The final rules at a glance

Risk transfer
The FSA has not altered its position, stated in PS174, that agency terms will determine when the broker is acting as agent of the insurer and thus whether risk transfer will occur.

But the FSA has now said that if a broker has a binding authority from an insurer the agreement must expressly state that the broker is to act as agent of the insurer for the purpose of receiving and holding premiums. This is to ensure clarity and certainty as to the effect of agency terms.

The FSA says: "The rules make it clear what is client money and what is not. It is time for the market to find some clarity on these issues. The rules give some clear examples of when broker is agent of the insurer. It is not up to the FSA to cover every alternative. It is up to brokers to look at the rules and decide how it affects them. The market should take legal advice if necessary."

Co-mingling of client and insurer monies
Transitional provisions will allow brokers to continue to hold the two monies together (co-mingling) for a further 12 months until January 2006.

The FSA will conduct additional work into the impact of the segregation rules, re-consulting where necessary.

The FSA says: "Late in the day the market realised that insurer monies would have to be kept in separate client accounts and that there would be cost and system issues. This was not raised in consultation. Brokers' systems may not be able to distinguish between client monies and insurer monies. The transitional provisions will give them a chance to sort out their systems.

"In the meantime we need to understand the scale and nature of the problem. We are a listening regulator. If there is an issue that we find we need to re-consult on then we will do so."

Professional indemnity
Special provisions have been added for firms that are covered by a policy for more than one firm. These relate to the limits of indemnity for all the firms named on the policy and each individual firm. Amendments have also been made in relation to excess levels.

Appointed representatives
The final rules remain largely unchanged. Additional guidance has been included on the role of the lead principal.

Status disclosure requirements
Status disclosure requirements have been significantly reduced for intermediaries making introductions. Firms now have the option of meeting the requirements through the use of a prescribed form, the initial disclosure document.

Tacit renewal (unsolicited services)
Insurers will be able to automatically renew a policy without consent if they have the right to do so through a contractual provision.

The FSA says: "We initially said that insurers could not automatically renew a policy without the client consent. But the response was that this would be costly. For this reason the rules have been modified. Insurers can now add a clause giving them the right to renew contract."

Needs and demands statements
Some flexibility has been introduced in the way that the rules can be met to reflect the range of products and methods of sale.

The FSA says: "There was lots of industry responses, particularly in relation to the sale of commoditised products. The feeling was that in these cases it would be very onerous to provide needs and demands statements. We agreed with this and have set out guidance as to how firms can meet the IMD's requirements. This could be through a generic statement in product leaflets."

Product disclosure
The rules have been revised in the light of the consultations. The FSA has changed the information that has to be given orally in face-to-face sales to retail customers. The rules now require the customer be told orally of the importance of reading the policy summary, especially the section on significant and unusual exclusions.

The FSA says: "The original rule was that the implications of 'significant and unusual' conditions had to be explained. The response was that this could be quite onerous for various retail outlets.

"Now customers must be given a policy summary spelling out clearly the unusual conditions. It must be clear and in plain English.

"There is a balance between caveat emptor and the nanny state. There is an obligation on a salesman to point out policy summary. It should signpost the consumer to the policy document. If the consumer is not given advice and doesn't understand it is up to the consumer to seek an explanation. But if the consumer is given advice the conditions must be taken into account in recommending a policy."

Transitional provisions - stationery

Newly authorised firms will have until 15 July 2005 to add statutory information (such as 'authorised and regulated by the FSA') to their letterheads. Firms will also have until this date to remove references to GISC membership.