The Folgate Partnership

So, we now have the "near-final" rules relating to financial safeguards, PI, client money segregation, capital and a customer compensation scheme. The overall first impression is that we have a 'listening regulator', and that consultation works, says Andy Homer, Folgate chief executive.

Approved persons regime:
We are all pleased to see the more pragmatic stance the FSA has now taken in this regard. I do not believe it will have been in the customer's interest to see secondary distribution channels and Introducers exiting the market due to what they might perceive as 'hassle', or risk, arising from the original proposals.It's right that the governing functions for Appointed Representatives ("as appropriate") is retained so as to help the principal manage the inherent AR risk.

Financial safeguards
It is no surprise that income will have to be withdrawn on a strict 'received' basis, though this is not to be confused with the way income can be accounted for. The additional flexibility in PII will be of some relief and is more-or-less in line with our expectations of the consultative process. However, the debate on risk transfer has taken an interesting twist. While the new proposals have decided against placing a compulsory risk transfer requirement on insurers, my attention is drawn to Rule CASS 5.5.18R(3) which appears to ensure that an intermediary will be liable, for any reason, for any client money owed but not paid over by an Appointed Representative (AR). While arguments against compulsory risk transfer were never properly debated in the industry press, I suspect this rule (which effectively places a compulsory risk transfer obligation on agents in their dealings with ARs) will keep the debate alive for a little while longer.

A choice is now available to place retail client money into a non-statutory trust, but brokers will need to study the rules carefully to satisfy themselves that the additional regulatory burden (which includes an additional £40K of capital) makes the option worthwhile.

There are also now options for ARs in relation to client money, though I don't imagine they will alter the original FSA position in the majority of AR situations - namely, that monies must be banked with the principal.

On the new solvency proposals, there is again a general relaxation of the original proposals. We also welcome the concession given in regard to 'goodwill', albeit it parks the problem until 2008. But I suspect that acquisitive companies like The Folgate Partnership will have already factored this into their financial planning models (given it was a well-publicised leak). Generally, the FSA has done a good job given that its hands were tied under the very strict Article 4.4 requirement of the Insurance Mediation Directive.

Overall, PS174 shifts the emphasis of compliance from customer-facing activities to the back office. PS174 is not the whole story: other large chunks of the FSA rulebook designed to help firms protect themselves, from themselves, will apply.

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