The soft underbelly of networks

The new year brings with it a regulated insurance market. But is the industry ready for the additional wave of compliance, competence, training and costs, asks Richard Griffiths

The Financial Services Authority’s insurance regulations will come into effect on January 14 2005. Compared with the volumes that have been written about mortgage regulations, insurance has been the poor relation.

By the time you pick up the first issue of Mortgage Strategy in the new year you will be just a few days away from the implementation of the regulated insurance market. The vast majority of the 4,226 newly regulated mortgage firms also write insurance business, and I trust they are prepared for the additional raft of compliance, training and competence, and professional indemnity insurance costs.

Given that only a small proportion of the wider insurance market ever joined the self-regulatory General Insurance Standards Council, where PI cover was a mandatory condition of membership, it is highly unlikely that these mortgage firms have ever had PI cover in place for insurance activities.

The cost of this PI insurance cover, which is mandatory under the FSA regulation, might well come as a bit of a shock. It is essential that directly authorised firms have such cover in place, otherwise they will be operating illegally and this may in turn invalidate the firms’ PI cover for mortgage business.

If you have not already done so, make sure you check your PI policy to ensure it provides the requisite minimums of insurance cover under the FSA rules. This will also apply to the 2,800 directly regulated IFA firms that have varied their permission to cover insurance business. For all directly regulated firms, it will be business as usual dealing with the product providers, the insurance companies themselves and facilitators such as Paymentshield and CETA.

For appointed representatives of networks, whether the traditional IFA networks or the new mortgage ones, there will be a fundamental shift in the working relationships. All insurance business has to be placed through your network.

I am not aware of any multiple principal arrangements that would allow an AR firm to place mortgage business through one network and insurance business through another network. As an AR, you will have signed up to both the mortgage and insurance panels set up by your network. Some networks have a wide selection of insurers and products, while other networks such as Enable and Pink Home Loans have a single product provider for household insurance.

Another complication for ARs is the issue of renewal commissions, and whether or not they can continue to be paid by organisations with whom they placed the original business. The FSA rule ICOB 4.1.5R, entitled ‘Renewals’, says “When a contract of insurance is renewed, the parties enter into a new contract of insurance, even if the terms and conditions of the new contract are identical to the old one. ICOB 4 therefore applies to the renewed contract of insurance as it would to the original contract of insurance, unless stated otherwise in ICOB 4.2.20R”

ICOB 4.2.20R relates only to status disclosure, which does not apply at renewal time provided the information given to the customer at the time of the initial contract is still accurate and up-to-date. ICOB 4.1.5R effectively says that renewals are deemed to be new business, which in turn means that renewal commissions should be treated as commissions on new business and paid through the network.

The network effectively acquires the responsibility for the sale at renewal time, and the fact the policy adequately meets the requirements of the clients.

Returning finally to the matter of PI cover for insurance activities, ARs should be clear about whether their network has PI insurance in place for the whole network, or whether they are expected to arrange and pay for their own.