Brokers have lost their battle with the FSA over compulsory risk transfer this week. Following the publication of the FSA's final rules on prudential and other requirements for brokers, the regulator has closed the door on this option, leaving the issue of risk transfer at the discretion of insurers.

Brokers now fear that insurers will rewrite their agreements to prevent risk transfer taking place.

But there was some good news for brokers with the relaxation of the proposed rules on professional indemnity insurance and capital requirements.

This week also saw the FSA dramatically change its stance on the regulation of appointed representatives (ARs) in its final rules, based on proposals in CP159.

The FSA originally proposed that ARs could have only one principal for each identified block of `substitutable' business. But the FSA has now scrapped the concept of product blocks, leaving ARs to have an unlimited number of principals.

But the issue of risk transfer overshadowed the positive aspects of the new rules.

Stuart Alexander joint managing director Stuart Reid said that the FSA had made a "mistake" in allowing only voluntary risk transfer.

The cost implication of having risk transfer with some insurers and statutory trusts with others was "significant" and that it could be "too much for smaller brokers" forcing many to consolidate or go out of business, he said.

"Ultimately, choice will be reduced, which will be the opposite of what the FSA is seeking to do."

Biba chief executive Mike Williams said that brokers needed to focus on the positive aspects of the rules.

"Some of the key changes, such as capital adequacy and PI requirements are to brokers' benefit."

Broker Network chief executive Grant Ellis said: "I would be very surprised if insurers do not rewrite their agency agreements."

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  • CP174 and CP159 at a glance

  • Transfer client monies risk to insurers voluntary
  • Brokers not holding client money must hold the higher of £5,000 or 2.5% annual net brokerage income (previously 5%).
  • For those holding client money, solvency will be the higher of £10,000 or 5% annual net brokerage income.

  • Voluntary trusts, renamed `non-statutory trusts', extended to brokers holding retail client money.
  • Minimum professional indemnity requirements maintained (¤1m single claim, ¤1.5m aggregate).
  • CP159

  • Appointed representatives (ARs) can have an unlimited number of principals.
  • ARs' activities to include dealing as an agent and dealing in administration and insurance contracts.
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