UK: A Flagship Policy On The Rocks Of Insurance Regulation

Last Updated: 7 February 2008
Article by Andrew Pincott

First published: Insurance Day [10th November 2006]

"Kicking out the Cowboy Contractors!" The Press coverage of a government-inspired scheme, TrustMark, to impose higher standards on plumbers, electricians and other contractors which members of the public call upon from time to time seemed a dream come true - especially as the scheme ensured that domestic consumers would be insured against the loss of any deposits paid or against faulty workmanship for at least six years after the job was done. But for the TrustMark certification bodies, their brokers, insurers and even the FSA, the dream is turning into a bit of a nightmare.

The problem is that the contractors, who operate with a TrustMark certification will, in most cases, be arranging deals in contracts of insurance or making arrangements with a view to transactions in insurance, which is a regulated activity under Articles 25(1) and (2) of the Financial Services & Markets Act 2000 (Regulated Activities) Order 2001. A firm is bringing about a contract of insurance if its involvement in the chain of events leading to the contract are important enough that without that firm there would be no policy. And where they do that, a firm needs to jump through the hoop of obtaining authorisation to carry on the business of insurance mediation, or, in plainer language, authorisation to act as a broker or agent in general insurance business. It came as a bit of a shock to dentists to be warned that, although they may display leaflets on dental insurance in their surgeries, in no way were they permitted to sell a policy to a patient or even to help him with the formalities of filling in a form which he could post off to a dental insurer in order to get cover. That was acting as an agent or broker for general insurance business, and prior authorisation by the FSA was required. Not only prior authorisation, but continuing compliance with FSA regulation in this area, reporting obligations and the ever-present threat of a friendly visit from the regulator or a not-so-friendly enforcement procedure.

But where dentists have feared to tread, some intrepid holders of TrustMark certification are prepared to go. A quick look at the FSA website at proves the point. There are plumbers, building contractors, double-glazing merchants galore. Shaw Preservations Limited, a timber treatment and damp-proofing concern, has TrustMark status as a member of the British Wood Preserving and Damp Proofing Association. And there they are, on the FSA Register, authorised to undertake insurance mediation as an appointed representative of an authorised firm. On their own website they hammer home what they see as a competitive advantage: out of 2500 remedial surveyors in the UK, Shaw Preservations Limited are one of only 20 registered with the Financial Services Authority licensed to sell back-up insurance.

So What Do The Other TrustMark-Certified Firms Do?

They may regard themselves as honest tradesmen plying their craft and it may not have occurred to them that they inhabit the undergrowth of the financial services jungle. But, unless the insurance scheme is very carefully crafted, they will be wrong about that, for the insurance cover is an incident of, and dependent upon, the contractor and his domestic consumer client coming to an agreement about work to be done. Without that agreement, there would be no insurance, so the contractor will usually be a key link in the chain of events leading to the insurance. Indeed, the provision of insurance is a key feature of TrustMark status.

Some contractors may take the view - and may have been advised - that they do not need authorisation because their involvement in arranging the insurance transaction is not "by way of business". This may be so where it is absolutely clear that the contractor receives no remuneration. But, although the contractor may receive no commission, the FSA has always taken a much broader view of what constitutes remuneration. The materially increased opportunity to a contractor to provide his principal services, which the existence of insurance cover might give, could amount to remuneration.

That there are potential difficulties with this line of argument is evident from the fact that some contractors have taken the trouble to obtain authorisation to provide insurance mediation services. Many have sought to shelter under the authorisation umbrella provided by the insurance broker responsible for putting together the particular scheme, typically to cover all TrustMark certified contractors in a particular industry sector. But by making each an appointed representative within the meaning of the Financial Services & Markets Act 2000, the insurance broker is assuming full responsibility for the regulatory misdemeanours and irregularities of the contractor concerned. Insurance brokers have, hitherto, been willing to assume that burden in some cases - although often limiting the contractor to introducer status - particularly where the contractor concerned is the source of much premium income and otherwise professional in its operations and well run. Some have extended approved representative or introducer status to the TrustMark certification bodies - although this is no solution to the status of the individual contractors certified by that body. But it must be doubted whether insurance brokers will continue for very long to run substantial exposures on businesses which are primarily tradespeople rather than financial services concerns.

And insurers who provide cover to the domestic customers need to be careful too. They have a responsibility to ensure that information given to consumers about the cover is accurate and contains the key facts. The insurers themselves are prohibited from dealing with unauthorised intermediaries. Furthermore, if it turns out that the contractor should have been authorised and he was not, the insurance contract could be unenforceable at the option of the consumer, who might decide to ask for the premium back once the work has been safely completed.

Not surprisingly, trade associations who were attracted to the TrustMark certification process are increasingly alarmed as they worry that their scheme will be wrecked on the rocks of insurance regulation. It is proving time-consuming and expensive to deal properly with the insurance mediation issues which TrustMark insurance schemes are throwing up.

The FSA is also in an invidious position. After all, it is the government which has promoted TrustMark. Did the government really intend that plumbers, electricians and damp-proofing consultants should end up regulated by the FSA?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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