Regulation costs estimated at between 4% and 18% of brokerage.

Brokers' profits are set to face a potentially devastating blow from the cost of becoming compliant.

Leading brokers have calculated that the cost of regulation will carve a significant chunk out of firms' profits. In the case of smaller brokers, profit margins could be totally eclipsed by these costs.

The news comes only weeks after accountants warned that changes to accounting rules could blow a huge hole in brokers' profits (18 December, Insurance Times).

Estimates vary as to the likely cost of regulation. The impact on individual firms will depend largely on how much work needs to be done to meet the regulatory requirements.

Stuart Alexander joint managing director Stuart Reid said: "We estimate it will amount to between 4% and 7% of brokerage. This is greater than the average profit that brokers make.'

Work by Biba suggests that the total cost could be even greater - as much as 18% of brokerage.

Layton Blackham Group chief executive Chris Blackham highlighted the FSA's requirement that revenues be accounted for when received rather than when debited as being a major source of additional costs.

"This change alone could cost between 10% and 25% of revenue," said Blackham.

"Regulation will have a substantial impact on upfront and running costs."

Alex Peterkin, director of compliance at consultants RW Associates, said that for a smaller broker the total cost could easily rise above its commission income.

"A broker could spend £15,000-£20,000 on advisory work alone.

" On top of that is the cost of things such as new systems and a compliance officer. The total cost could amount to 150% of a smaller broker's commission income."

Total Broker Solutions chief executive Mike Williams urged brokers to look at the long-term gains of regulation and not just at the costs.

"Most of what is proposed makes sense. There is a real benefit to be had in terms of efficiency and protection."