The Insurance Act 1989 needs to be strengthened to give regulators more powers and some of the onus to behave should be switched to the brokers themselves, according to Irish Brokers Association chief executive, Mr Paul Carty. The Central Bank is also understood to be keen to see the regulation of insurance intermediaries given similar legal backing as that of the fin ancial intermediaries it regulates.
But both institutions warn that complete and efficient regulation of the insurance and investment intermediary market cannot be achieved quickly. While the Insurance Act 1989 has been in operation since 1990, some investment intermediaries have only come under the regulatory wing of the Central Bank this year. Regulators insist that it is unreasonable to expect them to have a complete system up and running quickly. The sector is very complex and there are a large number of intermediaries who are running a number of different types of brokerages. They argue that a period of trial and error, while appropriate systems are being developed and lessons learned about the shortcomings of legislation, is inevitable. And they argue very forcibly that even within the most efficient regulatory systems, fraud will arise from time to time.
However, lessons have been learned from a number of high profile collapses including the Taylor Group, Mr Carty insists. Primary regulators such as the IBA need teeth, he argues. They need the support of legislation to fulfil their functions properly. If the IBA had power to enforce compliance with its own code of conduct and legal protection to communicate with other regulators, some of the problems that have arisen could have been avoided, he contends.
He is adamant that the Insurance Intermediaries Act is "a brilliant foundation". But he is equally adamant that there are shortcomings that need to be remedied. "It needs to be fleshed out, probably by giving legal teeth to the codes of conduct that we have developed over a number of years. The way it is policed must be given some legal status. There are some very obvious improvements that could be made," he says.
These include giving the IBA, or whoever is regulating insurance intermediaries, the legal powers to police brokers, to enforce its code of conduct and to insist on the provision of financial and operational information. Other improvements would involve strengthening the bonding provisions to protect customers and requiring brokers to have professional indemnity insurance. Central Bank sources feel that the insurance intermediary regulator should be given the legal power to do spot checks on brokers, to require answers to its questions and to take action if its code of conduct is not obeyed. In addition both the IBA and the Central Bank agree that there needs to be better communication and co-operation between all the different regulators, a better sharing of information and systems to make the overall regulation more efficient.
And there is a case for streamlining regulation through either amalgamating some of the regulators - the IBA and the Insurance Industry Compliance Bureau (IICB) for example - or putting all regulation under the Central Bank umbrella. A new regulator could build on expertise developed and lessons learned over the years at the IBA and the IICB, but it would need to be given improved statutory powers. The IBA is open to any change which would improve the regulatory environment, Mr Carty says. "Good effective regulation is all we are interested in, whether we do it or someone else does it is not the issue - we would happily co-operate with changes - it could go from Department of Enterprise and Employment to the Central Bank."
Whether regulation is done by one organisation or by a number of different organisations is not really an issue because in practical terms, he contends, if it was done by one organisation the function would have to be sub-divided into a number of divisions.
But having one organisation in charge would improve the public perception and could mean better co-ordination and co-operation, he agrees. "The crucial thing is the information flow. Maybe flows between organisations could be as good as the flows between the divisions of one organisation. What we need is good regulation and proper communication."
IBA would be happy to divest itself of its regulatory function. But Mr Carty insists that IBA has as good a reason as anyone to make sure the system works - the standing and reputation of its 600 members. There are a number of ways to make the current system work better, he suggests. The IBA spends a lot of time trying to collect the documentation brokers are required to lodge with the regulator. At the end of October brokers are asked to file annual returns. About 50 per cent reply on time. The rest have to be contacted again. Some have to be contacted a number of times and some return incomplete or incorrectly completed forms.
"We should turn the tables. We need to switch the onus on to brokers. It could be done by requiring them to have annual licences and they would not get the licences if they did not send in the documentation required," he suggests. The IBA has been recommending such a system for years, he says. It would allow the regulator to concentrate on chasing after non-compliant or potentially dangerous brokers rather than having to target its entire body of brokers.
Current bonding rules under the Insurance Act 1989 are at an inadequate level and too weak, he argues. The bonding arrangements under Section 47 of the Act were set in place to offer some protection to brokers' clients. The Act requires that where a non-life broker's Section 48 account exceeds £25,000, the broker must maintain a bond of £25,000. (Brokers must maintain a separate bank account for client funds which is known as a Section 48 account.) Where a life broker's Section 48 account exceeds £25,000, that broker must maintain a bond to the value of the greater of £25,000 or 25 per cent of his life assurance turnover.
But because of the differences between the ways life and non-life business is done, all non-life brokers have bonding while a very high proportion of life brokers have no bonding, according to Mr Carty.
In the case of many life brokers, cheques from clients are made payable to the insurance company providing the cover. So the cash never passes through the broker's Section 48 account. Therefore in some cases, where a broker is transacting a large amount of business, his turnover - defined in Section 47 of the Act as the Section 48 account - will not exceed £25,000, allowing him to avoid the necessity of bonding. If a rogue life broker was able to cash cheques made out to other parties, there may be no bonding to protect clients.
Bonding is not as necessary in the case of non-life brokers because under Section 53 of the Act where a premium is paid to an insurance intermediary either as a renewal of a policy or following acceptance of a proposal, the premium will be treated as if it was paid to the insurance company. In practice, because non-life companies give the broker some credit to pay over the premiums, clients are covered as soon as they hand over their cheque to the broker. But for life business the client is not covered by the insurance until the premium is paid to the company Under its code of conduct IBA requires all its members to have minimun bonds of £50,000. Bonding will never cover a customer's loss fully, according to Mr Carty. But brokers will have to meet financial and other control criteria to put a bond in place, so it provides an extra measure of protection for customers, he says.
There is no legal requirement for brokers to take out professional indemnity insurance. It is referred to in Section 45 of the Act but the Minister has never made a regulation requiring it. A number of problems which have arisen in the day-to-day regulation are not covered by the legislation. There is no legal requirement on brokers to disclose fees charged to clients. Brokers are required to pay client funds into a special Section 48 client account, but there is nothing in the Act as to when this money must be lodged to the account and there are no controls over payments out of Section 48 accounts.
The IBA has learned, often the hard way through very public broker collapses or other difficulties, that rules and regulations over and above the terms of the Act are required to operate the spirit of the legislation. For this reason it has developed the code of conduct and guidelines for operating the code which are given to every IBA member. Members can be expelled for breaches of the code. But that code of conduct has no legal force. So the regulator cannot take legal action against brokers who break the code.
