We should be grateful that the FSA has given some advance warning of what compliance will entail, but it is not going to be easy, says Lord Hunt
One of the FSA's many consultation papers on the subject of the regulation of insurance intermediaries and mortgage firms, CP174, covers what the FSA describes as "prudential and other requirements".
To most of us, that title gives little away. But an hour or two spent leafing through the hundreds of pages that CP174 contains reveals a range of the most fundamental issues that are going to hit those who will be obliged to seek FSA authorisation for the first time in 18 months from now.
One point to be grateful for is that the FSA is showing its hand now, rather than in six or nine months' time.
Everyone needs time to prepare for operating in the regulated environment and that is especially true for the issues covered in this consultation paper.
The minimum level of capital that will be required, from the dreaded date on which FSA regulation will bite, may well take some time to put in place. Some brokers will be fortunate enough to be more than adequately provided for already. Others will have to acquire extra capital to clear this particular hurdle.
We must remember, of course, that the details and the quantification are, at this stage, only provisional, but it is fair to assume that the broad approach set out by the FSA now in consultation will be the basis of the regulatory regime for years to come.
CP174 also tackles the vexed question of professional indemnity (PI) insurance. As is very well known, PI is already hard to come by. Proposing, as the FSA does, that PI should be mandatory for all insurance brokers seems likely to exacerbate the problem. Providers of PI have long complained about the unpredictability of the regulators over the past 15 years since the Financial Services Act came into force, and the FSA's reassuring words are unlikely to allay those concerns.
Another material issue covered in the consultation paper concerns the regime that will apply to the handling of client money.
As the proposals stand, firms will have a choice of two principal approaches: segregation of client money from the firm's own assets or making arrangements with the insurance companies, with which the broker deals, for that insurer to accept full responsibility for the money, received from or due to clients, that the broker holds.
Neither option is likely to appeal to most brokers. But, notwithstanding that changes may arise when the FSA has had a chance to consider the representations that it receives from the industry, brokers would be wise to be thinking seriously now about how they will cope with these requirements and what choices they will make for the future.
I am in no doubt that it is sound advice for everyone who will be affected by the FSA's new regime that they should be planning to shape their businesses to work with the flow of regulation and should be doing it now.
Those who leave it too late can expect to pay a high price.
Lord Hunt is senior partner of national law firm Beachcroft Wansbroughs