With FSA regulation on the horizon, the latest Think Tank debates how it will affect advisers working in the protection and health insurance market. Kirstie Redford reports
Kirstie Redford: Now we have almost come to the end of the consultation period for Financial Services Authority (FSA) regulation, we are here to discuss the issues facing advisers working in the health insurance and protection market. So how prepared are advisers for regulation?
Nick Kirwan: I think it depends who they are. Most IFAs are already regulated, they know the game and simply have to apply for an extension. I think the networks and large firms are also well prepared. Those not prepared are the smaller firms that have been operating purely in an unregulated environment, such as private medical insurance (PMI) brokers. However, I think there is still a topical awareness, which is growing. It is also good to see the FSA is holding seminars for advisers.
Penny Tompkins: I think the FSA is making a real effort to reach these people. I hope it has learnt its lesson after the first round of regulation. It has to meet the brokers half way.
Ron Wheatcroft: It is positive the FSA has been running workshops for trade bodies. Having attended one, what struck me was the difference in preparation needed between those who are part of the regulation process already and those who are not. The issues for awareness will be with unregulated groups.
Frank Fletcher: I agree there is a real problem for the FSA in identifying these people. I would add one thing and that is there seems to be disconnected communication in some networks between the compliance teams and those working at an operating level. This communication must be improved.
Nick Kirwan: Yes, but I think that will be addressed. The important thing is that the head is aware of what's going on even if the tail is behind.
Jason King: People working in the unregulated market and members of networks will become more aware of the requirements come January. This is when providers will start saying to advisers 'you will have to start doing this, this and this if you want to carry on working in the market.'
Nick Kirwan: There is an issue in that when regulation came out the first time, the regulator was almost feeling its way as much as the members, so it was a learning curve for both. How-ever, we now have a regulator that is up to speed. The learning curve will not be a slow one for those getting regulated - they will hit a solid wall. It will not be about becoming compliant gradually, it will mean advisers have to be up to speed from day one. That might cause a few shocks.
Kirstie Redford: Are advisers under-estimating the FSA's wrath if they fail to become compliant on time?
Nick Kirwan: I hope not and that they have learned that it won't be the same as last time.
Frank Fletcher: Those who have experienced it before should know what is coming.
Penny Tompkins: A huge number of brokers will need to be regulated. This is a vast number, far more than the first time round, so it is just as well the FSA does know where it is going. However, I am acutely concerned about the sheer logistics of this happening. If there are people who are doing things wrong, it could be a long time before they are picked up.
Nick Kirwan: That is right. The FSA recently said it was expecting around 20,000 applications. The logistics of processing all those will present challenges. Apparently the FSA has said it may take six months to process an application - or nine months if a box has not been ticked correctly.
Penny Tompkins: Is this why they have the 'apply early and pay less' arrangement?
Nick Kirwan: Yes, and I think it is sensible to do so. The FSA has also said a discount will be available for online applications.
Ron Wheatcroft: I think there are two stages. It is good the FSA has got it together, but there is a stage before that where distributors have to look at where they want to be strategically. The danger is that you try to fit into a certain box at the last minute. But advisers need to think about what they want - whether they want to become a principal, an appointed representative or join a network. And those decisions take time. Advisers also need to consider how they will manage the costs involved.
Robbie McGregor: And that is something they need to think about now. Because there is such a cost involved if you get it wrong on your initial application, it could have detrimental effects as you go on. You could change your mind six months' down the line and have to make a critical decision.
Penny Tompkins: And that in itself could take a long time because there may be other people who have reached the same conclusion.
Robbie McGregor: So the decision has to be made now over where you need to be.
Kirstie Redford: What questions should advisers be asking themselves when making this decision?
Nick Kirwan: I do not think people should let the tail wag the dog. They have to ask: 'what do I want to do for my customers? What is my prop-position to them?' and ask what regulatory status they need to achieve that.
Penny Tompkins: Do we feel advisers are beginning to have these conversations?
Nick Kirwan: We are trying to encourage them, but awareness is universally patchy.
Kirstie Redford: What will be the impact of added regulatory costs for advisers?
Nick Kirwan: I think we will see some consolidation. When an industry is faced with additional costs, what tends to happen is you see consolidation to share those costs and you need to be bigger to reach the critical mass. And that is what we have seen in the investment markets where regulation has pushed people together into networks, groups and clubs - because you have to be bigger to share the costs. So I think we will see this happen again.
Robbie McGregor: We need to look at the range of costs advisers will need to meet. In addition to application and annual fees, you have others such as financial services compensation scheme levies, Financial Ombudsman levies, professional indemnity insurance and capital reserves. So that is going to have an effect on what firms provide and the costs they pass on to customers. There is a huge range of costs to cover.
Penny Tompkins: Remaining complaint to satisfy the regulator will be costly.
Kirstie Redford: How will these costs impact on clients?
Jason King: Price on products is driven by providers. It will increase pressure on advisers' margins because of the new expenses and they will then have to make the decision about whether they want to stay in the market, or come out of it completely. It is likely advisers will put pressure on providers to increase commission rates.
Kevin Carr: Customers will still have alternative routes, such as the phone and the internet, so it is important to keep those costs down.
Nick Kirwan: Arguably, if there is extra commission, that will have to come back in our premiums. So it will be passed back to the customer.
Penny Tompkins: The customer at the end of the day always has to pay.
Kirstie Redford: Is there a risk regulatory costs could push clients down the non-advisory route?
Kevin Carr: They will pay if they go down the advice-led route, not necessarily if they go down the non-advisory route. Therefore, if there is a wedge being driven between the two, it may take a few years to filter through. We are talking about protection and we are living in a world and a country where people do not think they need advice. So if there is a cost issue, and if the cost of advice is passed onto the customer, then the net result will be to drive them further to non-advice.
Nick Kirwan: Absolutely. And the more we see upward pressures on commission and the cost of advice, the greater the incentive is to cut out the middle man. I hope this doesn't happen because I do think fundamentally you need advice. People taking out policies that should be in trust, for example, could be giving 40% of the benefits to the tax man. How much sense does that make?
Kevin Carr: Even the simple aspects of advice, such as single life over joint.
Penny Tompkins: You are right. People see protection choices as being more easily related to their every day lives, whereas investment advice is regarded as being outside their daily life, meaning they are more inclined to get advice for it.
Kevin Carr: People also tend to ask themselves: 'what should I do with my disposable income, what returns can I get?' They don't ask: 'what can I do to protect what I've got?'
Nick Kirwan: That said, people need face-to-face advice because the crucial piece in the jigsaw for protection is the need for persuasion. People need to be reminded, before we talk about pensions and savings, that we need to sort out some critical illness insurance and perhaps some income protection. It needs the adviser to do that.
Kirstie Redford: How will we persuade customers of this when the cost of advice is going up?
Nick Kirwan: There will be some things that intermediaries will do to help ride out costs as well. It is not completely negative: one of these areas will be better IT links through consolidation. Advisers are getting better IT links with providers to help reduce costs. But this will not make regulatory costs disappear, of course.
Penny Tompkins: We also need readily available information for customers that is educational, so people can make the decision to get independent advice. At the moment, many people do not know they need to get advice. The FSA is looking at education, but I think bigger firms should be doing this as well.
Ron Wheatcroft: We do need a market where we can get advice to people - especially low to middle income earners. The risk is that the cost bar is raised too high.
Penny Tompkins: And in an environ-ment where interest rates are set to rise, people will have some very hard choices to make about what they can afford to buy.
Kevin Carr: People forget what cover they have as well. Three or four years down the line and it is just a pound sign on a bank statement.
Kirstie Redford: Are there any areas of the market where we can help reduce costs for customers? Is there anything more providers or reinsurers could be doing?
Nick Kirwan: The market is already extremely lean and competitive. Especially since the Office of Fair Trading's report, which said products are not competitive because it is hard for customers to tell one product from the other and pick the best. But we now have Best Practice for Products, which has increased the transparency.
Kirstie Redford: Cost is obviously going to be one of the long-term effects of regulation. What are the other big issues that could affect the market long term?
Kevin Carr: There is the increased risk of litigation in light of retrospective legislation.
Nick Kirwan: That is obviously a huge issue. We know advice issues will come under the compulsory jurisdiction of the Ombudsman from January 2005. Because there is a risk of retrospection, advisers would be silly not to be giving the best advice they can now.
Penny Tompkins: I think many advisers have no real idea of how they should be recording, capturing and dealing with complaints. If they don't get it right they will be digging a grave for themselves. Handled well, they can actually retain more customers than they send away. I think many small brokers regard complaints as an assault on them. But handled well, they can be a positive.
Nick Kirwan: One thing we do know from the FSA is that advisers must take into account three things. These are value for money - not price; the financial strength of the company, so they will be there to pay your claim; and the company's claims history. If you are not taking account of those three things now, I think advisers certainly should start immediately. This should be a priority now, because it could be that these issues are retrospectively looked at by the Ombudsman. Was that advice right? Was it the right quality? Simply because the regulation does not yet apply, does not mean people are not under a duty of agency law to give the best execution and give good advice. That applies now. There is no reason for the Ombudsman not to say: 'you gave advice, there was no reason for that not to be good advice, you were acting as that client's agent, so you should have executed that deal as best you can.'
Penny Tompkins: Many advisers are who entering regulation for the first time do not understand the concept of best advice, whereas those who are already regulated have a clear idea of what advice means in regulated terms.
Kevin Carr: When we look at value for money for the individual - the way the critical illness market has moved in the past few years and will move in the next 12 to 24 months, will it still be value for money in three or five years' time when the product could look completely different from today?
Ron Wheatcroft: Indeed, particularly for long-term business, it may be very easy for clients to claim an intermediary sold them the wrong product. We have an awful lot of products in the protection market where there are cross-overs in benefits. But to me, these issues just make a case for good record keeping.
Kirstie Redford: Do you think we will see more people joining networks and fewer independent advisers in the market?
Kevin Carr: I think the word is 'eventually.'
Penny Tompkins: I think there will be a different mix moving forward.
Frank Fletcher: It seems to me that the IFA sector is not particularly profitable even now. One wonders what the additional costs are actually going to do to it and the pressures from the big companies with the deep pockets.
Kevin Carr: I think there will be more advisers joining networks and there will be more mergers as well. Businesses will have to look to each other to join their strengths together. It is the natural result of increased costs.
Penny Tompkins: That is what happened with regulation first time round and I think it is a reliable pattern for what will happen this time.
Kirstie Redford: We have discussed some of the main problems that could result from regulation. But what are the positives that could come out of it?
Kevin Carr: I would like to think better advice and that it will benefit the consumer in the future. But this fundamentally depends on which side of the fence providers decide to stand - which method of distribution they are going to back.
