The FSA will toughen its supervisory regime of brokers after it warned that the industry posed "more of a problem" than originally thought.

The hard-hitting assessment of the state of the insurance industry was made at a recent forum for compliance consultants.

Chris Harris of the FSA's insurance division highlighted a number of areas of concern for the regulator. These included: failure to properly segregate client money; lack of business continuity planning and disaster recovery; and inadequate product disclosure

On client money segregation, Harris said that despite being at the FSA only a few months he had "already handled two cases where money has been stolen by directors to fund extortionate living".

Harris said the main priorities for the FSA would include: perimeter enforcement, product disclosure, complaints, claims handling and client money. He also warned that it would be encouraging smaller brokers to give up trading business if it was not worth them being regulated. "Firms should be asking the question, should they be regulated or should they be giving up," he said.

He said that only half of the newly FSA-regulated firms had been regulated in the past - for example by the GISC. As such, the FSA would be treating brokers as if they had not been regulated and assume that they had not read the rules.

A compliance source at the forum said: "The FSA is realising that the GI side is not going to be as easy as first thought. It is worried that it will have another IFA market on its hands and it will take a long time to sort out."

Brokers hit back at the FSA's approach. Topaz Insurance director Richard Mikula said: "The FSA is taking a sledgehammer to crack a small nut. Brokers want to get on with business, but the FSA is still hounding us. It won't give straight answers to questions and doesn't talk to the small broker."

Broker 'arrow' visits start
An FSA spokesman said the document-based element of the 'arrow' process has begun, which will determine which companies receive 'arrow' visits. He said the process would be rolled out over the coming year.

Heath Lambert confirmed that it received a visit from the FSA last week.

A spokesman said the regulator had a series of meetings with senior people from all areas of the business.