Mortgage and general insurance intermediaries have a number of individual requirements applicable to their particular regulated activities and these have now been covered in CP160 Conduct of Business (COBS) and CP174 Prudential and other requirements for mortgage firms and insurance intermediaries. A lot has now been said about CP174 but it is too large a document to analyse in such a small space, and so chapter by chapter analysis will be concluded in forthcoming issues.
Within Consultation Paper 174, the Financial Services Authority (FSA) points out that its Handbook contains all the rules and guidance that all FSA-regulated firms must comply with.
The parts of the FSA Handbook that are relevant to Consultation Paper 174 are listed in the table below.
Chapter three covers ‘who and what will be affected’. By definition firms covered by the Insurance Mediation Directive (IMD) are intermediaries involved in: introducing, proposing or carrying out the work before the conclusion of contracts; concluding such contracts; or assisting in the administration and performance of such contracts, particularly in the event of a claim.
Specifically, the FSA wishes to address the following areas: administration, systems and controls; negligence by firms and their staff; financial failure of intermediaries; conduct of business and competence; administration and claims handling.
This chapter explains and lists an overview of the proposed regulatory tools which the FSA can apply to brokers.
Chapter five addresses the requirements relating to authorisation, and its principles for business are not dissimilar to those stipulated by the General Insurance Standards Council (GISC).
Again, emphasis is placed upon senior management arrangements, systems and controls. The statutory regulator has been charged by the Treasury to monitor the financial services market, but in practice the FSA seeks to monitor the management of a regulated firm and this comes under the heading of senior management systems and controls (SYSC). All firms seeking to become directly authorised need to have an extremely good grasp of this subject. It is not just something which a firm needs to read, but a subject which a firm needs to understand, action, implement the management structure and ensure that all managers are competent to undertake their controlled functions.
The FSA is taking a very realistic view of regulation for intermediaries and the systems and controls need to be proportionate to: the nature, scale and complexity of the business; the diversity of operations; the volume and size of transactions; and the levels of risk associated with its operations.
Areas covered by systems and controls must include: –
• Organisation n Compliance
• Risk Assessment n Management information
• Employees and agents n Audit committee
• Internal audit n Business strategy
• Remuneration policies n Business continuity
All firms that are seeking direct authorisation have to achieve the ‘threshold conditions’ prior to application for Permissions Part IV. These five threshold conditions are identified below:
• Legal Status ‘ If the regulated activity is effecting or carrying out contracts of insurance, the firm must be an incorporated firm (but not a limited liability partnership), a registered friendly society or a member of Lloyd’s.
• Location of offices ‘ A regulated UK firm must have its head office and registered office in the UK or (if not a body corporate) carry on business in the UK.
• Close links ‘ The FSA must be satisfied that it can effectively supervise a firm, taking into account the structure of the group to which it belongs or the other firms to which it has close links.
• Adequate resources ‘ The FSA must be satisfied the firm has adequate resources. The FSA looks at whether the firm has adequate financial resources, but also adequate management and staff, both in terms of quantity and quality.
• Suitability ‘ The FSA must be satisfied that the firm is ‘fit and proper’ to be authorised. In assessing this, the FSA looks at the competence and ability of management, as well as its commitment to carrying on the business with integrity and in compliance with the regulatory regime.
It is important to understand that it is up to the applicant firm to prove that they can achieve the threshold conditions, not for the FSA to disprove it. Firms practising compliantly prior to application and being capable of providing an audit trail to prove their compliance can more easily achieve this.
This analysis of CP174 will be concluded in the issue of Mortgage Solutions, published on 19 May.
Ian Langley is also a tutor with Incisive Training, a professional training organisation set up in conjunction with Mortgage Solutions to help mortgage advisers pass the MAQ qualifications.