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The final hurdles

by: By James Mayne, director of compliance services at Competent Adviser
  • 06/10/2003
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As consultation papers 159 and 174 turn the last corner, advisers need to decide about applying for direct authorisation or becoming an appointed representative

At the start of the year, two important consultation papers were published by the Financial Services Authority (FSA). The first was CP159: Appointed Representatives – Extending the Current Regime and the other was CP174: Prudential and Other Requirements for Mortgage Firms and Insurance Intermediaries. Both these consultations were extremely important for all mortgage intermediaries facing the decision of whether to apply for direct authorisation with the FSA, or whether to become an appointed representative (AR) of a principal firm such as a network.

CP174 set out the FSA’s proposals for direct authorisation including compliance of specific elements of the FSA handbook, as well as the extent of the financial safeguards required. CP159 set out how the FSA intends to extend the existing appointed representative regime to include mortgages and general insurance to that of investment business.

In September, the FSA finally published the outcomes of those two consultations in the form of policy statements. These included feedback on the consultation process carried out in CP159 and CP174 and the ‘near final’ rules. This now means these important areas are no longer subject to any further consultation and the only changes to the proposed rules will be made should there need to be any technical changes to include clarity, or changes resulting from a knock-on effect from other consultations.

The feedback on CP174 included:

• As a result of a number of requests, the FSA has added further guidance on who and what activities need to be regulated under what is known as the ‘perimeter guidance.’

• The FSA accepts the Handbook (the FSA’s library of rule books) is confusing and is considering a guide to assist small mortgage and insurance firms to understand it.

• The rulebook’s Principles for Business and Senior Management Arrangements, Systems and Controls will be applied to mortgage and insurance firms unchanged.

• An approved person’s regime will apply to mortgage and insurance intermediary firms, but those who actually carry out the advising will not be required to be ‘approved persons.’

• Some individuals within AR firms will still need to be ‘approved persons,’ unless the AR acts only as an ‘introducer.’

• The FSA definition of a network remains unchanged, it must have five or more ARs, or at least 26 representatives.

• Recognising the lower risks associated with mortgages and insurance the required professional indemnity insurance cover for mortgage and insurance intermediary firms has been slightly reduced. Excesses for firms not holding client money have also been reduced.

• There are many changes on the requirements for firms holding client money. If you hold or intend to hold client money, you need to become familiar with these rules as soon as possible.

• The minimum capital resource requirements for intermediary firms remains at £5,000, but the annual income element has been reduced from 5% to 2.5%. This means anyone with a turnover of up to £200,000 in net commission income will still only need to maintain £5,000 in capital resources.

• Personal assets, including property, provided they are not needed to meet other liabilities can be used to meet shortfalls in capital resource requirements.

• The Financial Services Compensation Scheme will be extended to cover both mortgage and insurance intermediaries.

• Firms not holding client money will not be required to appoint an auditor.

• Mortgage and insurance intermediary firms will not be subject to the money laundering rules.

The feedback on CP159 included:

• The FSA is retaining its proposal for it to be possible to have only two principals for mortgage business, one for regulated mortgages other than lifetime mortgages and one for lifetime mortgages.

• There is no restriction on the number of principals an AR can have for non-investment insurance. This, however, will be subject to the agreement of the principals and the rules on multiple principle arrangements.

• The AR will be free (subject to contractual arrangements with the principal) to offer different levels of service for different products, for example, independent for mortgages but not independent for insurances.

• ‘Introducers’ (who are not involved in advising or arranging) can have as many principals as they like.

• There are no restrictions on the number of ARs a principal may have in relation to its size. But the principal must demonstrate adequate controls.

• Rules on multiple principal arrangements have been strengthened to deal with the unlimited number of principals a firm may have and in response to concerns respondents had on the responsibilities of controls.

• ARs in the general insurance sector will be able to conclude contracts as agents and assist in their administration and performance.

• The plan is for these rules to come into force on 30 June 2004 and will apply to mortgages and insurances from 31 October 2004 and 14 January 2005 respectively.

There is still plenty to consider for any mortgage intermediary who has yet to decide whether they intend to apply for direct authorisation or become an appointed representative of say a network. I would recommend firms visit the FSA website ( for further details of these papers and some helpful frequently asked questions, but look out for the FSA workshops on ‘authorisation’ to be held in November.


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