Should brokers fear the regulator?

Barbon Insurance Group’s recent announcement that it has set aside £2.5m to compensate customers caught up in a recent sales blunder has caused some to question what the implications might be for other brokers.

The company has admitted that its HomeLet division compelled tenants to take out contents insurance when, in fact, it should have been voluntary. Two Barbon executives have been suspended, and the company is working closely with the FSA to rectify the mistake. The FSA has not yet said what sanctions it might impose on the business.

The case has made other brokers sit up and take notice. Some perceive that the FSA has been tough on Barbon, and this could herald the start of a new regulatory regime. Meanwhile, the consensus among compliance experts seems to be that the Barbon incident could represent a much-needed wake-up call for many brokers.

“I was surprised by the extent of the mis-selling and the fact that it appears to have been so systemic within the organisation,” says Terence Clark, a director at RWA Compliance Services, a consultancy that advises on regulatory compliance. “Anyone can make a mistake, but this was obviously a failure in the overall systems and controls.”

The regulator has lost patience with some brokers, and has had enough”

Terence Clark, RWA Compliance Services

Brokers have been regulated by the FSA since January 2005, and Clark is surprised that more than seven years on, incidents such as this are still emerging. He also believes it is no coincidence that the FSA has taken such a tough stance just months before it closes. In 2013, it will be replaced by two new bodies: the Prudential Regulation Authority (PRA), part of the Bank of England, will oversee financial firms; while the Financial Conduct Authority (FCA) will look after consumer protection.

“I do think it took a tough stance,” says Clark. “It is not exactly going out in a blaze of glory, but it has certainly shown some teeth in this case. I think the regulator has lost patience with some brokers and has had enough.

“The issue of selling optional extras to consumers is a hot topic at the moment. Brokers will have to be careful and I wouldn’t be surprised if the FCA continues this tough approach. It could be indicative of a new regulatory regime - we will see the regulator interfering more, and being a lot more proactive.”

Compliance experts admit that other brokers have been seeking more advice, and reviewing their own procedures in the wake of the case.

“We have seen huge interest,” says Clark. “They are very worried they might have a similar exposure. And even where procedures are tight, there is no harm in reviewing things.”

Wider cultural problem

Dart Compliance managing director Jim Dart says he believes the Barbon case is indicative of a wider cultural problem among brokers: that some have fallen into the trap of seeking revenues ahead of delivering what their customers want.

“Some brokers need to remember their duty is to their client; they are not there just to make as much money as they can,” he says. “They should be more focused on what clients need before simply selling them products.

“We always say that if they sell something they should be able to document the ‘need’ with the client. It is one of the harder jobs because of their diversity, but it is short sighted not to take this view.”

Dart says he was somewhat surprised by the FSA’s tough stance, but he sees it as an indicator the regulator - in whatever form - will now take problems in areas such as general insurance as seriously as it does in banks.

More aggressive approach

“This may well be the start of a more aggressive approach,” he says. “They will likely be more willing to jump in early, and may even get involved as early as product development.”

Should brokers suspect they have previously been guilty of similar crimes, the advice from compliance specialists is to come clean. “Any regulated firm should be aware that past mistakes - whether individual or systemic - have the potential to be uncovered and require resolution,” says Compliance Management Services director Norman Hughes, .

“Brokers with any concerns should be proactive about identifying and dealing with them, rather than putting their heads in the sand and hoping they will go away. It is never too late,” he says. “However, they do need to involve their insurers, to agree any actions to be taken, so as not to prejudice their PI policy cover.”

But he also notes that all policies and processes must be reviewed to ensure they are appropriate to the type of business they transact. “Staff should then be monitored to make sure they are doing what is expected of them,” he says.

The regulator is more and more interested in the way a firm conducts itself and, in particular, the way in which it makes its money”

Ann Peel, Insurance Compliance Services

“Monitoring is so often the area where things fall down. We have carried out audits of numerous firms where monitoring is either inadequate or simply doesn’t happen. In this sort of environment, management can only react to problems, rather than getting to the heart of issues before they become serious. This surely has to be a more cost-effective approach than waiting for regulatory intervention.”

Others believe regulation is becoming less about companies ticking boxes and more about assessing the overall culture within firms. Insurance Compliance Services technical consultant Ann Peel says: “The regulator is more and more interested in the way a firm conducts itself and, in particular, the way in which it makes its money.”

She says that the FSA principle of treating customers fairly should be the cornerstone of brokers’ thinking on this.

Customers’ interests

“This culture starts at the top and permeates through a business,” she says. “When deciding internal processes and procedures, the customers’ interests must be taken into account. Customers must always be given the right information to help them make an informed decision as to whether to buy. And it is no good having finely tuned procedures if sales are not properly supervised and monitored.”

The Barbon case also caused alarm among some smaller brokers because of the size of the financial hit the company has taken. The £2.5m charge helped push Barbon into a £547,000 pre-tax loss in 2011, from a £7.8m profit in 2010 – a bad year for Barbon, but such a hefty bill could do much greater and long-term damage to a smaller player.

Hughes acknowledges that a smaller broker might struggle to swallow such a charge, but notes that the costs involved in reviewing misdemeanours and/or compensating customers would likely be proportionate to the size of the firm. “It would never be the FSA’s aim to put a firm out of business, as that would only give rise to another set of problems,” he says.

Peel agrees, but notes that such an outcome is not impossible. “Insurance brokers, generally, tend to have a number of different streams to their business,” she says. “In general, they act on the client’s behalf, catering for individual demands and needs, and most small firms are unlikely to be involved in wide scale mis-selling. However a mis-selling problem with any one high-volume product could cost them dearly.”

Biba chief executive Eric Galbraith says that while he would not regard the FSA’s actions as specifically “tough”, he does see the case as breaking new ground for the regulator in another sense. “The FSA rules are clear,” he says. “What is new is the Office of Fair Trading guidance being linked to the FSA’s TCF [treating customers fairly] principles.”

Galbraith doubts other brokers will fall foul of a similar liability to Barbon on this specific issue, as the broker was one of the largest in the private rental sector. But he agrees that others should be wary of similar problems, especially if they rely on third parties operating in unregulated sectors to distribute products.

“Management information systems are also important,” he says. “Evidence of skewed or high sale levels might point to a sale process that was allowing mis-selling. Culture is important too – the tone from the top. It is all about doing things correctly for the end customer.”

PPI scandal

But the main warning for brokers is that the Barbon case could be a sign of things to come from the regulator - be it in the form of the FSA or the FCA. There is a belief that the recent scandal around payment protection insurance (PPI) has also had a bearing on the way in which the FSA has reacted, and that brokers can expect a much tougher time.

“The PPI saga has been a significant contributory factor in the FSA’s changing culture,” says Hughes. “As the switch from the FSA to the FCA gets closer, we are seeing how a new, more proactive and pre-emptive style of regulation is shaping up.

“In the coming months and years, intermediaries can expect to read about more cases where the regulator has taken enforcement action because there has been, or there is the potential for, significant customer detriment.”

Peel agrees. “The scale and severity of the PPI scandal has opened everyone’s eyes to the power of the regulatory machine,” she says. “There is no room for complacency in any regulated firm. 

“PPI mis-selling has involved, primarily, banks and credit brokers. Insurance brokers have been looking on with disapproval. The Barbon case, however, illustrates that incorrect behaviour may be found closer to home, and brokers should dispassionately assess their selling practices to identify potential problem areas. It seems some firms might be living in glass houses!”