The all powerful Financial Services Authority (FSA) will get another string to its bow in October 2004 when it takes over the regulation of general insurance, but the news has left many advisers in a quandary.
The City watchdog already regulates most aspects of the financial world, and will need to work fast to get the regime in place to take over from the General Insurance Standards Council’s (GISC) voluntary scheme by that date. But any changes could have a big impact on the bottom line of health insurance and protection intermediaries.
The first step was taken just before Christmas, when the FSA issued a consultation paper on its thoughts for general insurance regulation, but the details are far from finalised.
Sarah Wilson, director of the High Street Firms division of the FSA, said: “We want to ensure that customers are treated fairly. They should be provided with information on both firms and products and, if they receive advice, the product recommended should be adequate to meet their needs. If they make a claim, it should be handled promptly and efficiently.
“We aim to introduce a regime that achieves these goals in a proportionate, cost-effective manner, and which has regard to issues of competition both within the UK marketplace and internationally.”
All forms of general insurance will come under the FSA umbrella, including critical illness, income protection, long term care (LTC) and private medical insurance (PMI).
Advisory activities covered under the new regime include introducing, proposing, carrying out preparatory work for the conclusion of insurance contracts, concluding insurance contracts and assisting in the administration of these contracts, particularly where there is a claim.
Whether the FSA would have chosen to increase its regulatory remit to general insurance and mortgages is a moot point. The fact is that a European directive – the Insurance Mediation Directive – has forced the Treasury to increase the FSA’s regulatory role as the UK moves towards harmony with European advisers.
While this would help advisers to work abroad, or with customers abroad, the benefits may be outweighed by the drawbacks.
One of the proposals is that advisers could be required to disclose the amount of commission they receive on a product, as well as comply with an unfair inducements rule and cancellation periods. This should be seen by many as good practice.
Heather Armstrong of Scottish Equitable Protect, says she believes that disclosure will be one of the major changes for advisers to cope with.
Under the current GISC rules, advisers only need to disclose the commission they are earning if a customer asks, but they must disclose any extra charges that the adviser is making.
Armstrong says: “The market already provides some element of disclosure. For many advisers, critical illness, term assurance and income protection, which we deal with, are such a high proportion of the business that they are going to comply with whatever regulation the FSA puts in place.
“I don’t think it will have a huge impact. GISC is a voluntary body, so with any regulation under the new authority, there may be more consistency.”
Armstrong says that Scottish Equitable does not insist that the advisers it deals with are members of the GISC, as it is not compulsory, but believes that the advisers it uses are “behaving in a responsible way”.
Other proposals from the FSA suggest that firms may also have to provide information to customers about their status, and the basis on which they are advising them in an understandable format.
The FSA will also require advisers to make sure the policy is adequate for the customer’s needs, make sure people get key product information when it can still affect their decision-making, and set minimum claims handling standards so that firms deal with all claims fairly and promptly.
Much of this is simply good practice, and is required under the GISC rules.
Rachel Maidment of the GISC says: “Certainly making sure that the firm gets enough information from the customer, and gives enough to that customer, is absolutely fundamental within our requirements. It is quite likely that many elements of the GISC rules will be very similar to the FSA regime, but we can’t say for sure because that would be preempting what the FSA decides. “The GISC rules were formulated with this European directive in mind. It has only suddenly taken a fast track. Our rules already address most of what the FSA rules will have to meet.”
The need to comply with new training and competency rules but they could lead to extra costs for many advisers, who may be forced to set up compliance departments to satisfy the new regime. In addition, they would have to ensure that they kept up to date with all new information by using continuing professional development courses. But for advisers, where time is usually money, this could have an impact on the bottom line.
This, Armstrong believes, could lead to some consolidation within the industry, as advisers look to networks to help them cope with the extra cost of administrating compliance. Alternatively, the industry may simply see firms joining forces to cut costs, although she does not see too many people leaving the industry. Armstrong comments: “People may want to go to the networks for help with the costs, but consolidation is the word I would use, rather than contraction. The protection market is growing because investment markets are in a downturn, and more eyes are on protection. It is a cornerstone of financial advice.
“Income protection, for example, has become far more popular as people see the value of it. They worry about how they will pay for everything if they cannot work. The same has happened with unemployment insurance because of all the redundancies.”
However, with the current raft of FSA consultations that advisers are supposed to consider, the amount of time being spent responding to the FSA is beginning to grate on some of the health insurance and protection intermediaries.
Brian Lentz, of Portfolio Insurance Consultancy and Mortgage Brokers, says: “I wish the FSA would sit on their hands for five minutes. We have just had the consultation paper, which on the face of it was to do with endowment complaints, but affected other time bars.
“I haven’t yet had time to look at the consultation paper on general insurance. The FSA does not consult on the questions it needs to ask. What it does is come out with its own conclusions, and then you end up giving an opinion to be consulted on but it is already a foregone conclusion.
“There is no advantage to putting in another layer of costs. You end up using a sledgehammer to crack a nut. We already treat all customers as if it is a regulated business.”
Any extra costs would ultimately be passed on to the consumer. But the primary advantage to customers with this new regime is that they will have access to the Financial Ombudsman Service if they feel they have been badly advised, or badly treated by the insurance provider or the adviser.
However, this could present a drawback to advisers and may see many people moving out of the industry, if mis-selling complaints take a hold.
Penny O’Nions, of medical insurance specialist The Onion Group, notes: “When it was first announced that the FSA was going to take over the regulation of general insurance, including PMI, I was not only not surprised, I was relatively pleased. I felt it would give PMI advisers the kudos they were looking for. It would also give the public reassurance that they were dealing with ethical people.
“However, what has happened is that professional indemnity insurers are withdrawing from the market, or have increased their premiums. It is going to make the whole move much more dangerous once Joe Public realises that anything that comes under the regulation of the FSA you can make a claim for. We will find changes over the next five years that we have not so far seen.
“As advisers try to renew their professional indemnity insurance, they find they cannot get cover – this is going to have an impact on all sorts of things. A lot of brokers are coming out of the market because they can’t get cover. We are going to see quite a revolution.”
(For more information about changes to professional indemnity insurance, please refer to the feature on page 28).
The revolution will also be felt by advisers who fit work around their life, as the extra responsibility for keeping up with developments takes its toll.
O’Nions says: “It is going to massively increase time spent doing the work. A lot of brokers will quite often fit their lives around what they do, but I don’t think they will be able to do that because they are going to have to go on courses.
“In the next few years, I can see a massive rise in the number of subscribers that will make claims against advisers. They will say advice is FSA regulated, so they have some comeback.”
The consultation period ends on 10 March.
Alison Steed is a personal finance writer for the Daily Telegraph.