When Steptoe & Johnson expanded its financial services team in Washington DC in July, Micah Green took on the roles of head of that team and of the practice’s government affairs & public policy group. In a statement about the development, Mr Green spoke of the way clients’ needs will expand ‘beyond legislative and regulatory policy advocacy and move to compliance and enforcement’.

Breaking the law

On the other side of the Atlantic, underwriters in London are in full agreement with what the veteran lawyer said. ‘There is a massive concern about being compliant now,’ says ‘Michael’, an underwriter who works across the European markets and who would rather remain anonymous. ‘I’ve never seen so many people in compliance departments. I’ve never seen so many requests on compliance.’ Underwriters in the City of London are used to having a fairly free hand, he says, in the way that they agree deals with brokers. Agreements were regularly made on scraps of paper in the pub and firmed up afterwards. And if a broker wanted to locate a policy in Luxembourg, for instance, in order to save on insurance taxes, then few questions would have been asked - even if it seemed unlikely that the insured could justify the arrangement on purely commercial grounds. Michael was recently asked by a broker to provide cover on this kind of basis. He says: ‘Years ago a lot of underwriters would have done that deal for him. This time I said to him: “You would be breaking the law. This is called tax avoidance”.’ 

Selling

Battles between UK regulators and the sellers of PPI (payment protection insurance) show that the Financial Conduct Authority is looking at areas in which purchasers of policies are losing out. Over £20b has been paid out as compensation in the 41 months to June. Financial services compliance adviser Adam Samuel sees this regulatory focus as extending well beyond that one product. “If you are direct-selling over the phone, you are extremely vulnerable because the regulator is going after you,” says Mr Samuel, a compliance consultant dealing with insurance and investment issues. “Big areas now are the creation of useless products like add-ons, card protection and mobile phone cover where the customer probably already has or can buy more cheaply the relevant insurance or the cover available is very poor value for money.” 

Slowing down the business

But the change in working practices experienced by underwriters in Europe reflects a broader business concern - that of getting the paper work right in order to protect against all sorts of short cuts and misdemeanours. Under the new regime, some customers could actually find themselves losing out - as they would not be able to collude in suspect practices with their brokers and insurers. Totally honest customers will also lose out as the feel the various effects of the costs of compliance. It is not simply that they might pay more in administration costs; in some cases they will not even get the insurance protection they want. Michael describes how he turned down the opportunity to underwrite a policy recently because, done correctly, it involved six small policies (and six sets of paperwork) rather than just one. “Compliance is slowing down business,” he says. “The Is and Ts are being dotted and double-crossed. Maybe that is a good thing but the mentality has changed and it’s made everyone a little skittish.”

Helping clients

Many law firms are working to help insurance and other clients deal with the increased burdens of compliance. For instance, Pinsent Masons took a majority stake in a cloud-based seller of compliance products, Cerico, in July. And Allen & Overy has launched a blog (located in the Investigations Insight section of its website) aimed at lawyers and compliance officers to help them keep up with developments in financial services investigations. 

Legacy of 9/11

‘The worry is that the compliance services in the market are not very good,’ says Adam Samuel. ‘They aim to block the development of sensible business models and practices in favour of self-protection. The murky tax avoidance/evasion of the past was not pretty. Doing important business on the backs of envelopes should have ended on 9/11 when disputes followed on whether the Twin Towers were covered and for how much. Nevertheless, the creation of bureaucracy for its own sake is not even particularly effective at protecting practitioners, A potent mixture of competence and integrity is far more likely to work.’