How can intermediaries offset the mounting costs of regulation? It could be easier than you think, says Nick Kirwan
Regulating intermediary business in the protection industry is proving to be something of an arduous task, not only for intermediaries but also for the Financial Services Authority (FSA) when communicating with lenders and advisers. Intermediaries are faced with the task of adopting the new regime while keeping their expenses as tight as possible.
New technology
There are really only two avenues likely to be taken when trying to offset the cost of regulation. The first is consolidation, where intermediaries join forces and share the costs - much like what happened following investment regulation. The second is to find other ways to reduce costs, such as adopting new technology and embracing the time and cost savings that it can offer.
The FSA used technology to help with the changes, making extensive use of email and the internet as a means of keeping intermediaries and insurers informed on the consultation papers and the in-depth final rules.
Whether appointed representative (AR) or authorised principal (AP), one of the priorities for intermediaries is to assess the changing sales process and the cost implications when regulation takes effect in January 2005. In the same way that the FSA grasped technology to ease the burden of preparing for regulation, intermediaries can use new technology to help adopt regulatory processes, save business time when selling protection and reduce costs.
Over the past few months we have looked at some of the direct costs of becoming regulated. Fees are a prime example, such as application fees to become regulated, member fees if you join a network and fees for both the Financial Ombudsman Service and the Financial Services Compensation Schemes. Even at this early stage in the process it is easy to identify potential cost savings. Intermediaries will receive discounts for getting their applications into the FSA early - by 31 May 2004 - and for using the online submissions process. Both these discounts are rewards from the FSA for using systems that are less time-consuming and require less manual input, and should be exploited by intermediaries looking to keep costs low.
Significant savings
The online system will be of particular interest to those who want to be regulated for both mortgage and protection business. While the deadline for submitting an application to be sure of having it processed in time has passed - 30 April 2004 - the online application process and the advanced system it uses means that applications can be processed faster than paper-based applications.
The online application can only be submitted if all sections are completed - which means that intermediaries won't have to wait for the FSA to come back if it notices something has been omitted. It is also built on a score card system, which helps it to electronically score the application on the answer given. This again can offer substantial time savings.
Technology can be used to comply with the regulatory process in other areas too, resulting in significant savings across the board. Regulation means that intermediaries will be under increased scrutiny and those who take AP status will be asked to submit a number of documents to the FSA, including:
• Compliance arrangements
• Complaints procedure
• Detailed compliance manual and monitoring programme
• Plans for anti-money laundering controls, where applicable
APs who take on ARs will also have to fulfil these requirements for each of their appointed representative companies and ensure that they are abiding by them.
All businesses should be following the 11 principles of business set out by the FSA. The principles, which establish what a firm must do to remain compliant, are:
1. Integrity - firms must conduct their business with integrity.
2. Skill, care and diligence - firms must conduct business with due skill, care and diligence.
3. Management and control - reasonable care must be taken to organise and control affairs responsibly and effectively, with adequate risk management systems.
4. Financial prudence - firms must maintain adequate financial resources.
5. Market conduct - firms must observe proper standards of market conduct.
6. Customers' interests - firms must pay due regard to the interests of customers and treat them fairly.
7. Communications with clients - firms must pay due regard to the information needs of clients, and communicate information to them in a way that is clear, fair and not misleading.
8. Conflicts of interest - firms must manage conflicts of interest fairly, both between themselves and their customers and between a customer and another client.
9. Customers: relationships of trust - firms must take reasonable care to ensure the suitability of their advice and discretionary decisions for any customer who is entitled to rely upon their judgement.
10. Clients' assets - firms must arrange adequate protection for clients' assets when responsible for them.
11. Relations with regulators - firms must deal with regulators in an open and co-operative way, and disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.
Demands and needs
The costs of ensuring that these principles are adhered to are not going to be easily identifiable as up-front charges or fees. They will mainly come from the extra time that will have to be spent ensuring that they are followed, and the manual processing of this additional paperwork.
For example, all intermediaries will also be asked to compile a 'demands and needs' statement for every client they advise, to show how they have assessed their circumstances. This must be provided to the client in a durable medium, such as paper or floppy disk.
This type of regulatory reporting is likely to prove costly, unless intermediaries can not only accept the changes, but also embrace them to allow their firms to work smarter. Intermediaries who use an electronic fact finding template, to establish a client's financial needs and commitments, can save this data electronically to cover the 'demands and needs' statements.
Similarly, with submitting business online and saving product literature to disk, or downloading from the internet, intermediaries will have found a simple and economical way of fulfilling their FSA obligations. Not only can online processing save time and money in terms of reporting, but extra incentives are often offered for applications submitted online, which can then be offset against ongoing costs.
APs will also be required to keep a comprehensive record of the sales process under the new regime. Files, which traditionally would have been stored in paper, can now be kept on computer and accessed at the touch of a button.
There's no reason why regulation shouldn't be seen as an opportunity to create an integrated online system, with such documents being filed automatically by the system, for ease of access, should the FSA ask to see them. Intermediaries can increasingly access the information they need, when they need it. What's more, technology can also help meet training needs through the use of online continuing professional development courses. It is possible to download literature and sales material from providers' websites, meaning everything the intermediary needs is at their fingertips.
Win-win situation
In addition to this, intermediaries can increase earnings by using online systems to actually transact business. These systems now mean the whole sales process can be completed online:
• Online quotes - producing quotes online not only means that you have them instantaneously, but also allows a pre-populated application form to be filled in.
• Submitting business online - once the application form is submitted, it can be sent electronically to the provider and will be in the insurer's system instantaneously, meaning that it can be dealt with more quickly.
• Policy tracking - applications submitted online can then be tracked online, making it is easier to keep tabs on proposals once they start going through the new business process.
• Working offline - it is not always going to be convenient to work online. Some insurers can now offer their quotes system offline so that it can run from a laptop or PC. This lets the intermediary choose where their desk will be each day - it does not need to be next to the telephone line.
Ultimately, the client should see the benefit of these online improvements as well as the intermediary, as it's a much more efficient sales process. What's more, it will reduce the amount of time spent on each case - freeing up the intermediary's time to see more clients.
The cost of complying with regulatory change may be high for some intermediaries. However, there are many ways to reduce these costs and improve how business is done at the same time. Complying with the regulations can really be a win-win situation after all.
Nick Kirwan is head of protection, proposition development and marketing at Abbey for Intermediaries
COVER notes
• Intermediaries should get their applications in early using the online process if they want to cut costs.
• Many costs related to regulation are indirect - such as extra time and paperwork.
• Intermediaries should take advantage of emerging online systems to help cut costs in the long term.
