As has been widely reported since the original announcement in December 2001, Ruth Kelly, financial secretary to the Treasury, had said general insurance and mortgage mediation would come under statutory regulation from October 2004. However, under European Rules, EU members have two years and 20 days after the Insurance Mediation Directive (IMD) has been ratified to implement the changes. While in technical terms, it is generally accepted it will take place two years and 20 days from the date when it was posted into the European Journal, it was only actually posted into the European Journal on 14 January 2003.
And so while the Treasury has confirmed the statutory regulation of both mortgages and long-term care insurance will come into effect on 31 October 2004, Kelly said: ‘In the light of the significant delay in publication of the EU Insurance Mediation Directive, general insurance regulation will now come into force on 14 January 2005. This will allow time for the Financial Services Industry (FSA) and the insurance industry to prepare for this major change in regulation.’
It should be emphasised to those who are involved in both general insurance and mortgage business that this is not an extra ‘holiday period’ for their general insurance activities. It allows both the regulator and the regulated a small safety margin. Firms are advised to prepare to submit their applications for Permissions Part IV to the FSA early in 2004. The most sensible approach to FSA statutory regulation for both general insurance and mortgage firms is a four-stage process.
Arrange for an initial ‘healthcheck’ against the current voluntary regulator’s Rulebook. Although firms may be able to deliver this utilising internal ‘audit’ resources, most firms will approach regulation and compliance consultancies for an external and objective benchmarking exercise.
The healthcheck will identify the systems and procedures the firm has in place and, more importantly, what is missing. Firms should set a benchmark against either the Mortgage Code Compliance Board’s (MCCB), or the General Insurance Standards Council’s (GISC) Rules and Guidance or, as is normally the case for a compliant mortgage firm, both. The outcome of this activity is a written report detailing any remedial action that will be necessary to be ‘compliant’ with MCCB and/or GISC Rules and Guidance.
Once accomplished, this helps to ensure the firm is well placed to obtain maximum ‘due credit’ from the FSA when it applies for authorisation.
After the firm has become compliant with its existing regulator(s) it should then begin the process of change that will be necessary if it has never been regulated by statute before. Firms should prepare a Transition Project Plan to outline the necessary changes in both their ‘systems and procedures’ and in their ‘corporate culture’ to ensure a smooth transition from the current voluntary regulation into statutory FSA regulation. Once the plan is agreed firms should then design, prepare and implement the necessary ‘systems and procedures’ and manage the change in ‘corporate culture’ so the necessary ‘portfolio of evidence’ to support the FSA Application can be compiled.
The ‘portfolio of evidence’ will be needed to prove the firm is already compliant with the five blocks of the FSA Handbook before it applies for authorisation ‘ unlike MCCB and GISC regulation, where firms can join and may never be compliant. For example, the GISC admits only around 1,500 out of 6,700 members have been ‘officially monitored’ to check on their compliance with its rules.
In this respect, the FSA is: ‘Seeking expressions of interest from a single service supplier who could manage the provision of the complete initial application process and the relationship with applicants to ensure timely and accurate information is collected for consideration by the FSA.’
In its invitation to tender the FSA goes on to state that: ‘It is likely a contact centre will be required to support the data scanning, input and validation services and will undertake the following services: complaint and query handling, communication with applicants to provide information and advisory services, outbound communications to the target constituency, post-application enquiries, and a pre-registration process. ‘
Once a firm is fully compliant with the FSA Handbook it will need to complete its Application for Authorisation by the FSA. Although this will not be possible for ‘real’ until after the final Conduct of Business Rules have been published, there is a lot of sense in obtaining the current version and looking at the format and the way in which information is sought from applicants firms. This document is currently in excess of 200 pages, with another 200 plus page completion guidebook. The FSA has previously indicated it will try to amend this for the general insurance and mortgage firms, but there is no draft or timescale for this. Even in its current form, it will allow firms unfamiliar with the way the FSA does things to review and finalise its ‘portfolio of evidence,’ and ensure they go into the lowest possible ‘Risk Category.’
Under current law the FSA is allowed up to six months to process an initial application for authorisation. If something unsatisfactory is found within the application documentation, it is allowed to return the application to the firm and the clock will restart once it is resubmitted. However, the time limit for processing is extended to 12 months from the date of resubmission. Therefore, it is important to apply 12 months in advance of the date that statutory regulations begin. Do not forget there is a £2,000 application fee charged by the FSA to process an FSA Authorisation Application Form.
Once the firm is authorised by the FSA, regulation and compliance consultancies are often still heavily involved in providing ongoing compliance assistance. This can be everything from the provision of a completely outsourced ‘compliance service’ to the periodic external validation of the internal compliance systems and procedures. The latter includes random file checking, inspection of compliance records, review of complaints, inspection of management meeting minutes and so on, to ensure all procedures are being followed and a robust audit trail is created and maintained.
Ian Langley is a tutor with Incisive Training, a professional training organisation set up in conjunction with Mortgage Solutions to help mortgage advisers with the MAQ qualification.