The cashflow challenge

As if a soft market wasn't enough to put brokers' businesses to the test, there's a number of other issues, not market driven, that are hitting profits and straining cash flow.

These issues have arisen largely from new regulation. Brokers now face the challenge of running thriving yet compliant businesses. But there are steps brokers can take to cope with this challenge. And premium finance providers can help them.

So what are the particular issues in the area of cash management? First, the FSA's new CASS 5 regulation on commission recognition is having a big impact on cash flow.

The result of this regulation is that although brokers can account for commission before they have received the premium, they can't physically take the cash from their pool of client monies. This is a total reversal to the previous situation. The focus is now on protecting an individual client's funds.

Complex rules
Also, the way brokers handle client money in a trust sense has changed. Brokers now have to make a declaration as to whether they are running a statutory or non-statutory trust - and there are complex rules regarding setting them up and running them.

From what I have seen, it is very likely that some brokers have not selected the type of trust that best suits their needs.

For example, if you choose a statutory trust, you can't aggregate client monies to settle other premiums or bills. And you can't use ' ' client money for off-setting.

But the amount of professional indemnity cover increases if you're running a non-statutory trust. The capital requirements for each are completely different.

The result of all this is that brokers need more auditing, better reconciliation - basically more financial expertise within their business. And this can mean a significant increase in their operating costs.

Then add FSA fees, which can amount to as much as £50,000 or more per year, depending on the size of the broker. These are generally paid up front in July for the year and are another drain on profit and cash flow.

Clive Briault, managing director of retail markets at the FSA, has warned brokers that client money is to be a new priority area for the FSA. Reviews carried out earlier in the year of general insurance intermediaries in the wholesale sector highlighted a number of significant issues. Among them were:

As a result, the FSA sent out a letter in July to the chief executives of all general insurance intermediaries involved in the wholesale market setting out its concerns.

Furthermore, the FSA intends to extend its review to include the retail market and, over the next few months, it will be visiting retail firms to look at this issue.

The most noteworthy case to date has been BPS Insure. The FSA conducted thematic visits to this broker at the end of April and found a deficiency in the client money accounts. The regulator stopped the broker taking on any new business. BPS eventually went into administration at the end of May.

So how can premium finance and premium finance providers help to relieve the growing burden on cash management?

First, the use of premium finance generates additional income during this soft market - or indeed during any market. There are some highly competitive deals available from providers, which give brokers scope to earn a worthwhile amount of over-rider.

And brokers can take their commission in cash as soon as they've received the premium from the premium financier, regardless of whether or not it has actually been paid to the insurer.

Some premium finance companies have changed their fund transfer procedures in light of the more stringent regulatory requirements on brokers for managing their cash.

For example, at Close we've made changes allowing brokers to receive their commission more quickly, and to recognise their commission more quickly from an accounting perspective, through faster premium payment. And we are also giving brokers longer to chase refunds from insurers when customers default.

Logical choice
Finally, because premium finance companies tend to have healthy balance sheets, they are the logical choice for providing other banking facilities such as loans to cover fees or brokers' development costs.

There's no doubt that stringent supervision will continue; the FSA has barely started to cut its teeth yet. Brokers in the main are trying to comply with the raft of new regulations - but interpreting these regulations correctly can place a great strain on a business.

Because premium finance companies in general are financial organisations, they have the wherewithal and expertise in-house to ensure cash audits and reconciliation are up to par. Most small and mid-sized brokers do not.

We are keeping a close eye on the FSA's policy statements and behaviour, and trying to work out the future problems that brokers will face. We will continue to tweak existing products and develop new ones to make brokers' lives easier. IT

' Tim Wilson is sales and marketing director at Close Premium Finance