Important News. for all firms regarding the regulation of mortgage and general insurance business. Contents

Important News for all firms regarding the regulation of mortgage and general insurance business DPB UPDATE Issue 3 September 2004 This is a special issue of DPB Update that we are sending to all firms to assist you in considering your options. All firms, whether unregulated, DPB licensed or FSA authorised, will, we think, find something of interest here. Contents 1. Options for firms who are conducting regulated insurance and/or mortgage business. 2. Guidance on insurance activities 3. Guidance on mortgage business activities 4. Professional services in relation to HMIT and HMCE investigations 5. Long-term care an earlier start date 6. Changes to the Clients Money Regulations 7. Mediation a new service from the Institute 8. Mortgage and insurance business frequently asked questions 9. Changes to the Designated Professional Body Handbook 10. Professional indemnity insurance requirements under the Insurance Mediation Directive 11. Transitional arrangements for the DPB Handbook 12. What do I do if I am an FSA authorised professional firm? 13. How to obtain a DPB Licence 14. Useful sources of information You can obtain an electronic version of the DPB Update at www.icaew.co.uk/dpb. Firms are free to make further copies, provided these carry the Institute s copyright. Dear Colleague I wrote to you in March about the regulation of mortgage advice (and long-term care insurance), effective from 31 October 2004, and the regulation of general insurance business, effective from 14 January 2005. If you do not normally deal with these matters in your firm, would you please pass this newsletter to the appropriate person. The Institute has had extensive discussions with the FSA and the Treasury concerning these new regulated areas. We have been successful on a number of issues, such as allowing firms licensed by the Institute to conduct general insurance business. Also, we have achieved an exemption from the PII limits set under the EU s Insurance Mediation Directive for licensed firms where the only insurance activity that they undertake is to introduce clients to brokers or independent financial advisers. Generally, the new regulated activities can be conducted under a DPB licence with one main exception. If you advise on the selection of a specific regulated mortgage, you will need to obtain authorisation from the Financial Services Authority (FSA). If you are FSA authorised, all of your regulated activities would have to be conducted under FSA authorisation, you cannot be FSA authorised and DPB licensed at the same time. The implementation date for long-term care insurance is 31 October, in advance of other insurances. If you advise on or arrange these contracts, or introduce a client to an independent financial adviser for advice on this insurance, please see the special note in the newsletter. In a newsletter of this size, we cannot include everything that may be relevant. However, there should be enough information here for firms to make a decision about the type of regulation they need. In particular, this newsletter discusses the types of activities that firms are likely to undertake in relation to mortgage and general insurance and what form of regulation is needed. The special issue of fee protection insurance is also dealt with. The newsletter gives unregulated firms information on how to become licensed in the DPB arrangements, if needed. If you are a FSA authorised firm, you should have received information from the FSA on your options. Firms that are currently licensed do not need to reapply, but if activities relating to general insurance are undertaken, there are other considerations such as the required level of professional indemnity insurance. At the end of the newsletter there is a note of where you can find further information and details of a helpline we will be operating to assist you. Yours sincerely Chairman, Professional Standards Board 1

1. OPTIONS FOR FIRMS WHO ARE CONDUCTING REGULATED INSURANCE AND/OR MORTGAGE BUSINESS Firms will need to consider whether they are conducting any of the new regulated activities and, if so, whether they wish to carry on doing so. The next two sections describe the new regulated activities and what form of regulation, if any, is needed. Please note: you cannot be authorised by the Financial Services Authority (FSA) for one activity and licensed by the Institute under the Designated Professional Body (DPB) arrangements for another. The options are: cease to offer a regulated service; become an appointed representative of an independent insurance broker, independent financial adviser or mortgage broker, as appropriate; obtain (or retain) a DPB licence, if the activities can be undertaken under a licence; or obtain FSA authorisation. Each of the options will attract its own costs and benefits. Details of how to apply for a DPB licence are given in this Update. If you already hold a DPB licence, it allows you to undertake the new regulated activities that are described under the appropriate headings in sections 2 and 3 of this Update. You will need to comply with the revised DPB Handbook (see section 9) and you may need to increase the amount of professional indemnity insurance you hold. You do not need to notify the Institute that you will be conducting the new regulated activities. If you wish to become an appointed representative of an authorised firm, you should discuss this with the authorised firm itself. Firms should only become appointed representatives of independent firms. To become an appointed representative of an insurer/lender would not comply with the Ethical Guide. The FSA has details about appointed representative status on its website, www.fsa.gov.uk/mgi. Details about the FSA s application procedures and fees, etc can also be found here. 2. GUIDANCE ON INSURANCE ACTIVITIES This section describes what insurance activities are becoming regulated. What is a regulated insurance contract? General insurance becomes regulated and, for life assurance and pensions contracts, the activities that are currently regulated will increase. What is not regulated? Travel insurance sold as a package, and extended warranties sold with white goods. Which insurance related activities can I undertake? The following are examples of activities that a firm may be involved in, which relate to insurance. The schedule identifies the regulated status needed, if any. It starts with activities that any firm can do, then adds the extra activities that a DPB licensed firm can do and finishes with the activities that only an FSA authorised firm can undertake. This article is based on material in the DPB Handbook, at Schedule 6 of Part 3. That table should be referred to for a fuller explanation of the activities. It also appears as a separate item on the website, www.icaew.co.uk/dpb. 1. Discussion with and recommendation to a client about: the need for insurance generally; Activities that any firm can do the type of insurance needed (key man, medical insurance etc); which particular broker or independent financial adviser (IFA) to use, but not contacting the broker or IFA on the client s behalf. 2. Providing the client with leaflets or information about a broker, IFA, insurer or insurance product. The leaflet may contain a proposal form and the firm may receive commission, but the insurance in question must be related to the firm s business. The information can include product specific information but the firm must not recommend the product. The firm can recommend the broker/ifa, provided that this does not identify a product. 3. Introducing a client to a broker/ifa for independent investment advice (ie with no mention that the introduction is for advice about insurance or pensions). 4. Advising on the level of insurance cover needed. 5. Explaining the terms of an insurance contract. 6. Providing information to a client to enable him/her to complete a proposal form. 7. Providing information directly to the insurer at the request of an insurer, on the financial position of a client, such as the provision of turnover or profit figures. 8. Calculating the pension deductions and/or paying over premiums after the policy is set up (ie after any initial premium has been paid), eg, as part of a payroll service. 9. Providing the client with information to include in a claim form (such as turnover, loss of profits, etc.) or providing supporting arguments with regard to the quantum of a loss. 10. Acting as an expert witness. 2

Additional activities that a DPB licensed firm can do 11. Contacting a broker/ifa to introduce a client for any form of insurance advice. 12. Commenting on, agreeing or disagreeing with the specific advice of an authorised firm. 13. Completing a proposal form and/or sending the proposal form to the broker/insurer for a client. 14. Paying the premium to establish the policy on behalf of the client. 15. In respect of a claim: notifying the insurer of the claim on behalf of the client; completing the claim form for the client; negotiating the settlement of a claim. 16. Recommending a specific general insurance contract to a client. Additional activities than an FSA authorised firm can do 17. Recommending a specific life or pension (long-term insurance) contract to a client. 3. GUIDANCE ON MORTGAGE BUSINESS ACTIVITIES This section describes what mortgage activities are becoming regulated. What is a regulated mortgage? A mortgage contract is a regulated mortgage contract if, at the time it is entered into, the following apply: the contract is one under which a person ( the lender ) provides credit to an individual or to trustees ( the borrower ); the contract provides for the obligation of the borrower to repay to be secured by a first legal mortgage on land (other than timeshare accommodation) in the United Kingdom; and at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower or (in the case of credit provided to trustees) by an individual who is a beneficiary of the trust or a related person. A mortgage contract entered into before 31 October 2004 is not a regulated mortgage contract unless it is varied after that date to such an extent that a new contract is created, to which the above criteria apply. The definition does not state what the borrowed money is used for. Usually it would be used to purchase a house, but the money could be used by an individual to invest in a business. If the loan meets the above criteria it is a regulated mortgage. What is not a regulated mortgage? Given the above definition of a regulated mortgage, the following are not regulated mortgages: second charges unsecured lending credit card borrowing loans from family members (unless structured as a regulated mortgage) buy-to-let mortgages loans to companies home reversion schemes. NB, some home reversion loans are already regulated in part as they are linked to a long-term insurance contract. Others may be structured as regulated mortgages. The Government announced in spring 2004 that it intends to regulate all other types of home loans but has not set a date for when such regulation will begin. Which mortgage-related activities can I undertake? The following are examples of activities that a firm may be involved in, which relate to mortgages. The schedule identifies the degree of regulated status needed, if any. It starts with activities that any firm can do, then adds the extra activities that a DPB licensed firm can do and finishes with the activities that only a FSA authorised firm can undertake. This article is based on material in the DPB Handbook, at Schedule 7 of Part 3. That table should be referred to for a fuller explanation of the activities. Schedule 7 also appears as a separate item on the website at www.icaew.co.uk/dpb. Activities that any firm can do 1. Discussions with a client about: the need for a mortgage or loan; the type of mortgage to obtain (endowment, repayment, etc); which particular lender (which provides a range of mortgages) to go to. (NB a firm cannot segment its discussions as set out above if the overall result is a recommendation of a specific mortgage.) 2. Providing the client with leaflets or information about mortgages, but not recommending a particular mortgage. 3

3. Contacting a mortgage broker, who provides independent advice, to introduce a client for mortgage business. 4. Contacting a lender to introduce a client for mortgage business. (NB, the firm should ensure that in doing so, it does not recommend a specific regulated mortgage contract because, for example, the lender only has one mortgage product. The firm must not handle money relating to the mortgage. The firm should also consider if it would be complying with the Ethical Guide by potentially limiting the client s choice.) 5. Producing a cash flow forecast for a client to support a mortgage application. 6. Providing a reference for a client to support a mortgage application. 7. Advising a client to redeem a regulated mortgage contract. 8. Explaining the terms of a regulated mortgage contract to a client. 9. Assisting the client to complete a regulated mortgage contract application form. 10. Acting as an intermediary between the client and the lender to put in place a regulated mortgage contract, but where no advice is given to the client. Additional activities that a DPB licensed firm can do 11. Contacting a lender to introduce a client for mortgage business where the firm handles clients money. 12. Recommending a client to vary the terms of an existing regulated mortgage contract. 13. Commenting on, agreeing or disagreeing with the advice given in respect of a specific regulated mortgage contract by a mortgage broker or lender. (NB, the licensed firm must make sure that, in commenting, it does not recommend a specific regulated mortgage contract.) Additional activities that a FSA authorised firm can do 14. Discussing with and recommending a client to contact a particular lender that only provides one type of regulated mortgage contract. (NB, as the lender has only one regulated mortgage contract to offer, the recommendation of the lender will effectively result in the recommendation of a specific mortgage.) 15. Recommending a client to take out a specific regulated mortgage contract. 16. Acting as an intermediary between the client and the lender to advise on and put in place a specific mortgage contract. 4. PROFESSIONAL SERVICES IN RELATION TO HMIT AND HMCE INVESTIGATIONS We have been asked by many firms who act for their clients in dealing with investigations by the HMIT or HMCE whether this will be possible once general insurance is regulated. The simple answer is yes, but you may need to reconsider how you provide this service. This article is based on Schedule 8 to Part 3 of the DPB handbook and it contains all of the information from that schedule to enable you to make a decision about the type of service it provides. In producing this guidance we have taken legal advice and discussed it with the FSA. The task of resolving the matter with the HMIT and HMCE is a professional service. It could be undertaken on behalf of a client (or a third party such as an insurer). Any firm can do this, as it is not a regulated activity. In some cases, a client has an insurance contract (commonly known as fee protection or professional expenses insurance) that pays for the firm s costs. In this case the firm, as well as dealing with the HMIT or HMCE, may also deal with the insurer on behalf of the client, such as notifying the start of an investigation to the insurer. This is the regulated activity of claims handling and, unless the firm is DPB licensed or FSA authorised, it will not be able to do this. When considering the following table, you may take the view that what you do is not insurance related, but you should bear in mind the following features of an insurance contract: one party (A) will make one or more payments to another (B); so that B will pay A money or provide a service to it; in response to a defined event happening to A; the occurrence of which is uncertain (either as to timing or even if it will occur); and the event is adverse to the interests of A (as tax investigations are likely to be). Contrast this with the situation where you agree to provide a service (eg prepare a set of accounts) for a fixed fee. In this case the defined event, preparation of the accounts, will take place, there is no uncertainty and the event is unlikely to be adverse. It is just that you are willing to quote a fixed fee as, based on past experience, you can estimate the likely costs with reasonable accuracy. The situation can be even more complicated if you are insured (ie only your firm is the policy holder and insured party) and clients have no direct rights against the insurer, but can require you, if necessary, to make a claim on the policy for their benefit. In this situation you are not undertaking a regulated activity as you are not recommending, selling or arranging an insurance policy on a client s behalf. The following table sets out whether or not a firm is undertaking a regulated insurance activity. The examples cannot be exhaustive but any other situation is likely to be a variation or combination. 4

Activity Regulated Activities Order (RAO) Who can undertake this work? reference/comment 1. A firm offers a service of dealing with tax investigations as and when requested by a client, which is paid for in full by the client at the time of delivery of the service. (There is no contract with an insurance company.) The firm is providing a professional service. Any firm. 2. A firm agrees, for a fixed fee, to deal with a client s tax affairs (as agreed with the client, eg preparation and submission of a personal or business tax return) and to deal with any minor technical or routine queries arising from that tax return. (There is no contract with an insurance company.) The HMIT or HMCE asks a very specific question that can usually be answered from the firm s files, such as the detailed breakdown of an amount in the financial statements. These are commonly known as aspect enquiries. While these are likely to vary in complexity, from a cost perspective, these are not sufficiently substantial for firms to usually consider the use of an insurance contract. The fee charged needs to represent a genuine estimate of dealing with an average number of enquiries that the firm expects to receive. The firm would retain discretion and could refuse to deal with some enquiries on the grounds that the subject of the enquiry is too complex and not covered by the fee. Any firm. 3. As above, but a client decides to pay only for the preparation and submission and then to pay the firm to deal with subsequent enquiries if these arise, ie as in 1 above. (There is no contract with an insurance company.) The firm is providing a professional service. Any firm. 4. Firm offers a service (either as part of another service and so not paid for directly and provided to all clients, or as a separate fee and so only provided to those clients that request it) to deal with any HMIT/HMCE enquiries that arise during the period of service, for no additional fee. (There is no contract with an insurance company.) This is effectively an insurance contract. The firm has agreed to deal with any issue that may arise. If the arrangement constitutes an insurance contract then it can only be undertaken by a FSA authorised insurance company. 5. Firm insures itself (for all or selected clients) with an insurance company, in the event that a client calls on the service of dealing with an HMIT or HMCE investigation. The clients are not the policyholders, the firm is. (Firm may or may not make a specific charge to the client for the provision of this service.) The firm is not recommending to its clients a particular insurance contract, nor arranging one on their behalf. The firm is insuring itself, not its clients. The clients are not policyholders and have no rights against the insurer, although they may have the right to require the firm to make a claim on the insurer. So that this arrangement cannot be construed as an insurance contract, the following should also be considered: a) the contract between the firm and the client must require: the firm, at its discretion, to carry out work if an investigation occurs; the client to be liable for the firm s fees, whether or not an insurance claim succeeds; the firm to make the insurance claim and to credit any proceeds against the client s liability for fees; and the client to pay the fees if (and to the extent that) they are not covered by the proceeds of the insurance claim. Any firm. The client is only acquiring an interest in an insurance contract, not rights under a contract and this is not regulated. 5

Activity Regulated Activities Order (RAO) Who can undertake this work? reference/comment b) the firm has agreed with the insurance company that only the firm has an insurable interest under the insurance contract. c) the nature of the agreement is clear to the client, e.g. in promotional material, it would be advisable to use wording such as: Any firm. The client is only acquiring an interest in an insurance contract, not rights under a contract and this is not regulated. We can provide a service to assist you with tax investigations. To provide with you with extra security, the firm is insured in respect of the charges for such work. By retaining discretion in its arrangements with the client, as noted above, the firm may not have an insurable interest in the contract with the insurer, which is a key feature of an insurance contract. Therefore, in considering this point and the totality of the arrangements, the firm and the insurer need to satisfy themselves that the specific arrangements do not constitute an insurance contract between the firm (or the insurer) and the firm s clients, and only constitute such a contract between the firm and the insurer. In reaching their conclusions each particular arrangement needs to be looked at on its own specific facts, and the firm and the insurer should make this assessment with regard to the FSA s guidance on what constitutes an insurance contract which is contained in an appendix to the authorisation sourcebook of the FSA s handbook. 6. A firm sends a client a 3rd party s leaflet (eg from an insurer or broker) about fee protection insurance which the client returns to the 3rd party if the client wants to purchase the insurance. Firm enters its details on leaflet and so receives commission from the 3rd party. The client becomes a policy holder of the 3rd party. The firm is providing information to clients about fee protection insurance. This is an excluded activity under RAO article 72C. There is no regulated activity provided the firm does not make a recommendation. Any firm, but a firm that is not FSA authorised or DPB licensed cannot handle claims. 7. A firm sends a client a 3rd party s leaflet (eg from an insurer or broker) but in this case for the client to return to the firm. The firm passes details to the insurer, together with the client s premium. The firm does not make a recommendation but does receive commission. The client will be the policyholder. The client is benefiting from the bulk-buying power of the firm. The firm is arranging fee protection insurance on a client s behalf. It is the regulated activity of arranging (RAO article 25). The firm would need to be FSA authorised or DPB licensed. It would therefore be able to handle any claim and it could, if it wanted, make a recommendation to the client. 8. A firm recommends a specific insurance contract to a client, collects premiums and deals with claims. The client is benefiting from the bulkbuying power of the firm but in doing so the firm is advising (RAO article 53), arranging (RAO article 25) and performing and administering (RAO article 39A) fee protection insurance for the client. The firm would need to be FSA authorised or DPB licensed, but in either case would have to be able to justify the particular policy selected. 6

5. LONG-TERM CARE AN EARLIER START DATE Changes in the regulation of long-term care take effect at an earlier date than for other insurance activities. The new regulations will apply from 31 October 2004, as opposed to 14 January 2005, when the regulation of other types of insurance comes into force. Some types of long-term care insurance are already regulated as they are long-term insurance contracts but, from October, pure protection long-term care will also become regulated. This means that if you undertake any of the new regulated activities in respect of long-term care from 31 October 2004, you will need a DPB licence or the appropriate FSA authorisation. If you are not FSA authorised and you are involved in: introducing clients to Independent Financial Advisers for longterm care advice; advising on pure protection long-term care insurance; or arranging pure protection long-term care insurance; please write to Alison Carr at ICAEW, Professional Standards, Silbury Court, 412-416 Silbury Boulevard, Central Milton Keynes, MK9 2AF immediately. You will need to have a DPB licence in place to conduct this type of activity by 31 October 2004 and the Institute will need to arrange to place the firm s name (and that of the contact partner) on the FSA s register. If you are already FSA authorised, then you will need to ensure that you have the correct permission category in place. 6. CHANGES TO THE CLIENTS MONEY REGULATIONS The regulation of general insurance has revealed a need to change the Clients Money Regulations to make them compliant with the EU s Insurance Mediation Directive (IMD). The change is to regulation 9, which is about the opening of a clients money bank account. Discussions with the FSA revealed a concern about the wording of the confirmation that is required from a bank when opening a clients money account. The FSA took the view that it might be argued that monies described as being held by a firm as an agent could be regarded as being available to creditors in the event of the firm s liquidation. The IMD requirement is to have strictly segregated accounts and the FSA was concerned that an agent account would not achieve this. Sub-paragraph (b) of regulation 9 is a list of matters on which the firm must seek a confirmation from the bank and Regulation 9(b) (i) refers to an agent. To resolve this issue, the wording of sub-paragraph 9(b) (i) will now read as follows: 9(b) On opening a Client Bank Account, a Firm must notify the Bank in writing that: (i) all money standing to the credit of that account is held by the Firm as Clients Money and that the Bank is not entitled to combine the account with any other account or exercise any right to set off or counterclaim against money in that account in respect of any money owed to it on any other account of the Firm; The rest of this Regulation is not shown and is unchanged. This change was effective from 1 July 2004. However, where firms have opened clients money bank accounts using the wording referring to an agent, they have until 31 December 2005 to obtain the revised confirmation from the bank. There is no need for any action if the confirmation received from a bank did not refer to agent. Any new account should use the new confirmation given above. The Clients Money Regulations are part of the Members Handbook which can be found at www.icaew.co.uk/membershandbook. 7. MEDIATION A NEW SERVICE FROM THE INSTITUTE One of the requirements of the EU s Insurance Mediation Directive is that firms should always consider the use of alternative dispute resolution procedures to settle any complaints from clients. The revised DPB Handbook includes such advice so it is very timely that the Institute has launched a new mediation service. This article describes how the new service works. Whenever there is a dispute between a firm and a client, or between partners, the usual way to resolve it has been the court, tribunal or arbitration. That is until now. The term, alternative dispute resolution (ADR), encompasses a number of processes including mediation which is arguably the most well known and widely used. ADR should be regarded as a set of tools that can be used in addition to or in tandem with litigation. Mediation is not a soft option. Mediation employs a neutral person, to facilitate negotiations between the parties to a dispute, in an effort to reach a mutually acceptable resolution. A court can generally only award damages (money) or an injunction. Mediation can look at a much wider range of options for the benefit of all parties, to achieve something that is commercially acceptable, even if it does not reflect the precise legal rights and obligations of the parties. The mediator does not impose a solution but works with the parties to assist them in finding a resolution by exploring underlying interests and examining the relationships between parties. The understanding the mediator develops, helps parties to overcome hostilities and legal posturing and often leads to creative, business-driven solutions. That a matter is complex does not mean it is unsuitable for mediation. The process can often create quite innovative solutions which a court or arbitrator simply does not have the ability to achieve. Many bodies such as the Charity Commission and the Law Society operate ADR schemes. The Financial Services Authority uses mediation as part of its enforcement proceedings. ADR forms part of the Civil Procedure rules and the courts expect parties to have considered mediation and to say why they have not used it. The penalty for failing to do so could be that the Court awards the costs of litigation against you even if you win. The Institute believes that mediation has advantages for all concerned and now provides a mediation scheme, which makes the most of our considerable mediation experience and technical knowledge. The service is chargeable. For example a claim up to 49,999 will incur a basic charge of 765 (plus VAT) per party which includes the preparation of the case by the mediation team and an 8-hour mediation day. This compares very favourably with the costs of going to court. The Institute s mediators are all accredited with considerable practical experience and include a solicitor and chartered accountants. The following is an example of a successful investment business mediation case The case was very technical, regarding investment advice given to a client concerning the short-selling of shares. At the mediation, the client brought his new accountant. The firm had the engagement partner and a solicitor appointed by the firm s insurers. The various discussions including a face-to-face meeting between the new 7

accountant and the engagement partner led to a settlement being reached on the day. Members and their clients have commented favourably on the Institute s scheme. A member commented: I am sure that the process saved a considerable amount of time and money on both sides. Had we not reached a mediated settlement, I suspect legal costs would have greatly outweighed any benefits and, at the end of the day, both parties would have felt bitter and possibly even twisted. A client said: The meeting yesterday was the most helpful event I have experienced in the last five years. For the first time ever, we were able to express our problems without being shouted down. So in future, perhaps your first response to any dispute should be talk to my Institute s mediator. For further information on the mediation service, visit www.icaew.co.uk and click on Professional Standards and then mediation. Alternatively, call 01908 546232 or email mediation@icaew.co.uk. 8. MORTGAGE AND INSURANCE BUSINESS FREQUENTLY ASKED QUESTIONS The following questions and answers provide guidance on a few common scenarios. For more detailed information please refer to the DPB Handbook. MORTGAGE BUSINESS Can I introduce my client to a mortgage broker or a lender? Yes. Any firm can introduce clients to a broker for independent mortgage advice and can introduce to a lender provided, in the latter case, you do not handle clients money in respect of the mortgage. But, a note of caution! If the lender only offers one mortgage or a restricted range of mortgages, this may not be possible as you could breach the Institute s Ethical guide or have made an implicit recommendation. Do I need to be regulated to assist a client with all the mortgage paperwork? You can give general advice on types and sources of mortgages, provide cash flow forecasts, references, etc. without any form of authorisation or licence. You can also explain the terms of a mortgage offer to a client. I am an unregulated firm advising my client about a business loan. The lender said this must be secured by a first charge on my client s house. What can I do? You can continue to help the client, but as you don t have a DPB licence, you cannot comment on the lender s suggestion. You can continue to give general advice and provide professional services, cash flows, references, etc. You can also help arrange the contract as long as you have not advised the client and as long as you account for any commission you receive. If you hold a DPB licence, you are able to comment on, agree or disagree with the lender s recommendation. INSURANCE BUSINESS I occasionally arrange an insurance contract or a top up for a client, but I never charge a fee or receive commission. Can I carry on doing this? For an activity to be regulated, it must be done by way of business. For the activity not to be by way of business it would generally be a very infrequent occurrence; the firm would not receive any form of financial remuneration or commission and would not advertise the activity as part of its services. It appears that you are doing this as more than a simple one-off service, so it may be done by way of business. You would need a DPB licence or authorisation from the FSA to continue doing this. You may find that in future the insurance companies will only accept business from licensed or FSA authorised firms. Can I continue to introduce my clients to an IFA for pension advice? The regulated activity of introducing occurs when the firm contacts the IFA to pass on the client details. A DPB licensed firm can do this. An unregulated firm can provide information to a client about the broker but cannot contact the broker directly. For many firms who do not wish to take out a licence, this will be the way to refer clients to an IFA or insurance broker. The information can include the contact details for the IFA and a request for the client to tell the IFA how the client got his or her name. Commission can be paid to the firm. I am sometimes asked to complete a form on my client s turnover when they apply for a loss of profits policy or make a claim. Can I do that without being regulated? As an unregulated firm, you cannot complete a claim or proposal form for the client, nor can you negotiate with the insurer about the claim. You can provide a professional opinion, such as supplying details to the insurer concerning your client s financial position, and you can supply your client with information to enable him or her to complete a proposal or claim form. I do not arrange or advise on insurance generally, but I do hold an agency with a particular insurer and arrange insurance for myself and my wife (we can then get commission). Can I carry on doing this? You might find that if you do not hold a licence, the insurer will not let you continue to hold the agency. Where you are acting in a personal capacity to arrange your own insurance you would be acting outside the scope of a regulated activity. But in this case you receive commission and if the agency with the insurance company is held in the name of your firm, the firm may be regarded as acting as an insurance broker between you personally and the insurance company. You may be able to substantiate that this is not done by way of business if it is just insurance for yourself and your wife, but I suspect that the insurer s attitude will make this academic. You can continue to do this if you hold a DPB licence, I have heard I need a substantial amount of professional indemnity insurance in order to get a licence. Is that true? When you conduct regulated insurance activities you have to comply with the professional indemnity insurance (PII) limit of indemnity set by the Insurance Mediation Directive. This is the equivalent of 1 million for each claim and 1.5 million in total per annum. This only applies if you conduct regulated insurance activities but there is one exception. If the only insurance activity you do is introduce clients to authorised firms for insurance advice (which includes both general insurance and life and pensions), you need only comply with the Institute s PII regulations and the Directive limits are not needed. My firm holds an agency with an insurer and we place our firm s building insurance through that agency, together with buildings insurance for a small number of our clients. Can we carry on doing this? Only if you have a DPB licence or FSA authorisation. If you only place the firm s buildings insurance through that agency (and do not place clients insurance through the agency), then you may be able to continue as you are a party to the contract and you would not be doing this by way of business. However, the insurer may choose not continue your agency unless you hold a DPB licence. 8

I and my partners also part own an FSA authorised financial services company (FSC) and we introduce clients to that business. Can we still do this? You would need a DPB licence in order to introduce the client to the FSC. However, you could re-structure the arrangement so that a DPB licence was not needed. In this case you could only recommend to the client that they contact the FSC, rather than contacting the FSC yourself. The easiest solution is probably for the accountancy firm to have a DPB licence. You should also inform your clients of your financial interest in the FSC. Can we pass information from our files to an insurance intermediary or insurer? Providing information about a client to a broker or insurer can be regarded as assisting in arranging an insurance contract, which can only be undertaken by a DPB licensed or FSA authorised firm. However, there are situations where a professional firm is asked to provide professional information to a broker or insurer because the client does not have the information or because the broker/insurer requires a professional verification of the information. For example, an insurer will often request turnover figures from a professional firm in connection with a client s loss of profits insurance. In such circumstances the provision of that professional information and/or opinion would not amount to assisting in arranging an insurance contract and could be undertaken by any firm. You would need the client s authority to pass over the information. Can I become an appointed representative of an insurance company? No. You would be in breach of the Ethical Guide (statement 1.208 in the Members Handbook) if you did this. 9. CHANGES TO THE DESIGNATED PROFESSIONAL BODY HANDBOOK Changes to the Handbook to incorporate the regulation of mortgages and general insurance have resulted in the Handbook almost doubling in size. However, much of the increase is due to the significant amount of guidance included to assist firms. Changes to the regulations reflect the requirements of the Insurance Mediation Directive and these have been kept to a minimum. Other than new definitions, the incorporation of mortgage regulation has not resulted in significant regulation changes in the Handbook. The majority of the changes concern the scope of regulation and are therefore included in Part 3 of the Handbook. Changes to Parts 2 and 4 mainly reflect the requirements of the Insurance Mediation Directive. Another article in this newsletter explains the implementation of the revised Handbook. The following table identifies the main changes and highlights new areas. Handbook section Handbook summary Introduction Part 2 Terms and conditions of a licence Comment on changes A new section on how to use the Handbook. The introduction is expanded to accommodate references to insurance and mortgage business. Additional paragraphs highlight what a DPB licensed firm can do and the key items of legislation referred to in the Handbook. A new chart clarifies the different definitions of investments used in the legislation and the Handbook. This part notes that the Institute will place details of all licensed firms on the FSA s register, including the name of the contact partner. Details concerning the Distance Marketing Directive and conducting insurance mediation activities in other EU countries ( passporting ) have also been added. Further information on these two matters is in Part 8 of the Handbook, see below. The new professional indemnity insurance (PII) requirements for insurance mediation activities are detailed and further guidance on PII has been added at the end of this Part. See article 10 on PII for further details. Part 3 Regulated activities (investment business) regulations Part 3 Schedule 1 list of prohibited activities Part 3 Schedule 2 guidance on regulated activities that may be provided by a licensed firm Part 3 Schedule 3 guidance on work that is not investment business New guidance explains that some insurance activities may not be regarded as incidental to the professional firm s business and so cannot be conducted under a DPB licence. Updated to reflect insurance and mortgage business as set out in the Non-Exempt Activities Order. This schedule is now in four sub-sections according to the type of investment/insurance contract. The introduction is expanded to explain that work that is not conducted by way of business is not a regulated activity and indicates how this test should be applied. Lists A and B, which provide examples of unregulated activities, are significantly expanded to cover insurance and mortgage related activities that are not regulated. Part 3 Schedule 4 guidance on in an incidental manner Minor changes only. 9

Handbook section Part 3 Schedule 5 guidance on corporate finance Part 3 Schedule 6 insurance mediation Part 3 Schedule 7 mortgage business Part 3 Schedule 8 fee protection insurance Part 3 Schedule 9 Guidance to assist on deciding whether an activity can be undertaken within the scope of the DPB arrangements Comment on changes No material change. This is a new schedule which analyses each step in the insurance process and discusses the type of regulation (none, DPB licence or FSA authorisation) needed. This is a new schedule which analyses each step in the mortgage process and discusses the type of regulation (none, DPB licence or FSA authorisation) needed. A new schedule on fee protection insurance that discusses the type of regulation (none, DPB licence or FSA authorisation) needed. This was previously Schedule 5. Additional references are made to the by way of business test in respect of mortgage and insurance activities. Part 4 Conduct of business code Although changes in this Part have been made to accommodate both mortgage and insurance regulation, the main changes are in respect of the latter. Additional requirements for insurance activities include: 4.03 disclosing to the client, in a prescribed format, that the Institute licenses the firm; 4.16 providing information to the client about how a contract is selected for recommendation to the client (whether by a fair analysis of the market or by considering a restricted selection of contracts); 4.17 ensuring any recommendation is suitable for the client; 4.18 providing the client with a demands and needs statement. Part 4 Schedule 1 suggested paragraphs for an engagement letter and specimen legend Part 4 Schedule 2 Guidance on the demands and needs statement Part 5 Regulations (investment business) governing affiliates or regulated non-members Part 6 List of charges Part 7 Review and appeal process Part 8 Guidance on passporting for insurance mediation activities Part 8 Guidance on the Distance Marketing Directive Part 9 Definitions This schedule now includes a revised statement that a licensed firm must use to tell a client that it is licensed by the Institute before undertaking insurance mediation activities. This provides a proforma that firms can use to document the demands and needs of the client requesting advice on an insurance contract. No change. No change. No change. A new section about the requirements that apply if the firm wishes to conduct insurance business in another EU state. A new section about the requirements, which will apply if firms conduct business without any face to face contact with a client. This section applies to all types of regulated business. This was Part 8 and has been expanded to reflect the new regulated areas. Publication arrangements for the revised DPB Handbook We are still finalising the wording of the DPB Handbook with the FSA. There is a draft on the website at icaew.co.uk/dpb. We only expect to make minor changes to this version which will not affect the overall approach of the Handbook. Firms who are currently regulated will receive a copy of the revised Handbook as soon as it is finalised. Newly licensed firms will receive a copy when they are informed that they are licensed. Extra printed copies can be purchased by downloading the purchase form from www.icaew.co.uk/dpb. 10

10. PROFESSIONAL INDEMNITY INSURANCE REQUIREMENTS UNDER THE INSURANCE MEDIATION DIRECTIVE Currently DPB licensed firms must comply with the Institute s professional indemnity insurance (PII) regulations which specify the required amount of PII. For DPB licensed firms who intend to conduct regulated mortgage business, this will remain the same, no changes are required. However, the introduction of the Insurance Mediation Directive (IMD) may bring additional requirements, depending on the activities a licensed firm conducts and the amount of PII it already has. The IMD requirement for PII is that the sum insured must be equivalent to at least 1m per claim and 1.5m in total. Licensed firms only need to consider these IMD limits if they are undertaking insurance mediation activities (see Part 3 of the Handbook, schedule 2, tables 2B and 2C). If no insurance mediation activity is undertaken then there is no need to consider this issue, the PII held under the Institute s PII regulations will be sufficient. After lengthy discussions with the Treasury and the FSA the ICAEW has been successful in negotiating an exception that may be useful for many firms. Where the only regulated insurance activity is introducing a client to an authorised firm (see Part 3 of the Handbook, schedule 2, tables 2B and 2C, item 3) then compliance with the ICAEW s PII regulations is sufficient. Firms must be satisfied that this is the only regulated insurance activity they are involved in and they do not, for example, assist in claims handling or arranging insurance contracts, which require the higher limits. The IMD limits of PII are not in addition to that already required. Some firms will already have PII in excess of the IMD limits and so no further action is needed. For others the amount of PII may need increasing from that required by the Institute. This would normally be achieved by increasing the total sum insured to the IMD limits. It may be possible to obtain an extension of cover. In this case a licensed firm may have, for example, 500,000 of PII. Then, only in respect of claims relating to insurance mediation activities, the sum insured is increased to the IMD limits. It is unlikely that licensed firms would be able to obtain PII denominated in euros. A licensed firm only needs to consider whether its sum insured matches the IMD limits at the point of renewal. There is no need to consider future exchange rates and try and forecast the sterling amount that will always exceed the IMD limits throughout the period of the PII policy. Licensed firms who start negotiations well in advance of the date that the policy renews should consider what the exchange rate may be at the point of renewal. If the exchange rate used in the calculation was current at any time in the one-month period before the date of renewal this will be acceptable. For FSA authorised firms conducting insurance mediation business the same considerations apply and the FSA also apply maximum limits on the excess levels allowed for insurance activities (see FSA Prudential Sourcebook (PRU) 9.2.15). These new limits need to be in place before any insurance mediation business is conducted after 14 January 2005 (except for work in respect of long term care insurance where the effective date is 31 October 2004). Therefore some firms may need to make a mid-term adjustment to their PII policy. If necessary, firms should discuss with their broker or insurer the need for any changes to the sum insured. 11. TRANSITIONAL ARRANGEMENTS FOR THE DPB HANDBOOK The Treasury has set different dates for the implementation of the new regulatory arrangements: mortgage regulation and the regulation of long-term care insurance start on 31 October 2004; the regulation of general insurance and amendments to the scope of regulation of qualifying contracts of insurance (such as endowments and pensions) start on 14 January 2005. This necessitates a staged implementation of the revised DPB handbook and the following paragraphs explain the transitional arrangements. Firms may choose to apply the new Handbook in full from 31 October 2004. From 31 October The revised DPB Handbook (see the article elsewhere in this Update for details of the changes) comes into force for exempt regulated activities in respect of: regulated mortgage contracts; securities; long-term care insurance; and other contractually based investments except for qualifying contracts of insurance. Between 31 October 2004 and 14 January 2005 The previous Handbook (2001) will apply to the regulation of qualifying contracts of insurance. During this period, non-investment insurance contracts, such as general insurance, with the exception of long-term care insurance, will not be regulated. Thus the requirements to make new disclosures to clients, demands and needs statements, etc do not apply until after 14 January 2005. From 14 January 2005 The revised DPB Handbook comes into force in respect of contracts of insurance. If you have arranged fee protection insurance for your clients before 14 January 2005 you should note that claims handling is a regulated activity after that date. If your firm is DPB licensed (with the new required level of professional indemnity insurance) or FSA authorised (provided the correct permission category is held) you will be able to undertake such activities. If your firm in not regulated you will not be able to do this. Please see the article on fee protection insurance in this Update. You may need to make a mid-term adjustment to your PII policy. Please see article 10 on PII requirements in this Update. 12. WHAT DO I DO IF I AM AN FSA AUTHORISED PROFESSIONAL FIRM? As an authorised professional firm, you will no doubt be aware of the forthcoming regulations. This may mean that your firm needs to change its permission categories. You should also note that some changes are being made to the scope of regulated activities in respect of life and pensions business. Guidance is available on the FSA's website, www.fsa.gov.uk/mgi and the FSA has also written to all authorised professional firms to alert them to the need to consider their future work and to apply to the FSA directly for a change in permission category, where necessary. 11