Commercial Insurance Articles

Compliance update - the responsibilities of Appointed Representatives

03 May 2007

Background to Statutory Financial Services Regulation

The Financial Services Authority became the regulating body for the insurance industry on 14 January 2005. Regulation is statutory i.e. it is illegal to deal in general insurance without being authorised to do so.

Broadly, any company that deals in general insurance by way of business, however small a part of the business it might be, must be regulated and anyone who advises on, sells or administers general insurance must be proven to be competent to do so.

The Financial Services and Markets Act 2000 gave the FSA four statutory objectives.

• Market confidence: maintaining confidence in the financial system
• Public awareness: promoting public understanding of the financial system
• Consumer protection: securing the appropriate degree of protection for consumers
• The reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime

Regulatory Status Options

The FSA has Rules to meet these objectives and also the requirements of The Insurance Mediation Directive of 2002. Statutory regulation gives companies who deal in insurance, either as primary or secondary intermediaries, four options regarding their regulatory status. They can choose:

1. Full Authorisation
2. Appointed Representative
3. Appointed Introducer
4. Opt Out Of Insurance Mediation

The third option is very limited and the fourth option could mean that a property manager, for example, is not able to offer a full service if they cannot offer to administrate the insurance.

Choosing to be an Appointed Representative does not bring with it a ‘get out of jail free card’. Being an Appointed Representative brings with it responsibilities. The company has to decide who they wish to be their principal or principals and they have to agree to accept the company. The company may have to have an Approved Person [if the company has staff who deals with customers regarding insurance]. The company will have to enter into an agreement with the principal and if there is more than one the principals will have to enter into a multi principal agreement and agree between themselves on a ‘lead’ principal.

There are other things to take into consideration; options regarding obtaining quotations are limited as they can only be obtained through the market available to the principal. Meeting compliance requirements and evidencing that they are met inevitably increases the workload, for many businesses the procedures are already in place but not formally recorded. This includes training staff and recording their continuing professional development. The Appointed Representative has responsibilities to the principal and must accept that the businesses are linked by this relationship. The Appointed Representative cannot jeopardise the principal’s regulatory position by not actively ensuring the compliance requirements are met.

However, on the plus side, the principal does the ‘legwork’, keeping up with regulation and passing on the information and helping to put procedures in place. The Appointed Representative benefits from the products and services available and the customer benefits from enhanced customer service.

Regulatory Status Relationships

There are four relationships where the application of compliance has to be considered by a fully authorised firm:

• Directly to the customer
• Through other authorised intermediaries
• Through appointed representatives
• Through introducers

When a fully authorised intermediary sells directly to the customer they are responsible for the compliance and will have procedures in place accordingly.

If a customer is ‘introduced’ they are, in effect, also a direct customer so again it is straightforward.

Introducing on a ‘casual’ basis is not a regulated activity, but a formal arrangement involving remuneration in any form requires a business arrangement to be in place and the relationship notifying to the FSA. Firms cannot mix and match and be Appointed Representatives for one principal and an Introducer to another.

Fully authorised intermediaries can arrange policies for customers through other fully authorised intermediaries and be supplied with the policy documentation necessary e.g. policy summaries, certificates and schedules, but the status disclosures, terms of business and Demands and Needs would be their own i.e. the customer facing party delivers the compliance. The insurance provider must ensure that the intermediary who is the ‘customer facing party’ is provided with all that is needed in the way of information and documentation that is necessary for them to meet their regulatory obligations.

Similarly an Appointed Representative has to deliver the compliance, but the principal is ultimately responsible for it and certainly responsible if it is not delivered.

A principal has responsibilities where Appointed Representatives are concerned. They must ensure that an Appointed Representative is ‘fit and proper’ to deal with customers and the business is viable. There must be checks and resources in place to monitor that the Appointed Representatives are compliant and remain so. The FSA have to be informed of any changes to their details or activities.

Similarly an Appointed Representative has responsibilities. They must understand and comply with the FSA rules. They must be prepared to allow the principal to have access to their premises, records and staff and provide all the assistance the principal needs to fulfil its responsibilities. They must abide by the written contract that sets out the rights and duties of each party under that FSA regulations.

Appointed Representatives are not allowed to hold client money but property managers can collect service fees that includes insurance premium and hold it in a ‘client account’ which is a statutory account that complies with the ‘CASS’ [client’s assets] Rule 5.3. This type of account ensures the client’s money is protected. Royal Institute of Chartered Surveyors members already met this requirement so the FSA agreed that property managers who met the RICS standard are not required to have another account. Due to the protection offered by a statutory account the FSA will allow the ‘co mingling’ of insurance money with other ‘client money’ if it is in this type of account.

The Principal also has a responsibility to ensure that the client is protected so they are required to ‘cover’ the premium it anticipates the property manager will have collected to pay forthcoming premiums. Regular notification of what has been collected is required so that it can be reconciled against the estimation.

Risk transfer is the insurance company accepting that payment to their agent is payment to them, again protecting the customer. Some principals are fortunate in securing confirmation from their insurers that Risk Transfer can be ‘cascaded’ down to Appointed Representatives’.

This is another benefit of having a Principal who looks after the interests of their Appointed Representatives as this means their customers money is protected on both counts.

As statutory regulation has been in place for more than two years intermediaries should have their compliance position in place but it is possible to change if the one you chose originally does not suit your requirements. If you are planning a new business which involves insurance mediation research the options thoroughly and decide which one will suit your business.