FSA Regulation of General Insurance and Mortgage Sales

The FSA has just published the final rules for regulating the selling and administration of general insurance and mortgage contracts. While some of these rules take the form of a separate sourcebook (for example the conduct of business rules), firms will also need to assess the impact of the large number of prospective amendments to existing parts of the FSA Handbook which were also released on 15th January 2004.

Prudential and other requirements for mortgage firms and insurance intermediaries

Following the publication of Policy Statement 174, FSA has now finalised the proposed rules on the prudential and other authorisation-related requirements for regulating general insurance and mortgage mediation, mortgage lending and mortgage administration.

One of the more significant changes relates to client money and 'binding authorities' (which relate to both personal lines and commercial business). The revised rules now require that binding/delegated authorities must expressly provide that the intermediary is to act as agent of the insurer for the purpose of receiving and holding premiums (if the intermediary has authority to commit the insurer to risk), claims monies (if the intermediary has the authority to settle claims on behalf of the insurer) and/or premiums refunds (if the intermediary has the authority to make refunds of premiums on behalf of the insurer). In these circumstances (or in any other case where the intermediary receives money as agent of the insurer) the relevant moneys held by the intermediary do not constitute client money under FSA's rules. However, FSA has also recognised that many intermediaries currently co-mingle such moneys (in their IBA) with moneys that will constitute client money under FSA's rules. FSA intends to carry out further consultation as to whether segregation of client money from such other moneys is feasible. Meanwhile, intermediaries have the benefit of a twelve month transitional provision from NGI which will allow co-mingling of such moneys.

The other key changes are:

• Professional indemnity insurance (PII) – special provisions have been added for firms which are covered by a policy for more than one firm and the rules on excess levels have been clarified so that excess is not to exceed the set values given. Further, authorised professional firms carrying on mortgage mediation are required to comply with the rules of their designated professional body (eg ICEAW, the Law Society) rather than complying with FSA PII requirements.
• Capital – FSA has clarified that 'client assets' include a client's document only if it has value, or is capable of having value in itself. It has also extended the rules to cover how the capital calculations should be carried out in the case of limited liability partnerships. FSA also intends to make available on its website an example of a standard subordinated loan agreements.
• Perimeter guidance on insurance mediation activities – FSA has provided additional guidance in various areas, which offers further opportunity for firms to avoid regulation. Specific issues relate to a narrowed interpretation of certain insurance mediation activities, with FSA taking a broad interpretation on some exclusions. Moreover, further specific guidance on the role of introducers and, in particular, their remuneration, may assist many businesses involved in referrals.
• Appointed representatives (ARs) – the final rules remain largely unchanged from the near final rules as set out in Policy Statement 159. FSA has only made minor changes to the text to improve clarity or correct text. In particular, it has included additional guidance on the role of the lead principal.

Insurance selling and administration

FSA has also published the final conduct of business rules for regulating the selling and administration of general insurance contracts. The main changes from the draft rules published in Consultation Paper 187 are:

• Group policies – FSA has clarified how the rules apply to group policies and limited the information which needs to be provided to pass on to policyholder members of group schemes.
• Status disclosure by introducers – FSA has reduced the information that needs to be disclosed by intermediaries when introducing.
• Tacit renewals – FSA has revised the rules so that firms are allowed to renew contracts without the prior request of the retail customer if they have a right to do so (e.g. if their contract with the customer allows them to do so).
• Product disclosure – FSA has allowed firms to provide a key features document that complies with its investment business rules rather than a policy summary, if they wish.
• Renewal information – FSA has decided not to prescribe timescales by which commercial customers must be notified of renewal terms or if the insurer intends not to invite renewal.
• Claims handling – FSA has decided to remove the requirements on handling third party claims and instead to remind insurers of their obligations under its high-level standards when they handle such claims.
• Combined initial disclosure document (CIDD) – FSA is giving firms flexibility to use the CIDD if and when they wish.
• Exempt professional firms (EPFs) – the only change of substance to the rules is to alter the prescribed wording that FSA is requiring EPFs to use about their regulatory status so that it is simpler and clearer for customers.

What is outstanding?

FSA has yet to publish a policy statement to Consultation Paper 197, setting out the proposed rules on reporting requirements for mortgage, insurance and investment firms and audit requirements. This is due to be published in the first quarter of this year.

The majority of the rules on depolarisation (previously contained in the near final rules in Policy Statement 159) have now been moved and incorporated in a forthcoming consultation paper on depolarisation.

FSA also need to publish the final rules on the Financial Services Compensation Scheme and on fees.

For further information, please contact Paul Edmondson at paul.edmondson@cms-cmck.com or Nick Paul at nick.paul@cms-cmck.com

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