NEWCOB is a bold step towards a principles-based era, but while some see it as a chance for the industry to evolve, others think nothing much will change. Sam Barrett investigates
At the end of October last year the Financial Services Authority (FSA) set out a new method of operation for financial services firms. Its proposals, in part driven by the need to adopt the Markets in Financial Instruments Directive (MiFID), will see a radical simplification of the rules and a shift towards principles-based regulation.
Rather than provide a set of detailed, prescriptive rules that must be followed religiously, the new regulatory regime will allow firms to determine the way they run their business in line with a set of overarching principles.
This approach has already been seen in the FSA's work on Treating Customers Fairly, where guidance is delivered through a series of case studies, training sessions and cluster reports. It is also an approach the FSA is keen to adopt throughout its regulatory framework. "We want the industry to consider whether it is treating customers fairly not whether it's ticked all the boxes," explains Robin Gordon-Walker, a spokesman for the FSA.
The proposals, which are set out in CP06/19 and CP06/20 and are currently under consultation, have been largely well received by the industry. Steven Cameron, business development manager at Aegon Scottish Equitable, is pleased with the changes. "The proposed regime will offer greater flexibility. I do hope there won't be lots of required changes but, overall, a principles-based regime should allow greater evolution in the industry," he says.
Andy Peters, distribution director at Bright Grey, also welcomes the proposed changes. He adds: "We believe the move to principles-based regulation is a good thing. It makes sense for the focus to be on achieving the right end results rather than the minutiae of how you get there."
A principles-based approach also suits the market better. A wide variety of firms are currently regulated under Conduct of Business (COB) and, although the activities they are engaged in pose varying degrees of risk to consumers, they are all required to follow exactly the same rules. Allowing them to interpret the rules, while still ensuring the consumer is treated fairly, is a sensible step.
Benefits
Support for the change has also come from the Association of British Insurers (ABI), which has stated that principles-based regulation should deliver benefits for consumers as well as the industry. Among the benefits is the potential for greater innovation as firms will be less hampered by inappropriate rules. "There is security in the current rules but it is artificial security. Having one set of prescriptive rules for every firm isn't in the best interests of the consumer. The new regime will enable firms to design processes that will be more cost-effective and appropriate for their customers," says Mark Allen, project manager for COB reform at the ABI. "But we do have to be careful that it doesn't inadvertently impose additional costs to the industry," he adds.
Unsurprisingly, concerns have been raised that elements of the proposals will have a negative effect on the industry, potentially pushing up costs and stifling innovation. For example, Chris Wood, head of regulatory services, policy and development at Norwich Union, is seeking clarification on the changes being proposed for commission. "The proposals appear to suggest that if an IFA is paid a fee they will have to transfer the commission that would have been paid directly to the customer rather than use it to increase allocation for example," he explains.
This could have a significant effect on advisers. Having to return commission could limit the financial planning opportunities, making it less attractive to use commission to offer enhanced product terms. Potentially this could make fees less attractive too.
Neither does it appear to add any transparency for the customer. Presently, advisers must disclose the value of any commission within a sale, whether or not they are remunerated in this way.
"I don't believe the FSA intends this in its proposals," Wood adds. "It has talked about moving away from commission and this could have the opposite effect."
Concerns have also been raised about the proposal to change the name of key features documents to key facts documents. This would bring life, pensions and investment literature in line with that for mortgages and insurance but, with no material changes to the information presented in this document, would only be a semantic change.
"Reprinting all the literature to reflect this will cost money but it doesn't appear to a be a change that will really benefit the customer. Essentially it's going to be the same document. Does the customer care what it's called?" says Wood. "We're supportive of the move to principles-based regulation but we will push back on areas where we can't see the point of a change."
Two deadlines are in place for the consultation. The first, which was at the end of November, is in respect of the changes that are related to MiFID, while the second, on 23 February, is for other elements of the consultation with NEWCOB coming into effect on 1 November 2007, the same time MiFID will be adopted across Europe.
While the move to principles-based regulation may be radical, many are predicting business as usual for the industry. Mick James, marketing manager for protection at Standard Life, explains: "The proposals will see some tweaks to the documentation we send out and a much slimmed-down rulebook but, come 1 November, there's unlikely to be a major change in the way anyone conducts business."
Certainly, from a protection point of view, as regulation falls under the Insurance Conduct of Business, the impact will be minimal. Peters says: "NEWCOB's focus is very much on investment business. About 50% of the advisers we do business with will be regulated by NEWCOB but as a protection provider it's hard to see how the proposals will have a big impact on how we operate."
But, protection aside, changes could happen. Jackie Wells, director in the financial services practice at Deloitte, believes the industry response to the changes will come in two waves. "Initially I expect firms will be cautious. Their risk appetite is likely to mean that for a while they will continue to do what they do now to test the new rules," she says.
This initial trepidation is understandable. Having operated in a highly prescriptive regulatory environment with financial and reputational penalties for failing to follow the rules, moving to a regime that is open to interpretation but still retains the same penalties will not be easy.
Allen adds: "In the absence of prescriptive rules there does need to be more emphasis on other things to help interpretation. The industry will be preparing guidance and there will be useful material coming out of the FSA in terms of case studies and enforcement notices. The FSA will also need to be more open to the changes and in the speeches we've heard so far it does appear to have taken this on board."
With this support and guidance, Wells expects the second wave to be much more exciting. "Providing the FSA encourages them to be proactive, this will see firms developing their businesses within the principles," she adds.
These developments could include greater use of technology, integrated with support and telephone, a new direct market emerging as well as other more cost-efficient distribution channels.
"NEWCOB could potentially lead the way to a market place where firms are more able to develop their businesses in line with their customers or the market," Wells says. "It would be very sad if the industry did not take this opportunity to do things differently," she concludes.
Sam Barrett is a freelance journalistInsurance regulation updateAlthough the reform of the Conduct of Business rules is dominating the regulatory arena at the moment, the Financial Services Authority (FSA) is also reviewing the rules governing the sale of insurance products. It launched its review into the effectiveness of the general Insurance Conduct of Business regime at the beginning of 2006 and is looking at three key areas:
n Disclosure requirements, to ensure consumers receive appropriate information during a sale and at renewal.
n Non-protection products, to see how effective the rules are at addressing any consumer detriment.
n Protection products, also looking at how well the rules protect the consumer.
Preliminary findings were published in June 2006, indicating that changes were likely. "The initial findings of our review show that protection products such as critical illness insurance and mortgage payment protection insurance need more consumer protection than general insurance products," says Robin Gordon-Walker, a spokesman for the FSA. "Consumers are already reasonably safeguarded when they buy general insurance products such as household or motor insurance. These policies are annually renewable, relatively well understood and competition in these markets helps to protect the consumer. It seems likely that we will be able to move to less prescriptive rules, proportionate to the risk to the consumer, for general insurance," he adds.
Full results of the review will be available in Q1 of this year with a consultation period for any proposed rule changes taking place in Q2.
