Momentous changes are about to take place in the general insurance world which will have far reaching consequences for those firms or individuals that sell general insurances, such as buildings and contents or accident, sickness and unemployment covers, alongside the mortgage.
From 1 September 2001, anyone involved with general insurance, whether it be creditor, household, pet care, travel or building and contents, will come under the scrutiny of the General Insurance Standards Council (GISC).
This means any mortgage adviser wishing to keep selling mortgage-related general insurances needs to consider the options available to them, understand how this will impact their business and the implications of ignoring this issue. They must also recognise the urgency of the situation.
This is the first time mortgage intermediaries have been affected by general insurance regulation and compliance. GISC was launched on 3 July 2000 as a self-regulating body whose aim is to monitor and enforce standards in all areas of general insurance activity, including all matters relevant to the fair treatment of customers. The GISC will replace the former statutory requirement for insurance brokers to be registered with the Insurance Brokers Registration Council and when the GISC becomes mandatory, on 1 September 2001, it will replace the Association of British Insurers (ABI) voluntary code of practice. Applications need to be made to the GISC before this date.
However, there seems to be little information available to help mortgage intermediaries reach a decision on whether or not to join.
At the moment, there are three options open to advisers:
Join the GISC.
Become an appointed agent or sub agent.
Act as an introducer.
Making a decision
To help you decide, you need to consider the pros and cons of each option and evaluate these against your own business model. Although the pros and cons are accurate, they are not necessarily the official GISC interpretation. You should also bear in mind that when scrutinising your own modus operandi, some of the cons maybe pros and vice versa. However, the final decision must rest with the individual or firm.
The greatest benefit of becoming a GISC member is that you can offer your clients a choice: choice of competing products from any insurer who will grant you an agency. You retain your independence and control over your business in terms of systems and operational processes and you also retain control over the client. In addition, your business will only be reviewed by the GISC.
The downside to joining GISC is the cost of membership. This cost is 0.1% of insurance-related revenue a year (subject to a minimum of £200 and a maximum of £100,000), not forgetting the costs of the associated compliance which accompany membership. You will be responsible for your own compliance together with any costs involved with training, assessment and monitoring. If you are non-compliant then your own reputation is at risk, and financial penalties may be levied. Beware ‘ the GISC will have ‘teeth’.
By becoming an appointed agent or sub agent you agree to sell the products of just one company and consequently avoid the cost of joining GISC, which is borne by the insurer. In addition, any risk or fine or censure from non-compliance rests with the insurer and not the individual or firm. Training and competence is also taken up by the insurer and because you only sell the products of one company the operating procedures are easier to comply with.
The downside, of course, is that you are only able to offer the customer the products of one company and you lose control, since many elements of your operation will be dictated by the insurer to achieve compliance. For example, training. Policyholders are the responsibility of the insurer and you will be monitored by both the insurer and the GISC.
However, it is important to note that the GISC rules require that an appointed agent does not offer the customer competing products or a choice of similar products. For example, you could not offer single trip cover with one company and annual travel insurance with another.
You can, however, deal with more than one insurer. For instance you can use one company for buildings and contents, one for travel and one for creditor, since they do not offer the customer a choice of competing products.
The advantages of becoming an introducer are that you effectively make referrals to a GISC member who is then responsible for giving advice and recommending the most appropriate product to the client.
The appeal of this option rests with its overall simplicity, low cost, minimal administration and straightforward training with the potential for referral fees.
Yet while it is simple to be an introducer, this does contradict the very reason why many mortgage brokers and IFAs become involved with general insurance in the first place, namely the generation income. You will forfeit your commission and longer term, your annual renewal commissions. The client relationship is not a strong one and, therefore, this probably means either a partial or a total loss of control.
Compliance and regulation of general insurance is almost upon us. You must act before the 1 September and you need to decide which option best suits your business. Unfortunately, doing nothing and still expecting to sell general insurance is not an option. The size of the firm may influence which selection you make and already we are seeing larger mortgage firms setting up separate insurance subsidiaries with these most likely to become GISC members. Owing to the resource and cost issues of monitoring and compliance, lenders are unlikely to appoint agents en masse. They will, in all probability, purely seek business from those brokers who are full GISC members or those with introducer status.
Remember, if you are neither a GISC member, nor an appointed agent, nor an introducer, effective from 1 September 2001, lenders and insurers will not be able to accept insurance proposals from you. Clearly the sands of time are rapidly running out and important strategic decisions need to be made ‘ quickly.