Supervision strategy for retail general insurance intermediaries
Speech by Stephen Bland, Director Small Firms Division, to the British Insurance Brokers Association, Manchester
7th April 2005
I am delighted to be here today to talk to you about our supervision strategy for retail general insurance intermediaries, to outline our priorities for this year in the retail arena, to share with you how we will approach supervising so many new firms and to give you an early insight into the issues we are beginning to see. I am in charge of the FSA's Small Firms Division which regulates the vast majority, by number, of insurance brokers here today and I chair our internal programme board responsible for co-ordinating the FSA's supervisory priorities for the retail general insurance market. I hope this helps distinguish me from Matthew Pinsent whose photo is next to mine in the conference brochure. Also I've seen him in my local pub so I knew he's 6'5" ish and he's quite good at rowing.
The general insurance industry has seen dramatic regulatory changes over the past few years. For us, we are moving from developing a general insurance regime that is proportionate and effective to implementing it and authorising some 13,300 general insurance intermediaries for the first time in addition to the 4,800 firms who had a variation of permission to undertake such activities. In fact we are publishing today a report on all aspects of the Tiner insurance reforms over the last few years. And you are moving from voluntary regulation under GISC (or in some cases no regulation) to our new statutory regime, as required by European Directives, and all that that entails in terms of getting to grips with it. We know that has not been an easy task for many of you and that there are a great many concerns about whether you've got your compliance right. I want to say upfront that we will be working with you to improve standards across the industry. We'll give you regular feedback on the outcomes of our supervisory work so that you can compare what you do with the good and the bad and thus make judgements about your own standards of compliance. We'll provide practical material which will help you understand the rules in a way that enables you to apply it to your business. And we'll be here to answer your questions and listen to your concerns. More on that later. But let's be clear before I sound too much like a politician rather than a regulator – while we can give you some tools to equip you for complying with the rules the responsibility for your business and compliance with our rules lies with you.
Priorities
So, what are our priorities for the retail sector this year? Well, our first priority is of course to continue processing the late applications from general insurance intermediaries and either grant them full authorisation or reject them. So far, we've reduced the list of firms who are interim authorised – those firms that got their application in the few days before midnight on 13 January - to 148 firms down from 941.
Sharing joint first place with processing applications is ensuring that we continue rigorously to enforce the perimeter where firms are either unauthorised or acting outside their permissions. As you may have seen in the press we have been concentrating on detecting unauthorised mortgage firms. The focus of that work is now changing to the general insurance sector.
For firms correctly acting within their regulatory permissions, I'd mention four key areas for us.
First, the rapid expansion of networks, together with evidence gained from the authorisation process, suggests there may be significant systems and controls issues in firms that have appointed representatives. We are worried that principals and appointed representatives may not have implemented the controls demanded in such circumstances and will therefore be considering control adequacy in a small number of larger networks to ensure that they are compliant with the responsibilities they take on when accepting appointed representatives.
Secondly, disclosure is a keystone of our consumer protection regime and we will need to check that firms are adhering to the rules we have introduced to make the market work better for consumers. The policy summary is the key document and we will be focusing on whether significant and unusual exclusions are being properly and clearly disclosed as well as looking at higher risk contracts such as critical illness cover. The Ombudsman's experience will inform our approach here. Where Key Facts documents are used instead of policy summaries, we'll be looking at these too. Our project on this is just about to start. Of course, insurers rather than intermediaries are responsible for the content of policy summaries but we will also be looking at intermediaries' Initial Disclosure Documents to ensure consumers are getting the right information about the service being provided and statements of demands and needs. We know firms are having difficulty with the demands and needs statements in particular and we have seen some which are longer than necessary and are too generic even where advice has been given.
Thirdly, and high on the consumer agenda, is the sale of payment protection insurance. The FOS, consumer bodies, and the media have all expressed concerns where consumers acquire products on the back of another transaction. These concerns are normally about aggressive sales practices, poor value products or excessive profit margins, unsuitable products, small print and complex terms. Over the next few months we will be looking at payment protection insurance across the market (including mortgage payment protection insurance and credit card/loan payment protection), taking action where necessary, and identifying good and bad sales practices.
Fourthly, we'll also be focusing on claim and complaint handling. These two issues are linked, particularly in that firms with poor procedures may fail to inform consumers about their rights to complain and to take the case on to the Financial Ombudsman Service (FOS). The FOS reports that in cases of dispute, firms and consumers often disagree about where a negotiation process on a claim ends and a complaint starts, although this should be clearer under the new rules as insurers are required to communicate the reasons for refusing a claim to the customer. There are some allegations of poor practice in this area, especially when claims handling is outsourced.
There are many other issues that come to our attention which we will be dealing with, such as considering allegations of fraud. But the priority issues I have spoken about are aspects of a more general FSA priority: treating customers fairly. And I've talked a lot about good practice but what do we mean by that? Obviously it's complying with the regulations but the very essence of good practice is about treating customers fairly. Treating customers fairly is a priority for us and as you are telling us, it is for you too – it makes good business sense. We're expecting firms to have their customers at the heart of their business, to have a culture that promotes a healthy regard for the customer. The general insurance industry is fiercely competitive and customers are beginning to shop around more for the best deal on their insurance. If you do not have your customers at the heart of your business, you will lose them to the competitor who does.
So how do you assess whether you're treating your customers fairly? While our rules aim to underpin treating customers fairly, we would prefer to assess firms against the principle of treating customers fairly. This gives firms flexibility to embed the fair treatment of customers in a way that fits their business.
We realise that implementing a culture of treating customers fairly in small firms will raise issues that we haven't seen in our work with larger firms. There is a consultation group of firm and consumer representatives who give us views on our treating customers fairly work and they met recently to discuss the issues for small firms and to work out how we can get across the TCF agenda across to them effectively. We also recognise that generally small firms are only part of the chain and will be exploring the link between product providers and distributors as one of our clusters of work. More information about that will be available in a report that we aim to issue in June. Going forward we will be doing further work on what we think TCF means in particular for mortgage and general insurance firms
Our approach
So, you ask, will we have time to do anything else? These priorities will be tackled as part of our thematic work. For those who haven't read our supervision fact sheet, thematic work enables us to investigate or increase our knowledge of or address concerns relevant to a specific area. Thematic work will probably take up much of our time. The rest will be spent on dealing with issues of crystallised risk. Let me explain.
As a general principle, we supervise firms according to the risks they present to our statutory objectives. All authorised firms are analysed under a common risk-based methodology, which we call ARROW. We measure these risks by their potential impact on consumers and the market, and the likelihood of the risks occurring. The nature and extent of our supervisory relationship with an individual firm depends on whether we consider them to be a high, medium or low risk to our objectives. Large and medium-size firms will have a dedicated relationship manager and can expect a visit from them so that they can assess the risks those firms pose to our objectives. The result of that assessment will be a risk mitigation plan which the relationship manager will monitor. Depending on the level of risk these firms pose will determine how closely we monitor those firms.
However, 97% of the firms we now regulate are small firms in that they have been classified as posing a low risk to our objectives – individually. Collectively, so many small firms have a very big impact on our objectives. So we have to be organised and effective in the way we supervise them.
Much of our supervision of small firms will be done through analysing the information we get about a firm from our many and varied sources (regulatory returns, product sales data, common themes that arise from visits to firms or questionnaires received and information from consumers and the FOS for example) and identifying any risks to our objectives. We will not be reacting to every issue that lands on our desk or trying to save every firm that borders on failure. We must accept that with a finite number of resources we can only tackle the most important issues and even then we will have to prioritise so that the issues are dealt with according to their impact on our objectives.
Small firms won't have a day-to-day relationship with us nor should they expect us to visit them on a regular basis. Instead, we'll contact them only when we need to follow up any of the information we've received about them or to ask them to participate in our thematic work. It sounds like it's a rather one way relationship – don't call us we'll call you – but in fact there are plenty of opportunities for firms to interact with us. We're providing the tools so that firms can help themselves without reliance on us or on professional help. We run a wide and varied programme of training events where not only will you learn about aspects of the rulebook but you'll also be able to meet and ask questions of FSA staff. I've mentioned the roadshows which we will be running across the country where we'll be giving feedback on the outcome of our visits in those areas. Please attend if you can – they're free. There's also a wealth of information on our website – including dedicated pages for IFAs and for firms doing general insurance and mortgage business. Later this year we'll be launching pages specifically for small firms that brings together information in one place relevant to their business. And of course, you can always email or call our Firm Contact Centre when you've exhausted all your usual avenues of enquiry – BIBA's own website is an excellent source of information for its members.
I said in my opening remarks that we would be working with firms to improve standards in the industry. Make no mistake, we will fully employ our enforcement powers with firms and individuals that are wilfully uncooperative, persistently and knowingly non-compliant and who flout the regulations to their own ends. We will be flexible with those firms who are genuine in their commitment to improve even when they have got it badly wrong. If they can demonstrate to us that they can put things right quickly and are open and cooperative with us, we will work with them to ensure the right outcome for them, their customers and us.
Of course, it's not pleasant being in a sticky place with the regulator but there are lessons that can be learnt from others' misfortunes. We invariably publicise enforcement action taken against a firm, not just to make an example of them, but so that other firms can understand what we consider to be malpractice and learn what is good practice. Our aim for this year is to give firms more examples of good and bad practice to help them work towards higher standards in their business. That's not to say we'll be doing that all through more enforcement action as that is an expensive regulatory tool of last resort. In any event our enforcement colleagues will never see the light of day if that were the case! Rather we'll be giving firms feedback on the outcomes of our supervisory work. For small firms this will mean us developing and publishing good practice guides and giving feedback at regional roadshow events.
Early issues
If is of course less than three months into the new regime and we do not yet have information under the Retail Mediation Activity Return. Nonetheless, we already have some clue of the issues that face us and you will no doubt be interested in these initial (and brief) impressions. We want to crack down on firms that are breaching the perimeter and either get them doing their business on a legitimate footing or close them down to prevent consumer detriment.
We will also be following up with firms who gave us assurances during the authorisation process of their ability to be compliant come 14 January. Disappointingly, we are finding a number of cases where these assurances have not been fulfilled and we will be taking a tough stance with these firms.
We have some early indications of instances where potentially brokers are collecting premiums from their customers, not putting them on risk and pocketing the money. If cases like this are proven we cannot allow this type of practice to continue. Not only does it leave consumers exposed but it also has an impact on the credibility and honesty of the industry. So we will take action and, where relevant, involve other prosecuting authorities in these situations.
Our Financial Promotions Helpline has also seen a trickle of complaints about general insurance advertisements. The Financial Promotions team are treating mortgage financial promotions as their priority - to improve the clarity and fairness of mortgage promotions. However, if the trickle of complaints about general insurance promotions becomes a flood then they may need to review their priorities and begin looking more closely at general insurance.
We also know some of the issues vexing you. We have regular discussions with BIBA and more directly you have kept the phones and emails to our Firm Contact Centre buzzing with enquiries about disclosure documentation, client money, financial promotions and renewals, to pick a few of the most common enquiries we get. Don't forget you can find information on these issues and more on our website. But I am also interested in your feedback now and over lunch – just doorstep me in a way I hope you wouldn't doorstep your customers!
Conclusion
I hope I have given you an insight today of what we are trying to achieve this year and how we will go about implementing the general insurance regime in the retail sector. In preparing for the new regime you have had to review your business practices and make some radical changes to conform. I'm afraid that we haven't yet reached calm waters and some of you will no doubt have further upheaval this year as we begin interacting with you on your compliance with the regime. However, I hope that the vast majority of you are trying to do the right thing by your customers and by working with us we can help you rise to the challenges, drive your industry forward and secure the confidence of consumers that we all want to see the industry deserve.
