Political, Legal and Regulatory Factors

Political

The government has made it quite clear that is unable to fully support a society where people live longer and where jobs for life no longer exist. Increasingly it is promoting a need for individual responsibility, especially in education, health, retirement and social benefits such as unemployment, disability and legal aid. The free market is being actively encouraged to meet these needs, though it is often directed through political decisions. An example is the replacement of Personal Equity Plans (PEPs) with the Individual Savings Accounts (ISAs).
   

The government is also looking to reduce administrative overheads. Already the self employed have to make their own tax calculations and the government.direct initiative seeks to make many interactions with government agencies electronically based. These initiatives will introduce large segments of the population not only to advanced technology, including PCs, kiosks,  and Smartcards but more importantly to the practice of electronic communications and delivery. Already many Local Authorities have extensive Web sites. Hampshire County Council for example, has thousands of information, including pages defined by Trading Standards Officers - see Regulatory section below.

Government Direct Access Ideas Job Seekers Registration and available jobs. Vehicle Licence Renewal Skills Training Income Tax Returns Benefit Claims Checking Personal Information Accessing Citizen's Charter Information Access to Regulatory Information Health & Safety at Work Information National Statistics and Government Information

 

	Government's legislation will shift unprofitable levels of risk and administration onto financial services suppliers. Consumers will have easy access to understandable financial information such that they become more discerning and demanding of financial services suppliers.
	To provide the new products and services. To also exploit the consumers' familiarity, acquisition and use of technology for the efficient and effective delivery of financial products and services.

Legal

Insurance products are a contract usually requiring a signature of both parties. A life policy document has collateral status and can be sold to a third party or used as security against a loan or mortgage.General insurance products are less stringent, and many are bought over the 'phone without any form of signature (e.g. travel insurance).

Some products such as Motor insurance and Employer Liability are mandatory and other insurances, whilst not mandatory, are expected, for example, mortgage unemployment protection. Even so, expectations can change. Just recently, following the Halifax's lead, many mortgage lenders have scrapped the need for Mortgage Indemnity insurance.

Contracts over the Internet  and other electronic mediums lack a personal signature and there is currently no way to authenticate that the end user is indeed the customer. However, various authentication schemes are under development (e.g. SET protocols being developed by Visa and Mastercard) and the use of Smartcards used in conjunction with a PC reader. If the government were to adopt these methods then they could well be given statutory approval. Nether-the-less, the situation has nor deterred some companies selling products over the Internet, usually using a credit card for payment and the existing browser security.
   

	Legal requirements for electronic commerce become onerous. Electronic commerce security features cannot keep track with the expertise of hackers. Consumers fail to gain confidence in the use of electronic commerce. Electronic commerce accentuates consumers buying on price. Electronic commerce opens the flood gates to foreign insurers.
	Developments in electronic commerce, especially in security issues, and acceptability by consumers and regulatory authorities, provide opportunities to deliver low cost but profitable insurance to the masses.

Regulatory Factors

Generally the government is trying to dismantle controls, leave pricing and quality standards to market forces and individual negotiation. However, a number of financial scandals is forcing it to introduce new legislation to protect consumers of financial products and to enforce best practices through regulatory bodies.

Financial Services are heavily controlled by the Financial Services Act and regulated by such bodies as the Personal Investment Authority (PIA), Securities and Investment Board (SIB), and the Insurance Ombudsman. In a surprising move, perhaps influenced by the retailers moving into financial services, the proposed Individual Savings Account (ISA) could be regulated by the Office of Fair Trading.

Under the FS Act companies selling investment products, including life and savings products, have to either register as Independent Financial Advisor (i.e. they are not linked to any one companies products) or as Tied Agents / Company Representatives. Most FAs employed by a financial company are TAs/CRs.

The PIA sets training and competence rules and guidelines for people selling financial services. All FAs should conduct a needs analysis (fact-find) which must be documented and then only suggest products and services that meet the customer's requirements and ability to pay. There should be at least 2 meetings, periods for reflection and change of mind, and all recommendations must be in writing (the contents of which are prescribed). A number of major insurance companies have found to be wanting in these procedures. They have been fined and required to review past sales and make refunds.

The high cost to recruit, train and monitor FAs is likely to lead to their demise for the mass market and a switch to an execution only basis where customer's  make their own investment and selection decision. It is widely used for instance by many unit trust companies when selling off the page. Virgin Direct also use this basis for selling not only basic term life insurance but also more recently pension products. Currently the most widely used medium is the telephone, but now that the execution only basis is widely accepted it is just a small step to using other mediums such as the Internet.

A new Pensions Act came into force in 1997 and it bring wholesale changes in the way funds are administered and overseen. This is partly in response to the Maxwell case when substantial pension contributions went missing. Also in 1997, the Office of Fair Trading (OFT) launched a wide ranging review covering personal pensions and their relationship to occupational pensions. This is in the wake of the pensions mis-selling scandal where 1.5 million people were wrongly advised to transfer from their occupational pension to a private pension.

Financial Services Authority (FSA)

A major change in 1998 was the proposed establishment of the FSA¹, a single statutory financial services regulator for banking, building societies, insurance, financial services and friendly societies. It will replace the present statutory and self-regulatory regimes such as  the IMRO for investment management, PIA for retail investment, SFA for securities and derivatives and SIB for general investment business.

It will be under the control of the HM Treasury, Bank of England. Consultation papers were issued in 1997 with a response date of 30 January 1998. In 1999 the Financial regulatory reform bill will be submitted to Parliament and the FSA is expected to acquire it full range of new regulatory powers later that year.
   

	New legislation and codes of practices proves to be onerous on insurers and even off-putting to consumers. Pensions legislation set low maximum administrative levels and high minimum transfer values.
	To assist consumers in understanding the regulatory changes and in assessing the impact on their own personal lives.

Next is Industry Response

JS

External Resources

1. Financial Services Regulation, Lovell White Durrant
2. more to follow .......

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