It is fair to say that smaller private medical insurance (PMI) specialists have historically believed that they represented too inconsequential a risk to the Financial Services Authority (FSA) to warrant close scrutiny. This complacency is perhaps easy to understand when one considers that the FSA has previously classified PMI as a limited risk product. With bigger fish to fry, until recently smaller PMI brokers have indeed escaped close examination by the regulator.
However, times have changed since the evolution of Treating Customers Fairly (TCF). A bout of visits and thematic reviews is underway by the FSA with many one man bands in our sector being caught in the net of this massive TCF audit exercise. The FSA intends to visit 11,300 small firms by the end of 2010, which is a marked change in landscape and even the smallest PMI specialist should consider themselves a potential target for the regulator’s scrutiny and prepare themselves accordingly.
But how do you prepare for a TCF audit and beyond? Despite possessing a depth of industry experience, most intermediaries are unfamiliar with the requirements of operating within this more onerous regulatory environment.
A GOOD TRACK RECORD IS NO EXCUSE FOR APATHY
Many of the directly authorised firms who have turned to the compliance arm of our business for guidance following selection for assessment by the FSA were ready to use the defence that “I have had no client complaints – so I must be treating customers fairly” as the only proof that they are meeting muster in terms of TCF. Plainly, this will not wash as evidence enough for the FSA which is looking for detailed management information to support a firm’s compliance with TCF.
A huge part of being able to clearly demonstrate that a firm’s management behaviours result in improved outcomes for their clients must be delivered by the production of management information (MI). The detail of the MI required is often unfamiliar to intermediaries who, until now, have taken on personal responsibility for their own compliance. Smaller intermediaries readily acknowledge that they find it difficult to construct and implement the appropriate control framework and produce the required MI, while at the same time running their own business profitably. Indeed the time burden and costs often associated with the in-house management of a firm’s compliance may result in smaller brokers overlooking key requirements; something which could prove to be very costly in the longer term.
As a minimum, firms should have detailed MI including the following key areas:
■ Provider spread Can you evidence no provider bias exists and if it does can you provide appropriate rationale?
■ Proof of research for renewals and new business For those acting as whole of market independent intermediaries, it is fundamental to evidence that proof of research has been undertaken.
■ A documented sales process This should clearly define the sales process in operation within the firm.
■ A complaints file (and evidence that the firm understands what a complaint looks like) A firm should maintain records of any complaints received together with details of how they were handled and what the final outcome was for the consumer.
■ Documented complaints procedures A documented internal complaints procedure (ICP) outlining how the firm deals with complaints is a fundamental requirement. This should be readily available to issue to any clients wishing to make a complaint.
■ Know your customer information (Fact Finds) Retention of all Fact Finds undertaken as part of an advised sale. These should include sufficient information to demonstrate that the product(s) sold was in line with the client’s demands and needs.
■ Lapse/not taken up rates Information on any lapsed policies and policies not taken up, reflected as a percentage against total business volumes.
■ Proof of training undertaken Records of training undertaken by the firm to evidence their maintenance of knowledge and development.
■ File checking results Information relating to number of independent file checks performed, including any identified issues and the action taken.
Points are scored with the FSA when the firm is able to prove that external compliance audits have been undertaken and that the recommendations made by the external compliance firms have been acted upon. Independent file checks representing a reasonable sample of business are also a key plank in demonstrating that the firm takes its regulatory responsibility seriously.
Gone are the days of “tick-box” compliance. The advent of principle based regulation means that it is more difficult for intermediaries to interpret exactly what is required.
If the above list of MI requirements looks daunting then it is vital that the intermediary seeks assistance and guidance from an external firm that can help organise and implement these vital strategies. We would advise that the compliance firm chosen has in depth knowledge of the PMI market and can tailor its advice accordingly.
With much of the language used by the FSA talking about “embedding” TCF into a firm’s “culture”, the danger is that smaller brokers perceive this as not being applicable to them. Have no doubt the underlying principles apply to all.
Doing nothing really is not an option because it would appear that no-one is insignificant enough to fall outside the gaze of the FSA. Being small will certainly not be an alibi when it comes to demonstrating to the FSA that TCF is being consistently achieved through the behaviours of the firm’s management.