Broker regulation: what to watch out for

Are there any early signs of how the FSA might want to change brokers’ client money handling rules?

The FSA has almost completed its tour of Biba’s regional compliance forums and will now go off to draw up a consultation paper on client money. Biba head of compliance and training Steve White says that the regulator is likely to rewrite the rules to make them easier to understand.

The FSA is also likely to want to toughen up the rules around risk transfer and non-statutory trust accounts. White says the client money handling rules have always been a top priority for the regulator.

What’s going on with changes to the Insurance Mediation Directive (IMD)?

The revised IMD should be published in late May or early June. The 2005 IMD is being changed because the European Commission is worried about a lack of transparency and conflicts of interest in insurance sales.

In particular, the commission believes that brokers and insurers could choose profit over suitability when selling policies to consumers, and it wants the revised IMD to address this. The commission also wants any new IMD to set standardised rules on insurance disclosure across the whole EU and to make sure consumers understand what they are buying.

What’s the state of play with the FSA’s interest in brokers selling add-ons?

In its 2012/13 business plan, the FSA said it was concerned about the sale of add-on insurance products. These include legal expenses insurance, breakdown cover and key cover, and are often sold by brokers. The regulator wants to crack down on these being mis-sold or badly explained to consumers, and is particularly interested in add-ons that “replicate other existing rights or free services”. The regulator will pay more attention to the issue over the next 12-18 months.

The FSA also named add-ons as an “emerging risk” in its ‘Retail Conduct Risk Outlook’, which said that the mis-selling of these products would be one of its four main issues for reform in general insurance. The report argued that consumers were often focused on the primary sale and “may not understand the overall cost and value of the add-on to them”. The regulator is more likely to concentrate on non-brokers, such as car dealerships and mobile phone retailers, rather than standard general insurance brokers.

That said, the FSA is still touring the country to check how general insurance brokers sell and explain add-ons.

Brokers’ FSCS bills have been going up and up over the last few years. What will they look like this summer?

This year’s bill will be about 18% lower than last year’s, as the average value of each payment protection insurance (PPI) claim has fallen, even though the volume of PPI claims has gone up.

So why did the average value of each PPI claim go down?

It’s because the FSCS has almost completed handling PPI claims made against Picture Financial, which left the FSCS to pick up about £38m of claims when it went into administration in August 2009. General insurance brokers ended up picking up much of the tab. Each PPI claim made against the FSCS on Picture Finance was worth around £10,000, and the average claim size now is around £4,000.

Great, so what about brokers’ future bills?

Unfortunately, it looks like the rising volume of claims will counteract the temporary drop this year, meaning brokers’ FSCS bills could rise next summer.

Is anything else brewing that could increase brokers’ FSCS bills any more?

Potentially, yes. One possible problem is brewing with interest-only mortgages, which could end up affecting general insurance brokers.

Banks have seen a rising number of complaints that they did not properly explain interest-only mortgages when selling them to customers, often through mortgage brokers. Many customers are complaining that they did not realise they would have to pay back capital on top of their monthly mortgage repayments. Banks and mortgage brokers are worried that, if pushed, they might not be able to prove that they had tested their customers’ understanding of how the mortgage worked before selling it. A recent court case, Jones v Environcom, established that brokers are responsible for testing that their clients understand the rules around disclosing important facts when taking out a policy and that brokers can be held liable if their client’s claim is denied.

What banks are worried about is that this principle could be applied to them too. If this happens, White said that many interest-only mortgage complaints could end up being found in favour of the customers, and banks would then be out of pocket for the capital they were expecting. This could cause many mortgage brokers to go into administration, White said. “If that takes them down and it creates a wave of complaints, it could create a problem in the FSCS mortgage pot, which spills over into our pot.”