Revealed: FSA forms for brokers

The fight between brokers and insurers over risk transfer is set to intensify after documents obtained exclusively by Insurance Times show that the FSA has tightened its stance on voluntary trusts, making them less attractive.

Draft copies of the FSA's application forms for brokers, obtained by Insurance Times five months ahead of their release, give an insight into some of the FSA's final rules.

The regulator has maintained three approaches for protecting client money: risk transfer to insurers; segregating client money into a statutory trust; and segregating client money into a voluntary trust.

The FSA has toughened the rules on voluntary trusts. Under the rules, any firm operating a voluntary trust for retail client money must have a risk assessment capability, provide a recent audit of the client account, have adequate systems and controls, and "be able to meet a minimum capital threshold of £50,000".

The FSA has also revised its stance on broker's capital requirements. The capital required to ensure solvency has changed slightly from the proposals in CP174. For firms that hold client money, the proposed requirement was that they must have in reserve the greatest of either £10,000, 5% of annual income or 5% of average client money balance. This has been changed to the higher of either £10,000 or 2.5% of annual income. For firms that do not hold client money (including those with an agreement in place to transfer the risk to insurers) the initial proposal was the greater of either £5,000 or 5% of annual income. This has been revised to the greater of either £5,000 or 1% of total assets plus total undrawn commitments. The exemption from professional indemnity (PI) insurance - providing the broker is part of a group with net assets of more than £10m, which is seen as a comparable guarantee - remains.

The FSA defines a network as a firm that has five or more appointed representatives or a firm that has less than five appointed representatives, but which has more than 26 representatives between them. Specific details of the appointed representatives regime are not included, but a source close to the FSA said: "The premise will not change substantially. It will not be a popular option - principals will be regulated more intrusively."

All insurance broking firms applying for authorisation must complete High Street Firms (HSF) One (see below). Information captured includes details about the firm, the regulated activities the firm is applying for and certification it will continue to meet the FSA's threshold conditions. Individuals who control the firm are also required to complete HSF Two, which asks for personal details about directors and controllers, and details of their business and financial history. Firms with appointed representatives are required to complete a copy of HSF Three on the behalf of each appointed representative. This form asks about activities the principal agent has accepted responsibility for, and if there are any restrictions.

Brokers with annual income of over £1m must complete three annex forms. HSF Annex One (Regulatory Business Plan) requires brokers to provide information about the products they sell, marketing plan, financial projections and information about internal controls and staff.

HSF Annex Two (Compliance) asks brokers to give details of how they will comply with FSA rules. HSF Annex Three (Systems) asks for information about accounting and IT systems.

A brief guide to HSF One - the form that all brokers will have to fill in
Firm details: Asks for details such as name, address, principal contact, legal status of the firm, Companies House registration number, accounting date, additional trading names and other places of operation within the European Economic Area.

Type and size of business: Asks for further information about the type and size of the business, including from where the firm derives the largest percentage of its gross annual income, whether the firm is a primary or secondary intermediary and how long it has been in business.

History: Asks about the firm's history, and whether it is a member of the GISC or IIBRC and if it has previously been authorised by the FSA.

Disclosure: Asks the firm to disclose details of significant past events such as any bankruptcies, administrations, insolvencies, law suits, fraud offences or licence refusals, including details of the event the amount involved and the outcome.

Regulated business: Asks firms to identify which regulated activities they intend to do. Choices for brokers include: advising customers on insurance contracts, arranging insurance contracts, dealing as an agent in insurance contracts and assisting in the administration and performance of insurance contracts.

Owners and influencers: Asks for names and controlling interests of the firm's owners, including corporate owners and if it is part of a group. Also asks about close links, like parent or subsidiary companies.

Appointed Representatives: Asks if the firm intends to become a network, which is defined as a firm that has five or more appointed representatives or a firm that has less than five appointed representatives, but which have more than 26 representatives between them.

Compliance: Asks the firm to confirm that it will comply with the FSA's rules and guidance and continue to meet its minimum standards.

Among the questions, brokers are asked if they will comply with the professional indemnity insurance and capital requirement standards, how they will deal with client money, whether their client money account has been audited in the last year and if they will be compliant with the senior management, systems and controls, training and competence, and complaints handling requirements.

Application fees: Provides an outline of how the firm calculates which application fee block it fits within. This is done using the net amount of all brokerage, fees, commission and other income due to the firm. It also provides advise on calculating the application fee band if the broker is paid in a way other than fees or commission.