What was Branko talking about?
In Insurance Age’s March issue under Management - Regulation – Abiding by the Rules, Branko Bjelobaba suggests that “Compliance with requirements can only be achieved through having sensible and easy to understand rules”. He eloquently points out that “it is not beyond an intelligent person to create a rulebook that runs to an inch or two whereas the FSA handbook, if stacked, would reach around six feet high!” So what would compliance rules look like if they were two inches thick, or less, sensible and easy to understand?
First of all they wouldn’t be tick-boxable! Nothing can be more inappropriate for the regulation of insurance brokers than shoe-horning the role of the broker into a tick box system. It results in “compliance” being the job of someone who is not at the coal face selling to clients. Does that really make sense?
Take the ICOB rule concerning Demands and Needs. The Rule says; 5.2.2 (1) Prior to the conclusion of a contract, a firm must specify, in particular on the basis of information provided by the customer, the demands and the needs of that customer as well as the underlying reasons for any advice given to the customer on that policy. (2) The details must be modulated according to the complexity of the policy proposed.
What does this mean, in practice? Surely, it means that the broker assesses the proposer’s demands and needs and satisfies itself that what is being sold will meet them. That, at least, is what a reasonable consumer of insurance ought reasonably to expect and isn’t that, surely, the prime reason for regulation?
In a recent case before the court [Nicholas G Jones v Environcom Ltd & Miles Smith Insurance Brokers] (2010) QBD (Comm) (David Steel J)] the judge said of the broker’s failures to properly inform the client, resulting in allegations of non-disclosure, “All this flows from the requirement that the broker should take reasonable steps to ensure that the proposed policy is suitable for the client’s needs. By definition, a policy which is voidable for non-disclosure is not suitable”. It is difficult to argue against that.
In fact, in this case, as is the norm under the regulatory system adopted by the market, the broker simply sends a “Demands and Needs” statement that tells the client that the policy meets their demands and needs; but very often it clearly doesn’t.
An over-riding warning in the Miles Smith case that said “If you are aware of any fact which may affect underwriterʼs (sic) attitudes you should make it know (sic), whether it is specifically requested in the Proposal Form or not”. D Steel (J) said, “In my judgment all this afforded little or no help (to the Insured) on understanding the obligations to disclose material facts, the nature of material facts or the consequences of failing to disclose them.”
The ICOBs box was ticked and so all was well; until the claim was not met. At which point the FSA is not interested in the plight of the buyer.
So what should the Rules be?
Not rules, as such. Rather they should be eminently sensible statements of objectives and outcomes that, if not met would give the FSA the ability to question why and apply a sanction. There is no point in regulation that leaves the consumer unprotected from the miscreant broker.
The pre-requisites for this are alarmingly simple:
- Selling a policy that meets the demands and needs of the buyer; and not selling a policy that does not;
- Selling a policy that is fair and treats the customer with respect; and not selling a policy that is not fair.
- Having no conflict/s of interest; “No one can serve two masters. For you will hate one and love the other”
- Not selling a policy to a customer issued by an insurer that the broker believes:
- May not be able to honour its financial commitment at the time of any claim on the policy
- May not intend to honour the payment of a claim
- Does not have the reputation for underwriting the type of risk that it has accepted for the policyholder
These are the basic requirements of protecting the consumer and the (regulatory) test should be by the outcome, not by the method of delivery.
It should apply equally to a private consumer and a B to B business that invariably relies upon the broker’s expertise in much the same way as does a private consumer.
Mr Martin Wheatley’s appointment as CEO of the newly founded Consumer Protection and Markets Authority (CPMA) heralds an opportunity to focus on regulating the thing that matters most to the consumer in matters of insurance; getting their claim paid.
Branko’s astute appraisal makes all the more sense against a backdrop of an industry that needs simple straightforward leadership based upon good judgement, good sense and simple integrity.
This document is intended for general guidance. It is not intended to apply to any particular case and does not constitute either legal or insurance advice.