Regulation déjà vu

Paul Robertson explains why, amid the current debate, he has the distinct feeling that he’s seen it all before…

For me, watching the debate unfold on the regulation of managing agents is a case of déjà vu. That is because I have seen it all before. No - I haven’t invented a time machine - but the insurance industry has been through this whole process already. So I thought it might be interesting to look at the progression of regulation in insurance and how it might compare to property management.

When I started in the insurance industry there was no compulsory regulation as we have today. Anyone could be an insurance intermediary, however if you wanted to be a broker you needed to be a member of the Insurance Brokers Registration Council (IBRC) and comply with its code of conduct. This was mandatory by means of the Insurance Brokers Registration Act 1977. However being a broker was only a very light touch. For example, firms only needed to demonstrate solvency of at least £1,000 and this was only at the end of each financial year. In addition commissions could be claimed as soon as a policy was sold and this was perfectly acceptable accounting practice.

The first big change was the treat that the European Union would legislate to require a minimum standard of conduct in respect of the selling of insurance. My industry reacted by trying to self-regulate with the introduction of the General Insurance Standards Council (GISC). This involved complying with a rule book which, from memory, was just over 40 pages long. However GISC was voluntary and if you didn’t want to comply with its rule book then you simply didn’t join. Many firms were unprepared to be regulated, particularly as they could be publically exposed by GISC’s regulatory arm if they breached the rules. Also, regulation generated significant expenses to a firm, thus potentially reducing profits.

If you didn’t join GISC and didn’t call yourself a broker then you would be periodically visited by the Association of British Insurers’ compliance arm, a role that they outsourced. I now look back and appreciate how ineffective this was. I remember an example of a high street firm that was disciplined for failing to display a required notice in the prescribed form. The notice contained information to customers and came on a piece of pink A3 card that had to be displayed on the wall where customers could read it. The firm in question had made a much larger copy that their customers could read and displayed it clearly. However that didn’t comply with the rules and they were made to revert back to buying said A3 card.

Eventually the insurance industry couldn’t agree among itself as to who should be the regulator, resulting in a big legal challenge. The outcome was that the government had to step in and appoint one. They chose the Financial Services Authority (FSA) which was tasked with the job of adapting the existing rule book for life and pensions sales and including the sale of general insurance. The result was a rule book which, when printed in its entirety and put into binders, would fill 14 feet of shelving. Just think; we started with a rule book of just over 40 pages.

So what is regulation likely to look like for managing agents? Well if the insurance model is anything to go by, then there will be a lot of compliance. A regulated insurance brokerage can now only claim commission when it has been paid by the client - and in some cases only when it has then paid the insurer. Also, it needs to remain solvent at all times and carry minimum net assets which are based on income. Only approved assets are permitted, so you can’t include intangible assets in your solvency. For a small firm the impact of these financial requirements meant those with little capital had to strengthen their balance sheets and this requirement could easily be anything from 5% to 20% of their annual income.

If managing agents do end up being regulated - something I personally see as only a matter of time - then it will involve generating a suitable rule book. Ideally as an industry the trade bodies such as ARMA will be able to take the lead. Certainly when compared to the experience of the insurance industry I would urge the managing agent community to work together to achieve this. Otherwise you will have a rule book written for you.

Regulation starts with a set of principles against which a set of outcomes designed to protect customers are derived. Landlord and tenant law already offers enormous protection in respect of service charge monies, so hopefully there will be no surprises there. For me, the big wake up call for managing agents if they become compulsorily regulated is the likely raft of business principles and reporting that are likely to be the biggest shock. In the world of insurance regulation there is the common adage “if it’s not written down it didn’t happen”. For many managing agents the process of documenting their actions for the purposes of compliance are likely to be a major shock.

Ultimately, regulation may improve professionalism but probably only for the firms that are not currently ARMA members. It will however inevitably result in an additional overhead for lessees for which most will see little benefit. Just think back to when you used to buy your insurance 20 years ago. Did you select you broker because they were GISC or because they were called a broker rather than an intermediary?

Paul Robertson is MD of Midway Insurance and 1st Sure Flats Tel: 0345 370 2842