The FSA has accused insurers of doing a U-turn over accepting the risk for client money.

FSA high street firms division head of policy Eleanor Linton said insurers had initially supported the proposal in CP174 that they accepted the risk for brokers holding client money.

Under the EU Insurance Mediation Directive (IMD), by which the FSA is bound, the risk of handling client money can be dealt with in four ways: transferring the risk for client money to insurers; brokers holding client money in segregated accounts; brokers having financial capacity of 4% on annual premiums received; or the establishment of an industry-administered guarantee fund.

After extensive pre-consultation with the ABI, Biba and other groups to establish the preferred options, the FSA proposed two of these in CP174; brokers holding client money in segregated accounts; and transferring the risk for client money to insurers.

Linton said that, at the time, insurers backed the proposal for risk transfer, saying that currently, in the event of a broker insolvency, they effectively accept the risk.

But she said that, since the pre-consultation, insurers' views on the transfer of risk for client money have changed. The position of insurers on client money is important because other proposals in CP174 have been written around whether or not brokers hold the risk for client money.

"It is a core issue because it has ramifications throughout," she said.

For example, under the FSA's broker solvency proposals, also in CP174, brokers who hold client money will be required to hold capital of the higher of either £10,000, 5% of annual income or 5% of the average client money balance.

In comparison, those brokers who transferred their client money risk to insurers would be required to hold only the higher of either £5,000 or 5% of annual net broker income.

ABI general insurance head John Parker denied insurers' views had changed. He said, while it was common practice for some insurers to currently accept the risk, there were concerns about risk transfer as a statutory requirement. "The whole regime shouldn't be built around insurers accepting risk," he said.