Brokers that opt out of holding client money will benefit from less onerous solvency requirements under proposals in the FSA's latest consultation paper.
Biba chief executive Mike Williams said CP 174: Prudential and other requirements for mortgage firms and insurance intermediaries is "the most crucial paper to have come out so far" for brokers.
CP174 proposes that client money must either be guaranteed by insurers or held in segregated client accounts under a trust. It also proposes differing levels of solvency for brokers that hold client money from those that do not, compulsory professional indemnity (PI) insurance, and extending the FSCS to cover brokers.
But some are sceptical that insurers will agree to contractually accept responsibility for client funds. The Broker Network managing director Grant Ellis said: "Every insurer I've spoken to has said categorically that they won't be taking responsibility for client premiums."
The FSA acknowledges that the alternative - segregated client accounts under a trust - will increase broker costs and prevent firms from drawing commission from client funds before they are received.
Brokers that do not handle client money will also benefit from less onerous capital requirements with the FSA proposing they have £5,000 or 5% of annual net brokerage income, whichever is the higher. Brokers holding client money will be required to have: either the higher of £10,000, or 5% of annual income, or 5% of the average client money balance.
The FSA is proposing that brokers have PI cover of £680,000 or three times annual income, whichever is the higher. PI underwriters have warned that the proposal will result in PI premium increases, but the FSA estimates that PI premiums should increase by "no more than 1.1%".
Under its proposal to extend the FSCS to insurance intermediaries, the FSA said that, in the event of an intermediary insolvency, consumers and small businesses with turnover up to £1m would receive 100% of the first £2,000 of the claim and 90% of the rest. The FSA proposes that brokers contribute to the scheme via a levy, but have not said how this would be calculated.
Responses to CP174 are due by
13 June, with feedback and policy statements scheduled for released in the autumn.