The Lobby: Broker regulation

Has there been any update on how the FSA might change brokers’ client money handling rules?
Yes, the FSA has almost completed its tour of Biba’s regional compliance forums and will then go off to draw up a consultation paper on client money. Biba head of compliance and training Steve White said that the regulator was 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 said the client money handling rules had always been a top priority for the FSA. “These rules have been, are and will continue to be very near the top of the FSA’s list of interested issues when it looks at insurance intermediaries,” he said.

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 IMD has been around since 2005, but the European Commission wanted to change it because it was concerned about lack of transparency and conflicts of interest in insurance sales.

The commission believes that brokers and insurers could favour 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. The commission consulted on how to address these issues in November 2010, and stopped taking submissions in late February last year.

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 to 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 targets 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.

What will my FSCS bill look like this year?
The good news is that this summer’s bill will be 18% lower than last year’s. The reason is that the average value of each payment protection insurance (PPI) claim handled by the FSCS has fallen, even though the volume of PPI claims has gone up. A typical broker with a £250,000 turnover would save around £500 in FSCS fees under the suggested new system.

Next year, however, White believes the volume of PPI claims will cause broker fees to rise again. The FSCS estimates it will have completed about 12,800 claims by the end of this financial year, but expects that figure to hit about 17,850 by the end of next year. The FSCS fees paid by general insurance intermediaries has risen almost tenfold in two years. IIB figures show that a broker earning £1m a year will have paid £1,649 in 2011/12 compared to just £175 in 2009/10.