7 April 1998
46/98
BETTER PROTECTION FOR MORTGAGE BORROWERS
Helen Liddell announces further regulatory reform measures
Measures to ensure customers receive adequate protection when they take out a mortgage were announced today by the Economic Secretary, Helen Liddell.
The Treasury will have the power to extend the Financial Services Authority's (FSA) regulatory responsibilities to include mortgages as part of the proposed regulatory reform bill. It could, if necessary, be used if the Code fails to give sufficient protection. The Council for Mortgage Lenders (CML) voluntary Code will be kept under regular review to ensure it is providing adequate protection for customers.
The Code will be reviewed against a number of factors,including:
the extent to which the Code secures good quality advice for prospective borrowers; how well the Code provides remedies for borrowers' legitimate grievances.
There will be a formal review in 1999 and,depending on the outcome, an interim one in 2000 and further formal reviews every two years after that. The review will also include regular reports from the CML, independent intelligence and, an on-going consultation process with CML about how the Code is working.
Announcing the measure, Helen Liddell said:
"Taking out a mortgage is probably the most significant transaction most ordinary people undertake in their lifetime. I want to ensure that they receive the protection they are entitled to expect.
"I am aware that the CML and its members are making a serious investment in the success of the Mortgage Code and we will allow the Code a fair trial. However, if the Code fails to provide adequate protection for consumers we will not hesitate to use the reserve power in the regulatory reform bill and give the Financial Services Authority statutory power to regulate mortgages."
The Minister also announced that it would be possible for the Treasury to extend the scope of regulation to retail banking and non-life insurance (this includes a wide range of products from motor insurance to health insurance). These areas, too, will be kept under review. However, regulation would not be extended without consultation, including an appraisal of the costs and benefits.
Mrs Liddell said:
"We have no plans at present to extend the scope of regulation into these areas but standards of conduct in these markets and the risks faced by consumers will be kept under review.
"As we are now in the process of setting up a regulatory framework which will see us well into the next century, we want to ensure that we have relevant powers available to us if action is required."
The Minister also took the opportunity of welcoming the FSA's consultation document on the design of their handbook. She said:
"The FSA's main aim is to ensure that their handbook is accessible and easy to use by managers and advisors in the financial services industry. Self discipline is the key to good regulation. This consultation gives the industry the opportunity to shape the way regulation will work in future. It is in the industry's hands to get involved in the process."
Mrs Liddell announced that the proposed legislation would give the FSA a flexible rule-making power to impose requirements anywhere along the spectrum from broad principles to detailed rules. These must be consistent with the imperative for different approaches to wholesale and retail business.
The Minister said:
"Of course we have to distinguish between the retail and wholesale ends of the markets. At the retail end, where businesses have better information, customers must have proper protection. But at the wholesale end we must ensure the regulatory regime is light and flexible enough to give the industry the opportunity to develop and innovate and compete in global markets."
A consultation document on the future of the Insurance Brokers Registration Council (IBRC) was also issued today. The Government is reviewing the system of registration and professional governance of insurance brokers, and wishes to consult with the industry and others concerned whether it would be advisable to remove its present statutory basis. Such a change would involve repealing the Insurance Brokers
(Registration) Act 1977 as part of the regulatory reform bill. Insurance intermediaries who arrange life insurance business, whether described as 'insurance brokers' or by any other title, will be subject to authorisation by the FSA.
Mrs Liddell said:
"We have not yet adopted a final view on the way ahead and welcome views of brokers, insurers and consumer representatives.
"We will continue to look to this sector to provide competitive and high quality services for clients. We are also looking wider, to the insurance industry as a whole, to work with its customers in maintaining confidence in the ways non-life insurance is distributed."
Comments are requested by 29 May 1998.
NOTES TO EDITORS
1.The Minister made the announcements in response to parliamentary questions from Ivor Caplin [Hove]. The full texts are attached.
2.Non-media copies of the consultation document on insurance brokers and other intermediaries can be obtained from Matthew Clark, Insurance Directorate, HM Treasury, Room 5.H.26, 1 Victoria Street, London, SW1H 0ET or telephone 0171 215 0204 or fax 0171 215 0437.
IVOR CAPLIN [HOVE]: To ask Mr Chancellor of the Exchequer, if he will make a statement on the future scope of regulation by the Financial Services Authority?
HELEN LIDDELL: As has been already announced, we propose to publish for consultation this Summer draft legislation to reform the structure of financial services regulation. This will bring together regulation of investment business, deposit-taking and insurance business under a single regulator, the Financial Services Authority. The legislation presents an opportunity to ensure that the Financial Services Authority has the powers it needs to regulate effectively, and to provide for the scope of statutory regulation to be extended to new activities in the event that self -regulatory mechanisms fail to deliver the standards that the Government and consumers expect.
The Government has been considering how best we can carry forward the Government's manifesto commitment for fair dealing in mortgages, the most significant transaction many people undertake. I have decided that the proposed legislation to establish the Financial Services Authority as a single regulator will include powers for the Treasury to extend the scope of activities regulated by the Financial Services Authority. The activities that could be regulated will include mortgage business. The case for regulating mortgage business will be regularly reviewed by Ministers. The first review will take place before the Bill comes into force.
In the meantime the Treasury will monitor the Code introduced by the Council of Mortgage Lenders (CML) in July 1997 to see whether it can deliver the Government's objectives without statutory intervention. The CML is currently bringing intermediaries within the Code's scope, and introducing appeals arrangements. It is too soon to decide whether the Code, on its own, is capable of protecting mortgage borrowers to the standard that the Government is determined to see achieved.
Whether statutory mortgage regulation is introduced will depend upon a number of factors, including the extent to which the Code secures good quality advice for prospective borrowers and provides remedies for borrowers' legitimate grievances.
The Treasury will ask the Council of Mortgage Lenders to report on the impact of the Code, and provide statistical background. The Treasury will also look to the Department of Trade and Industry and the Office of Fair Trading to monitor the impact of recent changes in the guidelines for non-status market lenders and brokers, and the upper limit to which these consumer credit agreements apply from 15,000 to 25,000 Pounds. In addition, the Treasury will look to the Financial Services Authority for an assessment of the likely costs of activating the reserve power, to assess whether they would be commensurate with any potential benefits. Others with knowledge of the mortgage market would also be consulted before any decision is made.
The draft Bill will also make it possible to extend statutory regulation to include the conduct of retail banking and non- life insurance business. We have no plans at present to extend the scope of regulation in these areas, but standards of conduct and the risks faced by consumers will be kept under review. Regulation would only be extended after consultation, including an appraisal of the costs and benefits.
The Government has also decided to consult on the future of the Insurance Brokers Registration Council. A consultation paper has been published today by the Treasury. Copies have been placed in the Library of the House
IVOR CAPLIN: To ask Mr Chancellor of the Exchequer if he will make a statement on the Financial Services Authority's rule- making powers.
HELEN LIDDELL: We intend that the draft legislation will give the Financial Services Authority wide enabling powers to make rules. The rules will have the force of law, and be capable of imposing binding obligations upon firms. The rule-making power will enable the Financial Services Authority to lay down requirements anywhere along the spectrum from broad principles to detailed requirements.
The Financial Services Authority will also be able to issue guidance on the interpretation of its rules and other regulatory matters.
The rule-making power will be exercisable for the purpose of protecting the interests of customers of financial services businesses. Consistent with the need for differentiated levels of regulation for wholesale and retail business, the Financial Services Authority will be required to ensure that its rules take account of the fact that rules appropriate to business conducted with some classes of investor may be inappropriate in the case of others.
We also intend that the Financial Services Authority will be able to impose financial resources rules, supplemented by additional requirements on individual entities by means of administrative notifications.
The Financial Services Authority will be able to grant waivers, to disapply its rules on a case by case basis (subject to tests similar to those in the Financial Services Act). The Financial Services Authority will be under an obligation to publish waivers, subject to considerations of commercial or regulatory confidentiality.
We intend that a right of action for damages for private persons will attach to the Financial Services Authority's rules, except financial resources rules and others specified by the Financial Services Authority. The draft legislation will create a presumption that the rules confer no right of action for damages on non-private persons, unless the Financial Services Authority were to stipulate otherwise.
We intend that the power to make rules will be reserved to the Board of the Financial Services Authority. The Financial Services Authority will be obliged to consult on any proposed rules unless the delay created would be prejudicial to the interests of existing and potential investors, policyholder or depositors. The Financial Services Authority will be obliged to publish cost benefit appraisal of its proposals and other options as part of the consultation exercise unless the Financial Services Authority reasonably believes that the proposals on which it is consulting will reduce the costs of compliance incurred by those to whom the proposals will apply, are neutral in terms of such costs or that any increase in compliance costs will be of marginal significance only. More generally, we intend that exercise of the Financial Services Authority's rule-making powers will be informed by its statutory objectives.
The Financial Services Authority has today published a consultation document with initial proposals concerning the exercise of these powers. Copies have been placed in the Library of the House.
FINANCIAL SERVICES REGULATORY REFORM:
INSURANCE BROKERS AND OTHER INTERMEDIARIES
Summary
1. The Government has made clear its commitment to more straightforward and effective financial services regulation. As part of this process of improving regulation, it has considered the existing system for the regulation and professional governance of insurance brokers. There is a case for reviewing the present statutory basis of this system - particularly in terms of whether this type of basis is necessary for the quality of the profession or for the protection of the consumer. The broker registration system and its background
2. The Insurance Brokers (Registration) Act 1977 (IBRA) established the Insurance Brokers Registration Council (IBRC) and restricts use of the title 'insurance broker' to individuals and firms on the register maintained by the Council. The IBRC makes rules, subject to the Act and to approval by Parliament, and is responsible for its own decisions on registration and discipline of insurance brokers. It has no power to resolve disputes or to order brokers to make redress. The Council as a governing body consists of registered insurance brokers elected by their peers, together with Government nominees chosen for their experience in relevant professional and public interest fields.
3. The activity controlled by the Act is use of the title 'insurance broker', with the object of reserving it to competent, honest and independent practitioners. Insurance broking business is not defined, and is only regulated as far as it is carried on by practitioners and firms who choose to use the title mainly because of the type of clients they seek. Many other insurance intermediaries do similar business, without the costs and obligations of being registered, under alternative names such as 'consultant'. The Act provides no protection for the clients of such intermediaries.
4. At the time of the IBRA, many personal or small business customers purchased insurance services from intermediary outlets of varying quality. Those intermediaries not overtly identifying themselves as agents of insurers were often thought of as brokers, or described themselves as such. They were presumed to have a certain competence and independence traditionally expected of brokers - whether or not they acted for the client to procure the most suitable service, or were capable of doing so. Pretension by default to these qualities could mislead some clients. The IBRA achieved some success in curtailing such abuse which was widespread under access and distribution patterns prevalent in the 1970s.
5. The IBRC acquired an additional role through the Financial Services Act 1986, under which arranging or advising on life insurance, by life insurers or by intermediaries of whatever title, is currently regulated. Registered insurance brokers arranging life insurance business have been authorised under the Financial Services Act by virtue of their registration with the IBRC, a Recognised Professional Body (RPB) under that Act. However, the IBRC's RPB role will disappear when the reforming legislation is enacted, since it is not intended that the regulatory regime under the Financial Services Authority (FSA) should include an authorisation route via RPBs. Broking in the commercial and international insurance market
6.The commercial or wholesale insurance market, where transactions invariably involve brokers, has different concerns from those of personal and small business insurance customers. Clients are dependent on the expertise of brokers, but do not need protection as vulnerable consumers. They are in a stronger position than personal or small business clients to enforce their own legal rights to satisfactory performance. Appropriate terms of service tend to be agreed with brokers for each transaction, and it is partly up to the client himself to see that the arrangements made will serve his interests and that he is not incurring undue risk of financial loss through their failure.
7. Nevertheless there are concerns in this sector about confidence in the market as a whole, because of the scope for fraudulent or imprudent loss of the large sums handled in transit between clients and insurers. This is particularly important in the London wholesale market, where both broking itself and the business it brings to insurers in the market are substantial contributors to UK invisible earnings. To safeguard money and business confidence, the market needs to be capable of identifying brokers whose honesty and competence clients can trust within an enforceable client-agent relationship. A registration system, with standards and rules which must be complied with as a condition of continuing registration, offers a form of recognisable quality mark.
8. Brokers who bring business to Lloyd's are subject to particularly stringent standards, enforceable by Lloyd's with disciplinary sanctions. The Lloyd's broker regime's oversight applies equally to the non-Lloyd's element of its brokers' business, so that clients in the wider commercial market may seek quality assurance by using Lloyd's brokers. It is, however, essentially a private system, operated by Lloyd's through bylaws under the Lloyd's Act 1982, to serve the special needs of its marketplace rather than for general benefit. Registration by the IBRC regime is currently treated as a convenient standard credential for broking in the commercial market more generally. Relevance of the broker registration system's statutory basis
9. The Government recognises that the existence of the IBRC has raised standards of broker professionalism. But its ability to govern the profession as circumstances change, to the benefit of the broker sector and its clients, is limited by the form of statute upon which it presently relies for its existence. Whether its continuation as a statutory body would offer significant consumer protection, particularly once life insurance transactions are regulated wholly by the FSA, is for consideration. There is a corresponding question as to whether the IBRC's statutory basis is essential in enabling it to operate an accreditation or recognition system for the benefit of clients in the commercial insurance sector.
10. It is also open to discussion whether statutory control of the title 'insurance broker' brings anything more than a marginal benefit. In the personal and small business market, where so many insurance intermediaries elect to use alternative titles, it may contribute to the superficial but potentially misleading impression that insurance broking activity is regulated as an activity. In the commercial market it could be said with rather more accuracy that nearly all insurance broking activity is carried out subject to regulations which are part of the registration system and which thus have a statutory basis.
Arguably this is because registration is the indicator of the necessary professional standard, so that clients invariably use practitioners who are registered and who are therefore called insurance brokers. It may not necessarily follow that the commercial market needs the title to be statutorily controlled any more than the personal market. Future regulatory approach
11. Under the new legislation, selling, arranging and advising on life insurance products which are investments will be subject to a comprehensive regime of statutory authorisation and conduct of business regulation by the FSA. It is expected that the legislation will be so framed as to enable transactions in additional kinds of insurance to be made subject to regulation by the FSA at a later date if this should become necessary. While the Government does not consider that at present there is conclusive evidence that the risk to purchasers of non-life insurance justifies extending regulation in this way, it intends that the means of doing so in future should be available within the new regulatory regime.
12. If a case for not regulating non-life insurance distribution is to be sustained, the industry will need to retain public confidence that it can deal with potential abuses. It will need to set itself a clear standard of practice which will give customers an assurance of quality and on which they can come to insist - so that service providers who do not meet that standard would be at a significant market disadvantage. The standard might need to include a commitment to mechanisms dealing with customers' complaints and with disputes against intermediaries, complementing as necessary the resolution mechanisms covering regulated entities such as insurers. A code of conduct such as that operated by the Association of British Insurers (ABI) and its members, but applicable universally, could form a basis for developing such a standard. If so, it would probably need to be accompanied by an arrangement for maintaining consultation with public interest representatives and for demonstrating credibility and effectiveness.
13. In the commercial insurance broking sector, where market confidence depends on standards for individual and corporate practitioner quality rather than on prescribed transaction processes, the case for not introducing conduct of business regulation is a matter of avoiding unnecessary regulatory constraints on commercial judgements made in that market. Such regulation should only be necessary if it proves impossible to operate, to the market's satisfaction, a system for accrediting brokers to suitable standards of competence, and of integrity, with appropriate financial safeguards. Otherwise an authoritative professional body which takes account of the market's needs should be capable of maintaining confidence.
Possible ways forward
14. The Government has not adopted a final view on whether non- life insurance intermediaries need to be regulated by the new unified financial services regime. This question is largely dependent on whether the industry can work with its general public and commercial customers to maintain their confidence. In principle it is expected to do this at present, as there is no existing regulation covering the relevant field of activity.
However, because of the general impression created by the existence of the statutory regime under the IBRA, it is arguable whether industry's own ability to achieve this confidence without regulation has been realistically tested. Any decision to make the significant extension of regulation to cover all insurance intermediary activity would need to be based on objective consideration of such performance.
15. With reform and unification of the financial services regulatory regime, and of its underlying primary legislation, there will be opportunities to make regulation more straightforward, so that it does not entail separate unrelated pieces of legislation. Neither the new regime's regulation of life insurance transactions nor its potential ability to regulate non-life ones will make use of the IBRA. Insurance brokers' professional governance and standards, as part of industry's contribution to quality in the sector, would stand somewhat apart from the regulatory regime. The Government is minded to abolish their statutory basis, subject to consultation with the industry and its customers.
16. Repeal of the 1977 Act would abolish the present statutory Council. But it would be open to the broker sector itself to establish a non-statutory successor body if it saw advantages in this. Such a body could operate a system, with all the necessary features - admission criteria, discipline and rules - for accrediting or recognising professional insurance brokers.
Practitioners would seek to attain that recognised status, and clients to use their services. There would be much in common with the present system in which they choose to meet certain professional standards in order to gain access to a particular class of practice - except that there would be no associated statutorily-controlled title. It might be appropriate for such a body to seek a Royal Charter and thereby to develop a form of chartered professional status for insurance brokers. The Government would welcome views on how a possible non-statutory broker registration or accreditation system could serve the market's needs, and on how it could interact with Lloyd's regulation of brokers.
Comments and enquiries
17. The Government intends to publish the draft of the reforming legislation on financial services during the summer of 1998, and would like to receive any comments on the regulation of insurance brokers and other intermediaries by 29 May. Enquiries about this document and requests for further copies should be addressed to:
Matthew Clark
Insurance Directorate
HM Treasury
Room 5 H 26
1 Victoria Street
LONDON SW1H OET Tel: 0207-215 0204; Fax: 0207-215 0437)