Under FSA regulation, brokers will have to be more transparent. Brian Brown outlines the preparation procedures that intermediaries should introduce

The European Insurance Mediation Directive is near to final agreement by the European Parliament. Financial Services Authority (FSA) regulation, which it will underpin, is set to come into force in mid-2004 - almost two years away - leaving plenty of time for brokers to worry about the consequences. But is two years enough?

When the General Insurance Standards Council (GISC) was formed, many brokers adopted a "wait and see" approach rather than joining. The waverers may have been tempted to see FSA regulation as extra breathing space. However, when one looks at the detail of the EU Directive, two years may prove a frighteningly short time to implement some of its requirements.

One aspect of the EU proposals immediately raises issues for brokers. The legislation says: "If the intermediary declares he is giving advice on products from a broad range of insurance undertakings, he should carry out a fair and sufficiently wide-ranging analysis of the products available on the market. In addition, all intermediaries should explain the reasons underpinning their advice."

The key words here are, "available on the market". Many brokers have access to a relatively small number of agencies. By 2004 they will need to show that the policy they are recommending is suitable compared to the wider market. Brokers must show they understand the whole market, not just their own products, imposing an extra training and market intelligence burden on their business. It will not be sufficient to train staff only in the covers provided by their own insurers. It also means not selling products to clients where it is clear that a policy from another company would be more suitable.

Prior to conclusion of the contract, intermediaries must also specify what the customer's needs are and the reasons for advice given. This information must be provided on paper or a durable medium, in a clear and accurate manner that the customer understands.

Many of today's brokers, particularly those with little computer experience, may not be geared up to provide these services and there could be a significant cost and management time burden in changing working practices.

Our advice to brokers is not to wait until the final FSA rules are published next year, but to begin preparation now. In particular they should consider introducing procedures for the following:

  • Document your clients' requests. Ask enough questions to ensure you make a decision based on both cover and price

  • Ensure you have the systems in place to compare your products with those available in the wider market

  • Be prepared to turn business away, or refer it on if there are more suitable products elsewhere

  • Document why the policy chosen is the most appropriate

  • Give this information to customers at quote time, or immediately after purchase (for distance sales)

  • Get the customer to agree that these are their requirements prior to conclusion of the contract

  • Keep a record of the audit trail with each client file.

    Brokers who aren't members should seriously consider joining the GISC. Although there will be no grandfathering rights, the process of implementing the GISC rulebook will be invaluable in preparing for full regulation, and consideration of this will be given by the FSA when authorising firms.

    Firms that wish to remain in business after 2004 need to begin work now, if they haven't already done so. Wait and see is no longer an option.

    Brian Brown is associate director of research at The Research Department

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