Hundreds of brokers face FSA closure threat

Hundreds of brokers will face the threat of being closed by the FSA for not complying with an accountancy rule due to come into force next week.

From Monday, brokers will no longer be able to include goodwill in their solvency calculations. The FSA had given brokers three years to address the issue after taking over regulation of the broker sector in 2005.

Insurance sources said as many as three hundred brokers could be in breach of the new rules that come into effect on 14 January and face the threat of enforcement action from the regulator.

One senior insurer said the FSA expected a “few hundred” brokers to fail to meet the new requirements.

An FSA spokeswoman declined to specify how many brokers will have failed to make the necessary change.

“We expect a small number not to be in a position to remove goodwill,” the spokeswoman said. “This would be a breach of the threshold condition and could ultimately lead to the broker being referred to enforcement.”

The FSA wrote to nearly 600 brokers in March last year warning them that they had to restructure their businesses by early next year or be in breach of the rules.

The regulator subsequently contacted a number of brokers which it thought were most at risk – although it is not clear how many brokers had problems.

It is thought to be smaller brokers that have failed to deal with the goodwill on their balance sheets.

Norwich Union (NU) trading director George Berrie said NU expected a small number of brokers to fail to meet the capital requirements. “A couple of hundred at the top end,” he said.

He said that these distressed brokers could be attractive acquisition targets for other companies, but warned that problems with goodwill could mask other problems within the business.

A senior source at a major consolidator agreed there could be opportunities to buy brokers but expressed caution: “You would have to question the ability to manage the business if they can’t handle the goodwill.”