Although general insurance (GI) day has been and gone, the work is far from over. Branko Bjelobaba explains why intermediaries must ensure they stay ahead of the game
Eight months into statutory regulation, it appears that health insurance intermediaries can be divided into two distinct categories.
Some feel they can take their foot off the compliance accelerator. Having achieved authorisation, this group believes that a few cursory considerations towards compliance in the day-to-day running of the business are all that is required to keep the Financial Services Authority (FSA) at bay.
For others, the practical application of statutory regulation continues to dominate their working lives, and the frenzy of activity leading up to general insurance (GI) day on 14 January has been replaced by continuing concerns that their compliance efforts may not satisfy the FSA.
Controversy
Whichever camp you fall into, oddly, both face the same danger. Whether placing too little emphasis on compliance, or obsessing over every detail, the chances are that key regulatory requirements may be overlooked. The issue common to all intermediaries is that compliance has to become embedded in day-to-day procedures. If this doesn't happen - either because compliance is ignored, or because too much time is spent debating the minutiae of the FSA Handbook rather than implementing core compliance requirements - there is a risk your firm will find itself on the FSA's radar. Not least because regulatory reporting, in the form of the Retail Mediation Activities Return (RMAR), has already begun.
So, what are the key rules that are being missed or misinterpreted? Topping the list of common problem areas is the issue of handling client money. More so than in any other area, it really pays to get the basics right first. So (assuming you hold client money), before anything else, check that you do indeed have a record of the legal status of your client money account. It appears some firms have been conscientiously operating their client accounts in accordance with the rules, but have omitted to secure written confirmation from their bank that the client money account has trust status and will remain separate from any other money held by the firm.
The FSA effectively considers statutory accounts to be the default position. If your firm wants to offer credit facilities from client money, you need to operate a non-statutory trust account for which you will need a solicitor to draw up a deed. Check also that you are meeting the additional conditions required by the FSA of those operating non-statutory accounts, such as the higher capital resources requirement for money relating to transactions with retail customers (£50,000 for non-statutory trust accounts), and obtaining each client's consent for you to hold their money in this type of account.
If you don't have the necessary written confirmations, make sure you obtain them without delay (keeping written records of your communications to this end) and, in the meantime, complete your breach record log-book accordingly. If you don't handle client funds - excellent - but don't forget that odd travel policy.
Breach record log-book? While not exactly a point of misunderstanding, it is certainly a point of controversy. If you don't have a breach log-book this really should be your next action point. There is some debate as to whether this is best practice, as opposed to a handbook requirement. What is clear, in the visits that have been undertaken with larger firms, is how they are recording and then dealing with matters relating to non-compliance.
The existence, and usage, of a breach record log-book is essential to demonstrate to the FSA that your firm has the appropriate systems and controls. Breaches will happen, even in the most compliance-conscious of firms. Your firm's commitment to compliance, and the effectiveness of your systems and controls, will be shown by the fact that breaches are found and, most importantly, acted upon. Establishing and using a breach log-book helps your firm to demonstrate it is mindful of the FSA's principles for business, particularly principle three (to organise and control affairs effectively) and principle 11 (to deal with regulators in an open way).
Another common misunderstanding is over the classification of customers for the purposes of applying the Insurance Conduct of Business (ICOB) rules.
The FSA defines a retail customer as an individual acting outside his business, trade or profession. All other customers are commercial customers. Sometimes the lines are blurred, so in some circumstances a business buying insurance may be classified as a retail transaction. In such cases, it is important to remember that the classification applies to the contract the customer is buying.
Data collection
With private medical insurance (PMI), an individual buying PMI for themselves will always be retail, and a firm buying PMI for its staff (a group policy) will be commercial but with a twist. As the policy is defined as a 'group' policy, all scheme members should get a policy summary (as issued by the insurer) or have access to one via the firm (for example, on the intranet or notice board, or in the staff handbook). Retail clients get official cancellation rights that are required by ICOB, although commercial clients do not, unless the insurer offers this as a benefit.
We have become familiar with lots of new acronyms over the last couple of years, courtesy of the FSA and here is another one to add to the list - Retail Mediation Activities Return (RMAR). You will have seen reference earlier in this article to reporting. This is the hot topic of the moment and one on which you must act now.
Authorised firms were required to begin collecting data for the RMAR from 1 April with the first submissions starting from 1 July (depending on the dates of your firm's financial year). You will need to submit information relating to:
- Your firm's financial position (including balance sheet, profit and loss account showing commissions and fees, regulatory capital, client money accounts and professional indemnity insurance).
- Threshold conditions (including confirmation that your firm has adequate resources).
- Training and competence
- Insurance conduct of business (including an indication of sources of business, and information on the monitoring of any appointed representatives).
- General insurance income (required for the calculation of fees for the FSA, FOS and FSCS).
- Complaints.
The FSA will also collect supplementary product sales data on transactions where this is not included in the data provided by insurers. Health related insurances were perceived as higher risk when the FSA was consulting two years ago and now it comes as no surprise to see detailed sales data being required for these types of cover.
The full version of the RMAR in the FSA Handbook sets out all the possible items of data collected by the FSA, but the actual requirement for your firm will be tailored on the basis of the regulated activities set out in your permissions. Most firms will have to report twice a year.
The FSA has, however, made some concessions towards smaller firms (those with an income of £60,000 or less from general insurance) who will only have to report financial data once in the first year. At the other end of the scale, larger firms (those with an income of £5m or more from general insurance) will be required to report financial information every quarter.
Make sure your firm is collecting the relevant data now. If your year end is 31 December, your two RMAR reporting periods would be: 1 January to 30 June, and 1 July to 31 December. If you do not submit your RMAR in time, the FSA has warned it will impose a late submission penalty of £250, after which it may take enforcement action.
Remember that the only way of submitting your RMAR will be electronically, using the firms online system. This should prove helpful to firms because you will not have to concern yourself with how you present the data, or worry about omitting important facts. Make sure that you are registered (see www.fsa.gov.uk/mgi and select the information on Firms Online). As well as becoming familiar with the system, you can check the accuracy of your firm's profile, on which your tailored RMAR is based.
Compliance support
You could be forgiven for feeling that compliance has taken over your business; that your firm spends more time on this than it does on its customers and that customers are being deluged with pages and pages that they will never read. The fact of the matter is that compliance is your business and the FSA is doing themed reviews in the PMI sector.
A compliant sale, transacted by a compliant business, is exactly what you are offering to your customers, and this is not a new phenomenon. Adapting your firm's systems and processes to meet regulatory requirements began in earnest with the introduction of the General Insurance Standards Council's (GISC) rules in July 2000. Those firms that have already reviewed their operations methodically and diligently against GISC requirements and addressed any gaps will have had a huge advantage. For these firms, most of the impact of regulation has been in the time taken to interpret FSA requirements, rather than having to turn business processes upside down.
If your firm is still daunted by compliance requirements there is a great deal of support available, via trade bodies like the Association of Medical Insurance Intermediaries and commercial organisations that offer compliance assistance.
Most importantly, remember that if you are unsure of your compliance arrangements, you are not alone. Misunderstandings and mistakes will not be uncommon, but your chances of successfully maintaining compliance are infinitely increased if you keep yourself informed.
COVER NOTES
- Topping the list of common problem areas is the issue of handling client money.
- Another common misunderstanding is over the classification of customers for the purposes of applying the Insurance Conduct of Business (ICOB) rules.
