three dimensions to the next year:
   • making your choices in response to the advent of regulation (particularly whether to apply direct to the FSA or seek a principal) and then acting on these;

   • preparing to comply with the FSA's Principles and rules; and
   • becoming a supervised firm (either by the FSA or by a Principal)
     
3. I should like to take each in turn.
   
   
4. There continues to be lots of evidence that firms in the general insurance market are making decisions about the future and acting on them.
   
   
5. The latest data published by the FSA (as of 30 April) show that:
   • 15046 firms from the mortgage and general insurance sectors have registered with the FSA for an application pack – with 5199 from the primary general insurance market; and 3476 who sell general insurance products alongside other goods and services;
   • (of course, within the remaining 6371 mortgage sector firms, many are also registering to apply for permission to conduct general insurance business also – as they sell buildings and contents insurance if not other products);
   • we have so far received 1896 applications from general insurance firms; and
   • meanwhile, 3876 firms that are already authorised by the FSA have registered to apply to vary their permission to carry on either mortgage or general insurance business.
     
6. Moreover, since these statistics were published, we have seen a further 1000 firms register for authorisation – almost all from the general insurance sector - and the number of applications from general insurance brokers now stands at more than 2700. We fully expect a very large number of applications to arrive in the next fortnight (before the early discount deadline of 31 May), and then a further peak at the six-month point (before 13 July);
   
   
7. Of course these statistics hide those firms choosing to become an appointed representative. They are an important part of the picture – more important as far as we can see, however, in mortgages than in general insurance.
   
   
8. Second for firms, it is necessary to prepare to comply with the FSA's Principles and rules – a point that applies, of course, whether you are directly authorised or an appointed representative.
   
   
9. We place great emphasis on the role of senior management in firms – be they large or small. Our third principal requires each authorised firm to 'take reasonable care to organise and control its affairs responsibly and effectively', and this is further elaborated elsewhere in our Handbook to require firms to 'apportion responsibilities amongst its directors and senior managers' and to 'ensure the business and affairs of the firm can be adequately monitored' and also to 'take reasonable care to create and maintain such systems and controls as are appropriate to the business'. All of this means that we would expect the senior management to be taking a particular interest at present in the state of firms' preparation.
   
   
10. As you know the FSA has finalised the rules so that, in all cases, twelve months were allowed for firms' preparation. For the general insurance market we also gave a further transitional – allowing you to keep insurer money in client accounts up to January 2006. I will come back to the question of client money segregation in a few moments.
    
    
11. But overall, what are the new rules about?
    
    
12. I would characterise them as of four kinds:
    • those that require you to treat your customers fairly – to provide them with correct information and explanation; to protect their (client) funds; to handle their complaints fairly (including through membership of the FOS); and to maximise the chance of succeeding in this by ensuring that staff are competent for their task;
    • those that require you to hold the right resources – capital and PII cover;
    • those that require you to organise the firm – allocating responsibilities amongst staff; maintaining clear documentation; and keeping relevant records; and
    • those that require you to report to the FSA – when things change and through regular submission of data.
      
13. While we have taken great care to ensure that we have a proportionate regime (reflecting the risks in general insurance), we do of course also recognise that getting to grips with the FSA's requirements is not an easy task, and that this applies in particular to the senior management of smaller firms. It is important however to keep a sense of perspective. Many of the FSA’s rules reflect good business practice; those that have in the past volunteered for regulation will also find that they have a head-start. Furthermore, depending on the nature of your business, sections of the rules may not be directly applicable (insurers and not intermediaries, for example, are responsible for the content of policy summaries); and particularly in the secondary general insurance market, it may be that an identical policy is sold by staff in identical circumstances repeatedly – in which case after an initial investment in new processes and paperwork much of the work may be done.
    
    
14. Help is – as I hope you are aware – also readily available: on a special section of the FSA website; through a dedicated contact centre; and (most recently) through the publication of a special Guide to the relevant parts of the FSA Handbook. This is designed to make accessing and understanding the contents of the Handbook considerably easier – it covers all aspects of the rules that typically apply to smaller firms; is written in question and answer style; and contains worked examples in key areas such as capital and client money requirements. It is in three parts – one covering rules applicable to both sectors, and one each for rules applicable to only mortgages or general insurance. We have made it available on-line or in hard copy for firms that would prefer to order it. We hope very much that the large number of firms at whom this is targeted will find it invaluable.
    
    
15. Many of you will by now be increasingly familiar with much of this – the rules and sources of help. There is however one area that I wanted to mention specifically – and that it the need for proper documentation.
    
    
16. It is increasingly the FSA's view that the general insurance market has a great deal to do to sort out its documentation of transactions. This is necessary so that firms (intermediaries and insurers) understand their obligations, and so that clients understand the basis on which insurance is offered and/or their funds are held. It seems to us that there is often at present at inappropriate degree of reliance on unwritten or implied terms and arrangements.
    
    
17. Several of the FSA's Principles are relevant here – most notably Principle 3 (already mentioned) on the need to exercise management control; and Principle 8 on the importance of clients' information needs.
    
    
18. More specifically, the client money rules include various requirements for notification, informed consent or agreement in writing from clients. The issuance of a terms of business agreement may be an acceptable means of meeting those requirements. There are two notable examples:
    • a requirement that a firm takes reasonable steps to ensure that its terms of business or other client agreements adequately explain, and obtain the client's informed consent to, the firm holding client money in a non-statutory trust; and
    • a requirement to ensure that any retail customers whose client money may be invested are made aware of this (whether through terms of business, client agreements or otherwise in writing) and are given an opportunity to give their informed consent.
      
19. We believe that senior management in firms need to consider whether these requirements are met at present and whether changes are required to documentation to ensure that they are met in future.
    
    
20. And we have also introduced a rule requiring an intermediary not to agree to hold money as agent of an insurer unless it has entered into a written agreement with the insurer to that effect. We recognise that achieving clarity in this area – in particular - requires assistance from all parties in the market. We are aware that at present many intermediaries are struggling to clarify the nature of their existing agency agreements and are also finding it difficult to gain assistance from insurers. While we understand that this is not an easy task, and that some insurers will wish to take strategic decisions on the risks they incur going forward and therefore the documentation that they wish to sign, we do think it is very important that they move to resolve the issues as fast as possible. In particular, we are concerned to avoid a scenario where firms make assumptions in applying for authorisation (and subsequently) – either assuming that risk transfer will always apply and therefore not applying for permission to hold client money or setting up appropriate trusts, or assuming that money which is actually insurer money is client money and therefore not handling it in accordance with insurer wishes or the FSA rules.
    
    
21. The next twelve months takes us into a period when firms will start to be supervised – either by the FSA directly (or, if an appointed representative route is chosen, by their Principal). In the former case, general insurance brokers will be supervised in one of three categories – the London market brokers will be supervised by our Wholesale Markets Area; while the other categories (medium and smaller firms) will be regulated in the Retail Markets Area. In all cases you should expect us to be easy to do business with and to adopt a risk-based approach – our emphasis is on preventing consumer detriment. More particularly:
    • expect us to want to work with you to ensure rules are understood and to raise standards;
    • be proactive please in notifying us where you should – of business changes, but also of problems or non-compliance (we would rather be told than discover);
    • expect some involvement in thematic work (perhaps through completion of a questionnaire or targeted visit or mystery shopping), and to hear the outcome of that work – we want to share best practice and to help rapid learning from mistakes;
    • on the other hand, expect us of course to take enforcement action if we believe it necessary – which would be especially the case if there is wilful non-compliance and consumer protection suffers.
      
22. Let me then turn to the FSA's task in the next twelve months. I have noted four areas:
    • to complete our work on the rules – as I said I would like to return here to the question of client money
    • to raise awareness
    • to process applications; and
    • to plan for the supervision task that I have already outlined.
      
23. First completing the rules. Here I am able to say that the FSA has now concluded that we are able to consult again on the question of whether intermediaries should be permitted to co-mingle client and insurer money in client accounts. We expect to publish a consultation paper in late July, and to make final decisions on whether to change the rules early in 2005.; I understand that the industry might be rather pleased to hear this news!
    
    
24. It is fair to say that, although a little belatedly perhaps, the industry has made a very strong case to us in terms of the costs that will be incurred if the current arrangements (which prevent co-mingling from January 2006) are left in place. We are particularly grateful to BIBA for the work that it has done on your behalf on this issue.
    
    
25. It is equally fair to say that the issues are difficult. In consulting we will need to set out proposals which, while they allow funds to be mixed, nevertheless allow the FSA to meet its obligation to provide appropriate consumer protection – here to your clients. We will, as a part of that, need to consider how to allocate the costs of trust administration in the event of an insolvency. And of course, we will need to ensure that our proposition is consistent with the Insurance Mediation Directive which we are charged with implementing. We are now clear that a proposal can be put together that meets these tests – but respondents to consultation may not agree and we will need to weigh up their responses.
    
    
26. Finally, I need to stress that, whether or not the FSA changes the rules following consultation, two features of the current position will remain:
    • the industry will still need to clarify its documentation; intermediaries will in other words still need to understand for each insurer / type of business whether they have client or insurer money; and
    • insurers will still have a choice – to allow an intermediary to keep insurer money in a client trust or to require them to separate it – there will, in other words, continue not to be mandatory risk transfer.
      
27. The FSA's second task in the next twelve months is to continue in its work to raise awareness – so that firms are given every reasonable chance to learn of and react to the advent of statutory regulation. We recently commissioned NOP to do some work on our future population, including on levels of awareness amongst so-called secondary brokers. The results are as shown here – a very high level of awareness in the motor sector (nearly 90%), reasonable in health, property and other groups (around 50%), but poor in retail (shops etc) where it was as low as 15%. Although registrations from these sectors continue to rise (now to around 4000 firms), we remain concerned that too many firms are still not engaged. Depending on your position in the distribution chain this will affect you. I know that such firms are often referring at present to their immediate market contact (often a broker) for information and advice – I would encourage you to continue to assist wherever possible, including directing such firms to our website for factsheets and straightforward information.
    
    
28. In addition to the work that we are continuing to do (through trade associations, product providers, trade press etc), we have now concluded that we should do some advertising to raise awareness with these constituencies – most notably retail. Our aim in doing this will be to encourage firms to get information and make decisions quickly.
    
    
29. Third, the FSA is of course processing applications – both for authorisation itself and from existing authorised firms to vary their permission. We have now issued 1552 minded to authorise letters – a further 400 since the initial batch went out at end April. This includes 404 to general insurance brokers. We will continue to send them out regularly over the next eight months. When you get one depends of course on when you applied, what issues your application (or our intelligence) reveals which need to be checked; and the complexity of the business. I am often asked about the absence of networks from the minded to authorise letters to date. Quite apart from the timing of such applications and any particular issues, such firms are in their very nature complex – it therefore should not come as a surprise to find that they are not amongst the earliest decisions.
    
    
30. As you know, firms will be formally notified of our final decision from November (and from around then extracts from the FSA Register will also be available so that the market can see who is on the list).
    
    
31. Finally, we also will continue to prepare for supervision. We are putting in place the systems necessary to ensure that we can answer your enquiries (to be easy to do business with), and to follow up issues with individual firms or themes affecting the industry more broadly. These will make heavy use of the data that we are asking you to provide from mid 2005. We are also considering our supervision priorities. These are yet to be established (and much will depend on what we learn in the next few months), but I thought it would be helpful for you to know that we will certainly do some early work to police the perimeter – that is to identify and take action in respect of firms that have chosen to ignore the advent of regulation. As you know, they will be committing a criminal offence, and it is important both in consumer protection terms and in fairness to those who are putting in a lot of work to prepare themselves that we devote resources to catching up with those that don't.
    
    
32. In conclusion, we remain committed to working with the industry to ensure a smooth transition for general insurance regulation. We are looking forward to achieving this with you over the next twelve months