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Commentary: The realities of regulation

Recent estimates by the Building Societies’ Association suggest that the cost of mortgage regulation for lenders may reach 500m. However, little work seems yet to have been done on the similar likely costs for those parts of the industry that will have to comply with Icob from January next year.

To the uninitiated, Icob is the insurance conduct of business rules,
issued by the FSA and complementing MCOB for mortgages and Cob for
all other regulated products.

The cost quoted above relates only to lenders but Icob costs will, of
course, fall beyond providers to brokers and IFAs, whether already or
newly regulated.

But before Icob bites, the rules on polarisation also disappear and
multi-ties become a reality alongside tied or fully independent
distributors. In this article, I will share some initial thoughts
about what the cumulative effect of these changes may be for
providers and distributors.

One of the key changes that Icob will bring about – just as we have
seen recently with MCOB – is that only authorised intermediaries or
providers will be able to undertake the activities within the FSA’s
remit. These include advising on or arranging deals in general
insurance areas. So many firms will be applying for authorisation for
the first time and the date by which applications had to be submitted
to be likely to be authorised in the time for January 14 is long
gone. Any firm which has not applied is likely to be facing a period
without authorisation and in which it must stop trading.

So far, so obvious. What we have found from recent communications we
have undertaken with intermediaries, however, is that some currently
authorised firms have not realised that they too need to apply – in
this case for a variation of permission if they wish to continue to
deal in the general insurance arena. For the avoidance of doubt,
that includes protection and health insurances, as well as the
perhaps more obvious motor, household and contents.

As a provider, we are making sure we have in place new terms of
business with those intermediaries we have dealt with in the past to
make clear that we can only deal with them if authorised and with the
relevant permission. In future we will not be able to accept business
from a firm unless it can confirm such authorisation and permission.

We are training staff across the business to implement this since it
will not only apply to new business but to renewals, claims’ handling
and general administration.

However, for many intermediaries, the prospect of new or further
regulation may itself be prompting a move to consider their place in
the spectrum from tied to fully independent. It was just this
pressure that led to the setting up of the first networks in the
aftermath of the introduction of the Financial Services Act in l986.

It seems clear already that similar regulatory pressures are at least
one reason encouraging many of the bigger intermediary groupings to
consider or move towards multi-ties. Indeed, recent research by Legal
& General found that as many as three-quarters of all
distribution may become other than independent over the course of the
next few years.

It is very early in the process to predict what the combination of
regulation in the protection market with the introduction of
multi-ties will lead to but we do expect the growth of more Intel
Inside-type deals, variants on the model recently launched by Royal
Liver. This gives a single brand for intermediaries to access but
behind the scenes pulls in expertise from a range of providers or
outsourcers.

Looking further at other Icob implications, of course, they continue
beyond the relationship of provider and intermediary to that with the
ultimate customer.

Changes to FSA rules from consultation to implementation mean that in
Icob there is a clear distinction drawn between how customers are
treated, depending whether they are classified as commercial or retail
– with, of course, more detailed requirements at the retail end.

Those requirements vary particularly in the area of product
disclosure – how much and what needs to be disclosed at what stage in
the process. We – and I suspect all other providers – are working
hard to ensure we have all the relevant material, and ways to make it
available to intermediaries and their customers, ready by January 14.

At a more basic level, regulation also means declaring that you are
regulated, so all external documentation must refer to that fact.

In our case, this has meant checking through more than 450 documents.
Are they still in use and, if so, are they up to date? Arrangements
must be made for details of FSA regulations to be included.

On a very personal note, I am delighted that my own business cards now comply.

Joanne Hindle is corporate services director at Unum
Provident

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