When new FSA regulation hits mortgage and general insurance providers later this year, the associated impact on brokers will be significant.
Since the 19th century, banks, building societies and general insurance companies have been subject to regulation. But new conduct of business regulation from the FSA, due to come into effect this year, will shake up both industries – and will have an impact on brokers.
Mortgage lenders should find regulation more familiar, and thus less challenging, than general insurers. The big players have, or have had, their own life insurance subsidiaries. The lesser players have been appointed representatives for life insurance. Either way, they should be well aware of what happened to life insurers after A-Day in 1988. But is that too far away for the lessons learned to be transferred?
General insurers are not without experience. Since July 2000, they have been subject to “self-regulation” through membership of the General Insurance Standards Council but this should not lull them into a false sense of security. Regulation by the sharp-toothed FSA will be another matter entirely, not least because, in practice, the FSA is subject to greater external pressures from the press and the Treasury select committee than the GISC has been.
Nevertheless, just as life insurers have had to deal with regulation, so must mortgage providers and general insurers. After all, consumer complaints against these financial institutions fill the personal finance pages and consumer rights programmes each week.
How does this regulation affect the intermediaries selling these products? The big lesson from the early days of life insurance regulation is the difficulty that providers have in taking on responsibility for intermediaries who sell only their products. As the agents are their appointed representatives, the providers assume responsibility for their compliance but this raises a number of questions for providers and intermediaries alike:
What checks and balances will providers put in place to ensure that the intermediaries through whom they sell, and for whom they accept responsibility, are compliant with the new regulations?
How will these controls affect intermediaries, both in terms of time and costs? How is the brand of providers affected if agents fail to comply?
What is the risk/reward balance for providers in assuming compliance responsibility for agents to maintain distribution, and the potential costs that it might expose them to?
Will this result in a decrease in the number of agents they choose to sell their products?
Few providers seem keen to take on these responsibilities so we can expect multi-ties and independent brokerages to be the norm. Of course, independence brings with it obligations to scour the whole market for the most suitable product for each customer.
General insurers, particularly in the London market, are all too familiar with the problems that can be caused by imprudent underwriting by brokers to whom binding authority has been given. Mortgage providers have generally kept a much tighter control over the underwriter's pen. Conduct of business regulation opens up a new avenue for potential damage from lack of discipline and ineffective controls within the distribution network. Experience in both the life and general insurance sectors is that it is the provider's reputation that suffers long after the intermediary has disappeared into liquidation or worse.
As a consequence, intermediaries will suffer from intense scrutiny from providers as they endeavour to ensure they are spending enough and giving the right priority to compliance with the new rules.
When financial advisers sell to their clients, they talk about fast claims' settlement, appropriate cover and clear language. To its credit, the insurance industry, through the GISC, has set standards on pre-sale information, policy documentation that is “clear, fair and not misleading” and fair and prompt claims' settlement.
But this is still relatively new and untested. It is certainly not subject to the penalties available to the FSA. Tighter controls on the language used by providers and their intermediaries are likely.
What of the new requirement that customers must be treated fairly and equitably?
In a service industry, it is service and behaviour that is being sold. Currently, there is much concern that competition for new and informed customers is at the expense of old and less sophisticated ones.
Loyalty becomes a cost to a customer, which cannot be a successful long-term strategy. Indeed, in motor insurance, Direct Line's initial success was based on a clear understanding that it was more productive to keep existing customers than to replace them each year with new ones. It is not unlikely that a whole raft of marketing practices, such as good initial terms for new customers, treating them better than existing ones, will become outlawed.
An intense period of change runs the risk of resulting in poor strategic decisions. Providers and intermediaries are charged with the responsibility of getting it right according to FSA principles. Principals will find the FSA strong on senior management responsibilities. Failure will put them in the firing line, possibly literally.