The Financial Services Authority (FSA) has now published CP180, which contains its proposed approach to application fees for regulating mortgage firms and general insurance intermediaries. There are now several consultation papers requiring attention and advisers cannot afford to ignore any of them.
In its 21 April issue, Mortgage Solutions began a two-part analysis of CP174 Prudential and other requirements for mortgage firms and insurance intermediaries. This is the final part covering the last three chapters.
In chapter five, under the heading Authorisation, the FSA has brought in some good news explaining that it wishes to apply a streamlined process to authorisation and that it is re-designing the application form for most firms and individuals.
It appears the FSA is making it clear that there is some progress in this direction, but as the application form becomes simplified, the guidance notes are growing quite considerably. The application process may be getting easier, but the threshold conditions that need to be achieved, and the proven competency of the firm will not be reduced. It is only the application process that is being streamlined.
A great deal of coverage has been given to ‘due credit’, although the details are yet be specified. However, we do know that firms that can prove they are of good standing with the General Insurance Standards Council (GISC), are currently monitoring their compliance procedures, and have robust senior management systems and controls in place, should be ‘fast-tracked’, and this seems to be a very practical approach. Firms that are already authorised by the FSA (IFAs for packaged products) can apply for a variation or extension of their Permissions ‘ a much easier process than the initial application for FSA authorisation.
Chapter six covers financial safeguards and is one of the most critical elements of this paper. There are three specific risks against which the FSA intends to safeguard. Loss of customers’ money, failure by a firm to carry out its obligations, and disruption to the customer due to closure of the firm. To counter these risks, the FSA is proposing the following:
• Compulsory Professional Indemnity (PI) insurance.
• Segregation of Insurance Client Money or Risk Transfer.
• Minimum financial resource requirements.
• Compensation arrangements.
PI for insurance intermediaries is intended to be entirely proportionate to the size of the firm, and the FSA is proposing that intermediaries hold the highest of one million euros or three times annual income. This proposal is equivalent to the requirements of the Insurance Mediation Directive (IMD).
For insurance intermediaries the FSA, is suggesting two options: To provide by law or contract for a transfer of risk from the intermediary to the insurer; or that customers’ money be transferred via strictly segregated client accounts that cannot be used to reimburse other creditors in the event of the firm’s insolvency.
My understanding is that risk carriers are somewhat less than enthusiastic to have the transfer of risk option, so the second option looks to be the more likely.
The FSA’s proposals will not allow firms to withdraw commission until the relevant client has paid the commission to the intermediary. It does recognise that this will have a significant one-off impact on the cash flow of some firms, but it does not intend nor believe that using client funds for the firm’s own purpose is a proper use of the money. Capital resource requirements are covered in some detail, and indeed these are considerably easier than was first feared for firms that hold client money. The fierce restrictions will be on the segregation of client accounts and the accountancy practices to prove that when commissions are deducted they have indeed been paid.
Capital resources for an intermediary that does not hold client money should be the higher of: £5,000 or 5% of its annual net brokerage income. For the majority of mortgage advisers the 5% rule of net brokerage will be appropriate.
Where a firm holds client money, the FSA perceives a greater risk and is therefore looking for a higher capital requirement, which should be the highest of: £10,000, 5% of its annual income, or 5% of its average client money balance.
CP174 also covers the Financial Services Compensation Scheme (FSCS), and briefly concludes that the majority of activities and customers will be covered by this scheme.
Chapter seven discusses the supervision, enforcement and the method of supervision for insurance intermediaries will be identical to all other regulated firms, which is: desk-based reviews; analysis of periodic financial returns and reports; meetings; inspection visits; making recommendations for preventative or remedial action; and providing guidance and, where appropriate, imposing individual requirements.
Low resource, low risk firms of good standing that can prove they are the very minimal risk to the FSA objectives are unlikely to receive monitoring visits (unless a particular thematic visit), but firms will be expected to demonstrate that they can self-regulate and self-monitor.
One important point to note is that firms that may become appointed representatives of a principal firm will not be allowed to hold client money, the principal firm will provide this facility.
As stated earlier FSA are drafting a new application form which should be in draft by the summer of this year and firms will be allowed to submit these forms by January 2004. This raises the questions: are you prepared and will you be compliant in time? Remember there is only nine months to go.
Ian Langley is also a tutor with Incisive Training, a professional training organisation set up in conjunction with Mortgage Solutions to help mortgage advisers pass the MAQ qualifications.