The cash lifeline

Ask anyone running a business what is most important for staying afloat and they'll answer the same - cash flow. For brokers, this is an issue that is gaining sharp new currency with fast impending regulation by the FSA.

This will impose stringent cash handling requirements on brokers to protect client cash.

Where general insurance intermediaries handle client money - and at present 99% do - the proposals are that trust accounts must be maintained and that these should be reconciled at least every 25 days.

The current regime is far more lax, and compliance experts are saying that now is the time to be thinking about having more funds put aside to meet solvency requirements. In many cases, intermediaries will also have to wait longer before commission is withdrawn.

One solution could be short-term funding from premium finance providers, although to date, few are openly making overtures to brokers.

The Broker Network business development manager Martyn Denney is someone who has studied the premium finance market in depth by arranging deals for his members. He has also studied the implications the FSA will have on the intermediary sector.

"Premium finance is not going to be the whole solution, but it could be used to provide a line of debt if needed. It is up to brokers to speak to their provider to see if an arrangement can be set up and to make sure they are able to make their own additional provision. It is going to mean a different way of working."

Trust accounts
One firm which is considering options for brokers is Singer & Friedlander Insurance Finance.

Chief executive Ian Jerrum says: "We would not want to announce anything yet, but there is room for us to provide solutions in this area. But, we need to see what is decided as a result of CP174."

This is the consultation paper that concerns the financial requirements for intermediaries to trade and the protection of client cash. The FSA is proposing trust accounts should be held and that these should bereconciled at least every 25 days.

Under current rules, brokers operate IBAs (insurance brokerage accounts). These allow some flexibility and leverage according to Jerrum: "Many brokers are using Client A's money to finance Client B's premium, taking the commission as it is earned, even though they may not have been paid.

"The FSA is going to tighten up on this. It will mean each client's money is ring-fenced and in addition, they wait for payment before they can access commission."

Brokers will also have less time to sit on money. "Insurers are tightening up on credit terms. It was often 90 days, now it is more likely to be 30.

"There is less time to earn income, which is extra hard when the stockmarket has been performing poorly," comments Jerrum.

He says there could be a way for premium finance providers to step in and ease the situation. "It is not until brokers have received the premium from clients that they can pay insurers or themselves, unless they use their own funds.

"Plus, commission can only be taken when it is cleared in the trust account.

"We could come in here short term which could help relieve cashflow pressures on brokers."

Amber Credit sales and marketing manager Rob Fry agrees that regulation could bring problems as well as benefits for some intermediaries.

"It will focus the mind more effectively, which will be good for businesses longer term, but they will need to ensure their processes and systems are compliant which, apart from anything else, is all going to add to their costs."

Financing schemes
He believes that greater use of premium financing will negate the need to put such large reserves aside. This, he says, will also be good news for the independent sector as more brokers will look to the independent sector,rejecting both insurers and moving away from running their own financing schemes.

"Brokers will also become more focused on those providers that offer first rate service and, apart from the cost of insurers' own schemes, many do not manage direct debits particularly well."

He adds that the revenue which can be earned from putting business through a premium finance scheme will also be particularly appreciated by brokers who are having to pay out more to meet compliance costs.

"So regulation itself should act as an incentive.

Finsure development manager Nick Elliman agrees that regulated brokers are less likely to run their own schemes.

He says: "Those brokers who fund and administer their own credit schemes may now find that FSA solvency requirements mean that this is no longer a viable option.

"Premium finance enables them to continue to retain a high degree of flexibility and control over client payments and to generate revenue from the provision of credit, without placing a strain on solvency margins."

He points out that most providers in the market offer personal and commercial premium finance that does not expose the broker to bad debt and which does not, therefore, have a negative impact on their solvency level.

"Premium finance, particularly for commercial business, allows the broker to select payment terms that enable them to meet the FSA requirements regarding payment of premiums to insurers."

Access commission
While brokers will need to take on the extra costs of regulation, clients may also end up paying more.

Denney says that if brokers want a quicker turn around from a premium finance provider so that they can access commission, then interest rates may be hiked.

"Premium finance providers generally charge more if they have to settle earlier and this higher cost will be passed on to clients." He adds that brokers will also earn less from investment with funds being held for shorter periods.

Ian Woodley is sales director at Benfield Finance, which provides the Big Fish premium finance product.

He says regulation will benefit his business, since it targets the top end of the broker market. "It's likely to mean more mergers. And the situation where a high street broker is paid with a series of post-dated cheques is going to come to an end.

"It will make more sense for the broker to talk to the client about switching to a premium finance arrangement instead. We also expect to see more of a switch to independent providers from insurer schemes, as brokers realise we provide better value."

He agrees that brokers need to start looking at the implications of cash flow now but believes the larger brokers are already aware of what they need to do.

"I think they also need to looking at how they work with a premium finance provider. If regulation is going to mean more paperwork, they should be looking at working with a supplier such as ourselves that is technologically advanced."

Software house Sirius recently announced it was linking up with Benfield for its back-office systems, claiming the point-of-sale and EDI system is a key step in the transaction revolution of premium finance by insurance brokers.

Woodley says: "We have devised a product so brokers can write premium finance business without being involved in any paperwork and so the broker has far less work to do."

So much for brokers being regulated. Simon Horswell, sales and marketing director for recently arrived provider Aascent - it was launched 18 months ago - wants to see premium finance regulated by the FSA too, since he says it is an insurance as well as a financial product.

Insurers funded
Horswell says the FSA clearly wants to see brokers manage client money better and to eliminate the likelihood of misappropriation of funds, as happened in the case of broker Ward Evans.

He points out that insurers could be funded direct and brokers would still be able to earn commission on the finance.

Horswell explains: "In this case, brokers would submit the business but would not directly handle client money. We would be acting on behalf of brokers.

"Brokers would be instructing us to pay insurers, removing the danger of a Ward Evans catastrophe happening again."

But, while some premium finance providers are clearly willing and able to look at ways they can work more closely with regulated brokers, some agree that a hands-off policy will suit many.

According to Fry: "Most brokers are very independent and I don't see them outsourcing their financial departments to anyone. They are not the sort of people who want to relinquish control, although there will be individual cases where we may start to do more."

It remains unclear if many brokers would decide to relinquish handling client money altogether. And if this were all handled via a premium finance provider it is not certtain if they could bypass FSA capital adequacy requirements.

For this, CP 174 proposes that when the broker holds client money, its minimum capital should be the higher of 5% of annual income, or 5% of its average client money balance, with a minimum of £10,000.

Premium Credit, one of the market's largest providers, said it had no comment to make on the area of premium financing and regulation.

According to sales and marketing director, Simon Moran: "We are not looking to be quoted everywhere and have nothing to say on the matter. We are not qualified."

Perhaps this view is understandable. If premium finance providers are to ease brokers' cashflow problems in a regulated market, they will want to make sure they are doing so with transparency.

And in a sector where this is going to become increasingly important, it is vital that methods of working together are fully formulated before they are launched.