In practice this means that the regulations apply not only to full time insurance intermediaries but to insurance companies and to a very large number of secondary intermediaries.  These include car dealers, retailers, etc. In total we expect somewhere in excess of 20,000 firms to become authorised. 

The Financial Services Authority in the United Kingdom is responsible for regulating almost all of the financial services industry including banks, investment houses, mortgage brokers etc.   A comprehensive rule book is already in place and a number of parts of that rule book apply to all firms regulated by the FSA.

The Principles

The Principles are general statements of the main regulatory obligations of authorised firms.  Principles set out in simple terms are high level standards that all regulated firms must meet.

1.                 A firm must conduct its business with integrity.

2.                 A firm must conduct its business with due skill, care and diligence

3.                A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

 4.                 A firm must maintain adequate financial resources.

 5.                 A firm must observe proper standards of market conduct.

 6.                A firm must pay due regard to the interests of its customers and treat them fairly.

 7.                A firm must pay due regard to the information needs of its clients, and communicate information to them in a way, which is clear, fair and not misleading.

 8.                 A firm must manage conflicts of interests fairly, both between itself and its customers and between a customer and another client.

 9.                 A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.

 10.            A firm must arrange adequate protection for clients’ assets when it is responsible for them.

 11.            A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

The main features of the FSA rule book are:

Senior Management Systems and Controls

Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively.  This Principle is amplified by detailed rules covering senior management arrangement systems and controls. A firm must, for example, clearly apportion responsibilities amongst its directors and senior managers.  They must ensure the business affairs of the firm can be adequately monitored.  The rules take account of the size and complexity of the business.  These rules are to a large extent intended to ensure good business practice by firms. 

Approved Persons

The regulations require that certain persons performing key functions be individually approved by the FSA.    Typically this would include the chief executive and the directors of the organisation.

Financial Resource Requirements

Insurance intermediaries are required to hold a minimum amount of capital and to ensure that they are able to meet their liabilities as they fall due through a solvency requirement.  These rules are intended to reduce the possibility of a shortfall in funds and to provide a cushion against disruption if the firm ceases to trade.  For firms holding client money, the capital resource requirement is Ł10,000 or if higher, 5% of the firm’s annual income.

Professional Indemnity Insurance

All those involved in the ‘sale’ of general insurance must maintain professional indemnity insurance.  The policy must provide cover for a least €1m per claim.  In addition the policy must provide an aggregate level of cover of €1.5m or, if higher, 10% of annual income subject to an upper limit of Ł30m.  The maximum permitted excess is Ł5,000 or, if higher, 3% of annual income.  Provisions have been established to allow the excess to be increased by holding additional own funds in line with a detailed matrix.

Client Money

These rules are designed to protect customers if the firm fails or is unable to transfer an insurance premium paid by the customer to the insurance company or claims monies or return premiums to the customer.

Firms may hold the money as agent of the relevant insurance company or it can hold the money on trust in a segregated bank account that cannot be used to reimburse other creditors in the event of its insolvency.   If the latter option is chosen, detailed rules surround the operation of such accounts.

Conduct of Business

The conduct of business rules govern a firms relationship with its customers before, during and after the sale of a general insurance contract.   They aim to ensure that firms treat customers fairly.   The rules differentiate between retail customers (essentially personal) and commercial customers.

Rules governing financial promotions seek to ensure that these are clear, fair and not misleading and a detailed check list is provided.   The type of information that is required to be given to customers about the firm and the services provided largely follow the requirements of the Insurance Mediation Directive.   The FSA has produced template documents including an initial disclosure document which contains all the information required regarding the status of the firm.

A statement of demands and needs must be provided to the customer.   Rules are also set down relating to excessive charges and commission disclosure requirements.   Intermediaries are required to disclose their commission to commercial customers upon request.   Detailed rules are also set down requiring insurers to provide product disclosure information to customers.   For retail customers, this includes a policy summary, detailing the type of insurance significant features and significant and unusual exclusions, price information and cancellation provisions.   Claims handling rules require insurers to handle claims fairly and promptly and to keep the customer reasonably informed about the progress of any claims.

Training & Competence

The FSA’s rules require that individuals are competent for the work that they do, are appropriately supervised, have their competence regularly reviewed and have a level of competence appropriate for the nature of their business.  There is no requirement for insurance intermediaries to pass approved examinations, nor do the rules specify the level of competence required.  This is a matter for firms to decide what competence is necessary for their employees to perform their role effectively and comply with the relevant regulatory requirements.

Compensation and Complaints

All firms regulated by the FSA fall with the scope of the Financial Services Compensation Scheme (FSCS).   If an insurance intermediary fails and is unable to meet its obligations to its customers then eligible claimants (essentially individuals and business with a turnover of up to Ł1m) can seek compensation from the FSCS for any loss.   Compensation limits, where the intermediary fails, is set at 100% of the first Ł2,000 and 90% of the remainder (100% for compulsory classes).   The Scheme is funded, principally by a levy should claims arise.   The levy is paid by insurance intermediaries and insurance companies.

The Financial Ombudsman Scheme applies to all firms regulated by the FSA.  It provides a mechanism for resolving disputes and is provided free of charge to complainants.   The scheme is open to all individuals and small businesses.

Supervision and Enforcement

A comprehensive supervision system, tailored to the size of the firm is being introduced.  Periodic returns are required from all regulated firms and supervisory visits will be made to larger entities.

A comprehensive enforcement regime is established and the FSA has the ability to warn, fine and even commence criminal proceedings against both individuals and regulated firms.

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