The South West welcomes CIMIRF at TLT

On Friday 10 September, thanks to the generosity of TLT solicitors, the South West Region welcomed the Compliance Institute’s Mortgage & Insurance Regulatory Forum (CIMIRF aka ‘smurf’) to its quarterly regional seminar where we also had in attendance Steve Williams Group Manager of FSA’s Retail Firms Division.

From April the FSA has been split into three business units covering Wholesale regulation, Retail regulation and Regulatory Services. A large part of mMortgage and general insurance regulation rests in the retail markets but commercial insurance, including the London Market, does not include reinsurance, which is covered by the Wholesale business unit. The Retail business unit has three supervision divisions being Major Retail Groups, Retail Firms Division and Small Business Division. The split between Retail Firms and Small bBusinesses is determined by turnover with £3 million per annum being the dividing line.

The authorisation process begins with the application going to Durham where it is a firm of outsourcers converts the information into electronic forms and makes validatedions ready for the form to go onto the High Street Firms (HSF) system. Basic checks are then carried out by HSF for systems and controls, credit checks, approved persons and the information on the form e.g. whether the firm is general insurance only or a mixed business. Firms, which are part of an existing group, are sent to their current supervisory area and the larger firms (over £3m) are sent to the appropriate supervision division. iIf they form a new group all the component parts are kept together.

The supervision team then assess and review the applicationon a best-placed basis without generally visiting a firm although further questions may be raised by a call or written query. If the application is particularly complex it will go to a relatively small team in the Authorisations Dept. within the Regulatory Transactions Division who deal with around 15% of applications. Assuming all is in order a minded to authorise (MTA) letter is issued otherwise they may be refused via the Regulatory Decisions Committee (RDC). In most cases a firm will withdraw before being refused and only about 6 cases from the Retail Firms Division are being refused authorisation. The refusal process is quite drawn out although it is expected refusals will go through the RDC by the end of this month. Warning notices are not published although FSA may issue statistics at a later stage. In percentage terms it is a very small number that withdraw from the process. About 15 to 20 applications have withdrawn in Retail thus far.

HSF carry out checks of threshold conditions (TC) 1 and 2, which are relatively easystraightforward checks. Retail Firms Division (RDF) look at TC3 for close links, structure, ownership and associations to see if anything impedes supervision e.g. having owners in the Cayman Islands might be a cause for concern. TC4 is about adequate resources, which is the biggest area not just whether the firm is financially sound but human resources being adequate in terms of carrying out regulated business and gGroup finances including issues with other parts of theany Group. TC5 covers suitability, which is not normally a problem but there may be issues with individuals and culture. There is a fear that firms which escaped regulation previously, by diverting from investment business to general insurance and mortgages may slip through the net. However, FSA has background information on firms who were previously authorisedapplied for regulation and this will be taken into account although it remains a high hurdle for FSA to say a firm or individual is not suitable for authorisation and it is not easy to keep everyone out where there may have been a previous problem.

There will be about 420 new large firms for Retail Firms division, which is a huge number coming into regulation. They are mostly firms new to regulation and some are connected to large retail groups, but some are parts of existing regulated groups and are mainly newly regulated. For mortgage regulation they are lenders, administrators, brokers and networks and with general insurance, brokers and networks plus secondary general insurance intermediaries. Problems at existingapplicant firms could lead to refusal. Discussions will take place at refusal but it is very rare an application reaches that stage.

The principals of appointed representatives are checked so it is possible ‘back door’ applications can be avoided however it is the network’s responsibility to satisfy itself on all the other issues considered relevant by FSA. The FSA will not be carrying out the same checks on appointed representative firms as with directly authorised firms.

There are a lot of motor dealers, car manufacturers and electrical retailers coming into regulation, which will pose a challenge in terms of supervision. Airlines can also act as insurance intermediaries. There is a big process underway to communicate with all areas that require regulation with FSA road shows and communications to trade bodies. There has been a very good response from the motor trade but not everywhere. No doubt there will be firms that will be acting illegally, which FSA will have to talk to. If they apply quickly it is possible FSA will not take action but for firms who deliberately try to avoid regulationthis will be overlooked FSA will take action. Most insurers want to check with FSA whether brokers have been authorised and they are writing to their existing intermediaries to check their current status.

Existing firms will have to apply for a variation in permission (VOP) or stop general insurance or mortgage activity. There have been about 480 applications for VOP and some have problems. Problem firms will be refused but have to go through the full RDC process e.g. IFAs with a lack of financial resources as per TC4. Firms who have been in deficit for some time will not receive VOP for mortgage and general insurance business. A handful of firms are going through that process. Once FSA are minded to agree they will get a variation notice.

New firms should get a Scope of Permission Notice (SOPN) in 2 –3 weeks. They will get a SOPN for both types of business applied for but it will only be effective from the relevant dates. If firms have an issue with receiving their MTA and authorisation they should raise this with FSA and they will look at it again. Once a firm is authorised FSA would have to take action to withdraw authorisation so firms are being looked at closely beforehand. If there are significant changes in the firm before authorisation, which have not been advised to FSA this would be a breach of faith and authorisation could be withdrawn quickly in these circumstances.

Supervision of larger firms will be relationship-managed categorised as A, B or C but there are also some classed as D. Supervision will be more intensive and continuous for As and less for Cs. With relationship management that means FSA operate a contact management system with all calls going to the Firm Contact Centre (a part of Regulatory Services Business Unit). The contact centre may refer queries to a relationship partnermanager.

RFD will conduct a risk assessment and provide risk mitigation programmes to firms using a probability scale. RFD may conduct on site ‘discovery’ work with risks scored and detailed in a Risk Mitigationanagement Programme (RMP), which the firm completes. There is a rolling cycle of risk assessments based on risk, which could be up to 3 years but always with an interim half way assessment. It will take a long time to visit firms and there will be a ‘get to know you’ meeting first. It will be some months before a full risk assessment is carried out but FSA will act on Crystallised risk cases e.g. where firm may be about to go bust.

FSA carry out thematic work, which could include responsible lending practices as per MCOB rules where FSA expects firms to take responsibility for their lending practices. There are currently a few products around that would not meet the rules, which FSA are talking to firms about. Issues such as advice and non advice and where to draw the line, training and competence, financial promotions (an interesting one) where rules are changing from MCCB and GISC, KFI and IDD getting it right and SYSC which is a big issue for FSA, are also possibilities.

Groups will be looked at as highly or partially integrated groups (HIG or PIG). There will be a group risk assessment with one RMP for a HIG and perhaps two for a PIG with individual assessments for each entity if not integrated.

We then followed with the questions submitted via the CIMIRF forum with questions debated in the audience with some comments from Steve Williams although he will refer them to the complex queries team who will provide a full set of answers. The next South West seminar is scheduled for 5 November at Bristol & West with David Millington a Banking Ombudsman from FOS. The next CIMIRF meeting will be on 19 November from 10:30 to 12:30 at FSA Canary Wharf with a presentation from the supervision team.

Published: September 2004
By: Anthony Smith

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