Checking on authorisation of a broking firm's trading partners is a broker's job

Despite the passing of the 14 July deadline for FSA application, many secondary intermediaries still haven't applied. With renewal season fast approaching, brokers are going to have to ask searching questions of the secondary market. They will need to check whether they can continue trading with these companies.

Just because the firms that brokers deal with may have received 'minded to authorise' letters, it does not mean that the business in extended chains is safe. The 'chain' may yet become a problem, for all concerned.

Knowing that everyone in the chain is correctly authorised, whether risk transfer has been given to anyone in the chain, and what commissions others receive will be essential information as of 15 January 2005.

But perhaps of greater concern is that client-facing brokers are going to have to make up their own mind if they can deal with a so-called secondary market client, which may or may not appear to require FSA authorisation.

It will make life a little easier for brokers if they have. For those that do not, questions will have to be asked.

Buried in the depth of the rules is the requirement that firms should deal only with properly authorised firms within the European Economic Area (EEA).

This requirement means that brokers will have to check firms with their respective home state regulators, or alternatively satisfy themselves that those firms don't need to be regulated.

For many UK-based brokers this would at first glance mean that all they have to do is check the FSA register. But it may not be that simple, as the secondary intermediary may not be on the register.

Vets, dentists, group companies, freight forwarders, storage providers, conference and exhibition organisers, property managing agents and car dealers are just some of the client base that are potential intermediaries.

Client vetting for general insurance business should certainly be high on firms' agendas for this 2004/2005 renewal season.

Not asking the questions to satisfy yourself that such clients may not require to be authorised is likely to cause problems for you in the long run. After all, to help police the perimeter, just who do you think is going to collect and provide information to the FSA?

If the FSA chooses to conduct a thematic review, focused on some of those primary intermediary firms rated as being low risk in the insurance market, would you be able to cope?

  • Alex Peterkin is director of compliance at RWA Group