Lloyd's and provincial brokers could face insolvency and will breach FSA rules if negotiations of the new Lloyd's terms of business agreements (Tobas) are not resolved today.

Negotiations on Lloyd's Tobas between the LMBC and the LMA have stalled over the issue of risk transfer, except on certain binding authorities, according to a London market source.

As a result the written agency agreements required by the FSA that allow risk transfer have not been signed in time for the start of FSA regulation.

LMBC executive director David Hough denied there was a problem. He said the discussions with the LMA were "progressing" and that they would be resolved in the first quarter of 2005.

But according to compliance expert Alex Peterkin, director of

FSA solutions, the FSA has made it clear that written agreements between brokers and insures are required by 14 January if risk transfer is to take effect.

She said: "In my discussions with the regulator it has confirmed that firms that do not have risk transfer agreements in place by 14 January will be in breach of the rules."

Without these agreements in place brokers will not have risk transfer, she added.

A spokesman for the FSA confirmed that risk transfer agreements had to be in place by
14 January.

Lloyd's brokers without risk transfer could be sidelined as managing agents could choose to collect money direct from retail brokers.

"Smaller Lloyd's brokers could run out of cash by the end of 2005," said the source. "The LMBC could be gambling that the managing agents are not prepared to collect direct."

One Lloyd's broker said: "It is an issue for us as to what insurers will want to do to reduce their credit risk. This could mean setting up service companies."

Retail brokers also faced insolvency if a Lloyd's broker without risk transfer collapsed, said the source. In these circumstances, the creditors could look to the retail broker to recover premiums. Where sizeable books of business were involved it could make the retail broker insolvent, the source added.

An LMA spokeswoman said negotiations were at a "sensitive stage".

Latest FSA figures
As at 31 December 2004

  • 10,221 general insurance intermediaries have applied for authorisation, an increase of 576 since 3 December.
  • 9,700 have been authorised.
  • Outrage over Treasury U-turn on regs
    Brokers' agencies have been axed unnecessarily after the Treasury's relaxation of the FSA authorisation deadline in the week before Christmas. AXA chief executive Peter Hubbard told Insurance Times that the insurer would not have been so quick to cancel 100 agencies late last year had it known what the Treasury was going to do.

    Brokers have also expressed dismay at the Treasury's actions. Topaz Insurance managing director Richard Mikula said that the move would lead to a "two-tier" system.

    "The industry is being told that it has more time, while 50% of brokers and insurers have rushed through to become compliant. This will lead to a two-tier system running for the next year. It is highly dangerous for the industry."

    Under the Treasury order, intermediaries that apply before the 14 January but have not had a decision on their application can continue to trade for up to a year until the FSA determines their application.