Brokers lose their level playing field

This week the FSA announced proposals to scale back regulation in the personal lines market. The move, though welcomed by insurers, has been met with strong criticism from sections of the broking community who argue that the plans will put brokers at a disadvantage in their battle with the direct writers.

It has also reignited calls for the European Directive that underpins the FSA's broker regulations to be put under the spotlight.

The FSA is proposing to cut back the rules governing the sale of insurance products, such as motor and home insurance, which go beyond minimum EU Directive requirements.

This could see the regulator scrapping many disclosure rules, such as the requirement to provide policy summaries and demands and needs statements. Rules requiring a 14-day cooling-off period could also come under the knife.

The FSA has already cut back the rules for direct insurers requiring them to disclose their status as an insurer rather than an intermediary to consumers.

The proposals follow a review by the FSA that looked at how effectively the general insurance market is working for retail consumers. It found that for non-protection personal lines products such as household, motor and pet policies, the market worked in the interests of consumers given the levels of competition and consumer understanding.

Most consumers did not rely on disclosure documents from firms when making purchasing decisions, the FSA review found.

However, the FSA also proposed a tightening of the rules governing the sale of personal protection products such as critical illness cover and payment protection insurance.

FSA chief executive John Tiner said: "The work so far confirms our belief that the risk of consumer detriment varies according to the type of insurance product purchased. There is now a strong case for moving to a differentiated regulatory regime, expressed in a more principles-based way, where the focus is on outcomes for consumers rather than processes within firms.

"Our insurance rules will be more risk-based and proportionate, while continuing to meet our consumer protection objective."

Brokers, however, said they would not benefit from most of the FSA's proposals as the European Insurance Mediation Directive (IMD) would limit the extent to which the regulator could ease the rules as they related to intermediaries. The IMD does not apply to insurers selling direct to consumers.

Commercial disadvantage
Biba and other brokers argued that intermediaries would be put at a commercial disadvantage as direct insurers would no longer suffer the onerous administrative burdens that brokers face as a result of the rules.

"For those products not identified as personal protection products, the FSA is looking at removing areas of super-equivalence from their rules. This is likely to lead to a further un-levelling of the playing field as the FSA has greater latitude to remove rules on insurers," said Biba.

The trade body argues that the FSA's move is contrary to the government's original intentions when the rules were formulated. Biba says the government made it clear that it introduced the super-equivalent rules for direct insurers to ensure parity with the rules governing brokers.

"In [consultation paper] CP160, the government said it wanted to apply the rules to insurers to provide a level playing field," says Steve White, head of compliance and training at Biba. "The proposals drive a wedge through that level playing field."

CP160, paragraph 4.13, states: "Although the IMD only applies to intermediaries, the government has decided to extend conduct of business regulation to insurers as well, to avoid consumer confusion and to create a level playing field. So the above activities will be subject to regulation whether carried on by intermediaries or by insurers themselves (and their employees)."

White said: "Biba is strongly of the opinion that it is in the best interests of both the consumer and the wider market in general that consumers receive the same suite of disclosures, regardless of their route to market."

He says that the proposals would add a "significant cost differential" between the large personal lines brokers and direct insurers.

"We will respond to the consultation paper and would encourage members to do likewise."

Biba's concerns are also shared by some of the UK's major personal lines brokers. A spokesman for AA Insurance says the company is "not happy" with the proposals. "We would be happier if everyone is treated in the same way."

The spokesman said the easing of the cost burden on insurers at a time when brokers' margins are being squeezed is "disappointing".

He also questions the FSA's logic in cutting back the rules. "If consumers don't read the information from direct writers, why do they need it for brokers?"

The FSA argues that the principal objective of the changes is not to reduce the regulatory costs for firms. "We are making the proposals because we believe this will enable us discharge our duties better - that is, meet our statutory objectives, particularly in delivering the intended consumer outcomes for the insurance conduct of business regime through an appropriate degree of consumer protection."

The regulator accepts, however, that "there may be some potential for reducing firms' administration costs".

Major beneficiary
Insurers, not surprisingly, support the proposals, as they will be the major beneficiaries. Norwich Union (NU) has been arguing for a less burdensome regulator regime. Aviva executive director Patrick Snowball recently criticised the FSA for "over-regulating" the insurance market.

James Crawford, regulatory affairs manager at NU, welcomed the move. "We have been lobbying for a while on some of these issues. [The proposals] remove a lot of excess regulation."

Crawford says he can "appreciate" brokers' point of view in relation to arguments over the removal of the so-called level playing field. However, he says there is a need to take account of the role of each sector.

Brokers should be treated differently because of their role in searching the market, he argues, and adds that brokers need to lobby at a European level if they want changes to their disclosure requirements.

The ABI is equally supportive of the proposals. Stephen Haddrill, ABI director general, said: "Customers will benefit from the FSA's simplified, principles-based and proportionate approach to regulating general insurance.

"ABI research has shown that providing customers with unwanted information can be counter-productive. Many customers shop around less if their time is wasted. The FSA is right to focus on getting the right outcome for customers."

But Haddrill argues that the reforms need to apply to all sectors of the general insurance market - including brokers. "The FSA should do what it can under EU law quickly, and press the Commission to review the Insurance Mediation Directive urgently to enable a fully principles-based regime to be established." IT