A week may be a long time in politics but a year can feel like a very short time when you operate in the general insurance (GI) market and you’ve become regulated for the first time. The burden (or should that be opportunity) of compliance has hit the industry hard and the regulatory landscape changes as the weeks and months roll by.
Today, the industry reaches a landmark on its regulatory journey: the first anniversary of FSA regulation. This time last year the trade press was flooded with stories of impending doom: commercial failures; networks collapsing; and even of firms pulling out of the industry due to the pressure and cost of compliance. And this regulation is supposed to benefit the consumer and promote a stable market?
What has happened?
So have those stories come true? What has actually happened in the market over the last year and what have been the key issues affecting you?
The profile of the GI regulatory regime has risen in prominence at Canary Wharf as time has marched on. In the early days of regulation, a stated priority for the FSA was ‘policing the perimeter’: making sure the only companies operating in the GI market were those authorised to do so and there were no ‘rogue traders’ breaking the law. Likewise, the profile of the regulator’s demands increased among most firms’ senior management. The honeymoon period of the GI industry getting used to the FSA’s demands (if indeed there ever was one), didn’t last long and is well and truly over now.
Next a series of desk-based benchmark reviews were undertaken. Here, through information gathered in regulatory reporting and on-site visits, the FSA aimed to group firms with their peers. Therefore, not only did firms need to comply with the FSA’s rules, but they also needed to ‘run faster than the pack’, to avoid being looked upon unfavourably and potentially incurring greater supervision from the regulator.
More recently a series of thematic reviews and investigations has been undertaken as the FSA sharpens its regulatory tools and seeks to ensure firms are complying with its regime and there is no undue consumer detriment. We have seen this in a few areas already including: Financial Promotions and disclosure; conflicts of interest; policyholders’ eligibility to claim and the suitability of sales made. More thematic work is planned for the future, including a review of the effectiveness of the GI regulatory regime in the Spring.
Consolidating compliance
A key challenge for many firms has been consolidating their compliance with two, and sometimes three, separate sets of rules: the original Conduct of Business sourcebook (COB) and the ‘M’ and ‘I’ versions: MCOB and ICOB. Mortgage regulation commenced a mere three months before ICOB. Many firms devoted so much time and resources to complying with mortgage rules that by January last year they suffered from ‘compliance fatigue’: budgets exhausted; the back-office overloaded with new processes; and sales staff unsure of what they could and couldn’t say, could and couldn’t sell.
Were firms able to flick a switch on the 14 January 2005 and suddenly operate a ‘belt and braces’, gold-plated compliance regime? Probably not; the challenges were too enormous and timescales too short.
Even if they were able to, most firms would not want to do this because of budgetary constraints and all the other pressures attached to running a business in the real world. The FSA itself has recognised that an industry where mistakes never happen is neither achievable nor even desirable. Consequently, the focus is on promoting consumer protection, treating customers fairly and market confidence, not creating a ‘zero failure’ regime. However, a firm still needs an ‘internal radar’, watching for breaches of the rules however minor they may appear. Repeated instances of the most minor error indicates a systemic problem, which the FSA will expect to be identified and remedied and even reported to them if needs be.
Taking stock
So this point in the journey, one year into regulation, is a key time to take stock of the events of the last 12 months and crucially, the systems and controls put in operation in your firm to ensure your compliance with ICOB and MCOB and how you monitor them. This is also a good opportunity to develop and refine your processes and systems, not only to satisfy regulation but also for good business practice and the resulting productivity and efficiency gains.
At its most simplistic, when you review your organisation the question is: ‘Are your systems and controls robust enough?’ But thinking at this level misses the point about what a regulatory review should achieve and indeed misses the point of why the FSA was devised in the first place. What is it that your systems and controls need to be robust enough to achieve?
The answer to that is of course quite simple, although achieving it in reality is anything but. Of the FSA’s four statutory objectives, the two most often quoted relate to confidence in the UK financial services industry and in ensuring the appropriate degree of protection for the consumer. The position firms need to work towards, then, is the design and operation of a stable compliance culture: one that does not materially disadvantage individual customers or groups of customers; one that does not facilitate or allow for materially unfair or non-compliant practices within the firm; and one that does not result in reputational risks for the industry as a whole.
Clear communication
A number of issues are covered under that umbrella, and some examples have already been offered in this article. The key trend running through these themes is the importance of clear communication from the firm to the customer. So far though the news from the industry has not been good with the FSA criticising both the content and presentation of key items of literature. In a recent study over 60 per cent of Initial Disclosure Documents (IDD) were found to contain errors or inaccuracies. By now, senior management of GI firms will have received a ‘Dear CEO’ letter from the FSA, with the clear instruction that “you should consider whether you need to review your product disclosure documents” for GI contracts. The FSA goes on to state that it will be conducting follow-up work in this area during 2006. The warning has been issued and firms need to act.
If clear communication with customers is an issue, then sure as eggs are eggs, communication with the FSA is also under the spotlight. The Retail Mediation Activities Return (RMAR) is one of Canary Wharf’s key regulatory tools, particularly for small firms. The majority of regulated firms are too small to justify an individual inspection visit from the FSA. So, the data provided in electronic reporting will be closely scrutinised to identify regulatory risks and trends and acted upon if needs be. By September of last year, 20 per cent of firms due to submit their RMAR had not done so on time, a mistake they will definitely not want to repeat next time around.
Within the ICOB rules there is nothing explicit about the need to check for a customer’s eligibility to claim on a policy. However, the regulator has made a lot of noise about this issue in recent months and it is right to do so. Checking eligibility to claim in non-advised sales, and the requirement for suitability in an advised sale, will undoubtedly be a key issue for the regulator in our immediate future. The life and pensions industry suffered from mis-selling accusations and a lack of credibility for years, a mistake this industry cannot afford to make.
Stability
A good, stable regime of compliance in one firm will look very different to a compliance culture in another. The differences arise for a number of reasons, among them are: size of the firm; sales type (advised or non-advised) and distribution method; target market and vulnerability of customers; and product type and the associated risk. Each firm must map out its own regulatory ‘foot print’: define and understand the risks it poses to the customer and to the FSA, then ensure it has the internal radars set so it knows when something goes wrong and can take steps to remedy the problem. FSA regulation may have begun 12 months ago, but actually regulation starts with you.
Mike Harrison is senior consultant at Huntswood
