General insurance regulation
Speech by Sarah Wilson, Director Retail Firms, FSA
Institute of Insurance Brokers Reception,
House of Commons
6 December 2005
I am delighted to be able to be here today and I am sure you will all join me in thanking John Greenway MP for hosting such a magnificent reception, in such splendid surroundings. Thank you also to the Institute of Insurance Brokers for inviting me to address you. I promise to keep my remarks brief so that I do not eat into the short time we have to enjoy the House of Commons.
In these surroundings, it is of course particularly relevant for me to start my remarks by emphasising the critical role that general insurance plays in the domestic economy. It provides the means for risk to be transferred from those individuals, corporations and other bodies who lack the knowledge or appetite to absorb those risks, to organisations that do and have the capital to back that up. The UK industry is the largest in Europe and the third largest in the world. Without it, businesses would not be able to operate, buildings would not be built, and aeroplanes would not leave the ground. It plays a critical social role: every year, around 35 million UK consumers take, or renew, 77 million policies for content, vehicles, medical, payment protection and other types of general insurance; and ABI figures show that – last year - insurers paid out £355m to victims of domestic burglaries and £456m to victims of private car theft.
So when we took on responsibility for regulating the sales of general insurance in January this year, we were well aware of the significant challenge we faced. Not only because of the social and economic importance of the sector, but also because of the significant increase – around 10,000 - in the number of firms we would regulate.
In implementing the new requirements for these firms – many of which as you know stemmed from the Insurance Mediation Directive – we recognised the different risks posed by these products, compared, say, to investment products and the important role that competition plays in this market. The need for proportionality in our regulation of the sector was therefore an important driver in the design of our regime.
However, we did identify a number of areas where we had cause to believe some early supervisory work was necessary, and some products and practices which are more likely to give rise to consumer detriment than others. Our primary objectives for the retail sector centre on the quality of information and advice available to, and the fair treatment of, consumers. And in line with our statutory obligations, we also need to maintain confidence in this market. So it is these objectives and potential areas of concern that have driven our priorities in the past year. Today I'd like to give you some examples of how these priorities fit within our general approach to regulation.
We have sought to protect the reputation of the general insurance market by identifying firms who have chosen to operate outside the perimeter of regulation. Policing the perimeter is of course vital also to consumers, ensuring they benefit from the safeguards of regulation and have access to redress and compensation mechanisms. We were, therefore, very pleased that our recent review - of over 1700 firms - identified only a handful of intermediaries wilfully acting illegally. As you would expect, we have taken appropriate action with those firms.
Our work to ensure the fair treatment of consumers has focused not only on assessing compliance with the letter of our rules, but also with the spirit of those rules. Within the context of the FSA's existing overarching principle that firms should treat their customers fairly, we have launched an initiative across retail financial markets to challenge senior management to consider themselves how they should organise their business so that consumers are indeed treated fairly. This 'principle-based' approach can, we believe, be hugely beneficial for the industry as well as consumers – in shifting the emphasis away from further detailed rule making where possible and towards a greater exercise of judgement in firms.
Of course, the Principle on Treating Customers Fairly is just one part of the new regulatory approach that firms have had to become familiar with. And, we also understand that adapting to regulation and understanding our requirements takes time. In our supervision of the general insurance sector we are taking a graduated approach, aiming initially to focus on raising standards across the market and to share good practice on compliance. You will have seen this approach recently in our work on disclosure documentation and the management of conflicts of interest, and we will shortly publish feedback on the control of appointed representatives. Where our initial work identifies problems, we will engage with the industry to tackle the issues. If, during follow-up reviews, we find that our messages and guidance have been ignored or not acted upon, we will have no choice but to take intervening action.
Where we have clear evidence that detriment exists, such a graduated approach is neither appropriate nor justified and we need to act rapidly to protect consumers. This was necessary following our work on payment protection insurance which uncovered poor selling practices and a lack of proper compliance controls. We will be providing feedback with a view to raising standards but, in a number of more serious cases, further investigation is warranted.
Similarly, we have taken a robust line with firms who fail to maintain proper controls over their clients' money. Earlier this year, our work looking at client money in wholesale general insurance intermediaries identified significant issues, including deficits in client money accounts; problems with the client money calculations; and issues around the correct trust status of client money accounts. We set out our concerns to the Chief Executives of these firms and carried out further investigations where the seriousness of what we found warranted it. We have also extended the review to the retail general insurance market.
Contrary to the views of some commentators, we are a risk-based regulator so we do not have the resource or the appetite to deal with every small breach of the rules – but we do expect firms to draw issues to our attention and provide us with plans to rectify breaches. Conversely, serious breaches such as client money deficits will be dealt with in a proportionate way.
Finally, I wanted to end with an example of how we aim to work with the grain of the market wherever possible and appropriate, intervening only where such intervention is justified. This approach has driven our challenge to the market to achieve contract certainty by the end of next year – yes, just one year away now. In doing so, I'd like to recognise the work that trade bodies and associations – including the IIB - have done to date in helping the industry with this challenge.
It is generally accepted that the problems associated with contract uncertainty are more acute in the wholesale – or subscription – market, than in your market. However, the non-subscription market has identified a number of areas where improvements are needed so that insurers know what they are exposed to; brokers reduce the risk of errors and omissions; and insureds know what cover they have actually bought - at inception, not days, weeks or even months later. So this initiative is clearly not limited to the London insurance market but extends to the whole UK market.
You will – or at least should - know that a definition has now been agreed which applies to all insurance business. A Market Code for retail and commercial business was issued in September and took effect from 1 October. That should now be driving firms' individual processes and, where necessary, behavioural changes should be evident.
Over the next few weeks, our formal stocktake will provide us with an opportunity to assess how far the market has progressed in year one. Here, we will take account of the results of our own work to assess the degree of change across the market together with feedback from the market we will receive tomorrow afternoon. As we have said previously, the alternative to a market solution will be regulatory intervention. I am sure that, for a sector which is new to FSA regulation and that has put so much effort into implementing our regime over the past couple of years, further regulatory requirements would be far from welcome. Your opportunity to engage here is very clear and present.
Closing remarks
I promised to keep my remarks brief so that you can get back to the drinks and [delicious canapés]. I hope that my comments are helpful and provide an understanding about the FSA's priorities, set within the context of our overall regulatory approach. I'd like to finish by wishing you a very happy Christmas and a prosperous New Year.