FSA Regulation - does it affect your GI business?
By Mike North
Summer 2005
Financial Services Authority (FSA) regulation of both the mortgage and general insurance markets is a reality. The FSA is now beginning to undertake on-site visits and reviews of market activity.
They are encountering:
- organisations that have not applied for authorisation, yet are trading as mortgage and/or general insurance intermediaries
- rapid expansion of networks, raising concerns as to whether or not there are effective systems and controls in place to satisfy the FSA’s requirements
- broking firms who are failing to look after clients’ assets properly
- poor product disclosure material
- inadequacies in claims and complaints handling
The FSA states that 97% of all firms that they regulate have been classified as low individual risk to their objectives. Collectively this must represent a huge risk to the FSA. Clearly it would be impossible for the FSA to visit every firm. However, they will still be required to exercise their responsibilities. The FSA states that they will achieve this through deskbased monitoring of information provided to them in the form of regulatory returns, product sales data and responses to questionnaires.
It is not too difficult to perceive how the FSA would gather the information they require during a formal visit. However, it is less easy to see how their proposed desk-based monitoring mechanism will be used to alert them to inappropriate behaviour. Firms are obliged to submit to the FSA, in the form of regulatory returns, the required data covering product sales, financials, training & competence and complaints. Other information may be collected through questionnaires, but these are undefined at this stage.
The FSA have stated that specific products, such as payment protection, will be of interest; if these products are in a firm’s portfolio then they will attract greater attention. The FSA state that they will use information available to them to identify other areas of concern, they can only do this by examination of differences from the ‘norm’.
Regardless of how the FSA’s interest is provoked, e.g. by direct examination or by desk-based review, once the investigation process is activated then further analysis would be necessary. In their Risk Assessment Framework, the FSA stresses the importance of senior management’s responsibilities in operating effective internal controls and running their business compliantly. Systems and controls are key to the FSA’s approach to mitigating risks to their objectives. The term the FSA use is ‘governance’. It is therefore essential that firms ensure that they have effective controls in place, and that these are well documented.
For example, the FSA require that the board (or management team) meet and discuss compliance activity. They would expect that there would be statistical and other information regularly supplied to the board covering the regulatory activities that have been monitored, encountered and dealt with throughout the organisation.
Winchester White has developed a post-NGI health-check for firms systematic checking of the parts of the car that determine its roadworthiness and not its performance, then FSA regulated companies need a regular review of their systems and controls to ensure that they are adequate and effective in safeguarding the organisation against potential regulatory risks.
The health-check standard process comprises a 50- point cross-check that assesses whether or not there is sufficient documentary evidence available to demonstrate that adequate and appropriate systems and controls are in place and being utilised throughout the organisation. The output of the health-check is a workbook describing what has been found and also identifying areas where improvements are necessary.
For further information please contact Diane Williams, Principal Consultant.