New deadlines will throw brokers' futures into doubt

The FSA will delay setting final rules on risk transfer for a further year.

The regulator is expected to announce the decision when it releases its final broker regulation rules later this month.

Sources said the FSA would make a temporary amendment to the rules concerning the transfer of the credit risk for client money to insurers, and publish only high-level guidance on the issue.

A further round of consultation will take place in 2004, with final rules to be set in late 2004 or early 2005. This has raised concerns among brokers that they will have little time to implement the rules before regulation begins on 14 January 2005.

"It will make the time-scale tight between the announcement of final rules on risk transfer and the beginning of regulation," said one broker.

The FSA's decision to delay setting final rules on risk transfer comes after discussions with insurers about whether existing agency agreements contain the terms necessary to constitute a contract for the transfer of client money risk.

The FSA's position is that if agency agreements delegate the authority to attach cover to a broker, the broker is acting as the insurer's agent, and the agreement would constitute a contract for risk transfer.

But, according to sources, who the broker is acting for when it has the authority to issue temporary cover or cover notes before cover is confirmed, and who it is acting for when using an EDI system or a quote system supplied by an insurer, is a "grey area" that the FSA is seeking further advice on.

An FSA spokeswoman declined to comment ahead of the announcement of its final rules later this month.

Treasury concerned at FSA action

The debacle surrounding the risk transfer rules is unlikely to impress the Treasury, which is understood to be concerned about the FSA's decision to implement regulatory requirements that go beyond those in the European Union's Insurance Mediation Directive (IMD).

According to sources, the Treasury is particularly concerned that the FSA's prudential requirements for UK insurers, as proposed in CP190, could lead to several insurers relocating their operations offshore. The proposals require UK insurers to hold capital commensurate to their risks and any large-scale transfer of the credit risk for client money would only increase the capital burden on insurers.