The last things brokers wanted

The last thing brokers need in the current economic environment is more drain on their financial resources and manpower, but according to accountant Moore Stephens this is what will happen with the FSA’s proposed new client money rules.

Under the proposals, client money account audits would be tightened and so-called conditional risk transfer would be banned. Under pure risk transfer, client monies held by an MGA or broker are deemed to be held by the insurer - in other words, the credit risk associated with holding the client funds rests with the insurer, and the client money rules do not therefore apply. However, with conditional risk transfer, this applies only in certain circumstances, potentially making it unclear who is responsible for the client funds if problems arise.

The regulator also proposes that brokers calculate client funds more frequently than the current rate of once every 25 days. According to Moore Stephens partner Stuart Markley, “This will be of concern to firms with limited IT resource or man-hours.”

It is understandable that the FSA would want to keep a firm eye on how brokers handle client funds and create more certainty about how client monies would be protected in the event of any problems.

While some may argue that the current regime does not need fixing, the FSA will clearly not want to wait for problems to start emerging before taking action. It wants to strengthen the system against potential problems, so that it cannot be accused of having failed to spot warning signs when trouble hits.

However, the regulator also needs to be wary about overburdening already stretched brokers. Smaller brokers in particular are already complaining about the high cost of compliance. Adding further to this is only likely to put further pressure on them to sell up to larger, acquisitive groups such as Towergate, Oval and Giles.

Greater client money controls are clearly desirable, but should this come at the expense of broker choice?

Brokers have been dealt another potential blow this week with the failure of Gibraltar-based insurer Hill Insurance Company. The company’s capital base was made up of bonds that it subsequently discovered either did not exist or did not belong to it.

Hill’s demise follows hot on the heels of the collapse of fellow Gibraltarian company Lemma Europe Insurance Company.

While the collapses clearly do not mean that all Gibraltarian insurers have a problem, it reminds brokers that they need to be wary when placing business with insurers in offshore jurisdictions, and cannot rely on the fact that regulators have allowed them to do business in the UK as proof of their financial stability.

Of course, this means greater scrutiny of insurer panels, and, if more rigorous selection criteria are used, less choice for the client. Neither of these are good things in today’s tough market.