Many companies face the prospect of having to suspend their business activity in the general insurance market from January 14 this year (N(GI)), the date on which the Financial Services Authoritys (FSA) regulation of general insurance sales and administration starts.
The evidence for this comes from a mortgage and general insurance article on the FSA website. It shows that a significant number of companies had not submitted their applications by December 2004, especially in the secondary market. As a result, there is no guarantee the FSA will process their application in time for N(GI).
Without confirmation of authorisation or an exemption from regulation, it will be illegal for companies to sell general insurance after January 14.
According to the FSA, although more than 14,000 general insurance companies initially registered to apply for authorisation, more than 4,500 had still not applied by December.
The top three hotspot sectors were motor dealers, removals companies and property managers.
Under the Financial Services and Markets Act 2000, the FSA has six months to decide whether or not to authorise a company following receipt of a completed application.
Despite this, the FSA has made it clear that it is keen for the industry to be ready on time and has said it will do everything it can to process applications received before the deadline. It is also issuing reminders to secondary companies who registered but have not yet applied.
The FSAs comments about secondary market companies are supported by the findings of Grant Thorntons survey of the UK insurance sector, completed in December. Of the secondary market respondents, 40 per cent said they had not submitted an application at that point.
Around 40 per cent of the companies surveyed had no idea what authorisation had cost them or what future compliance costs would be. A third of these companies also stated that they were concerned that regulation would lead to reduced margins on insurance sales.
In addition, more than a third of the companies said they could see no clear benefit arising from the new regulation. However, half of them felt that as regulation was going to happen anyway, the FSA should focus on unfair selling practices and poor controls in companies.
If the FSA finds evidence of such issues, it is likely to make quick examples of offending companies.
For evidence of this, general insurance companies need only look to the investment business market. Here the FSA has already imposed significant fines and requested past business reviews or other forms of rectification work. Where necessary, it has been willing to close companies down.
A final word of warning: while gaining authorisation has been a challenge for many general insurance companies, maintaining compliance is likely to be equally taxing. Having the authorisation letter in the drawer and forgetting about it is an approach that some companies may come to regret.
Darren Castle, manager, financial markets group, Grant Thornton