Where have all the secondary intermediaries gone?

The latest figures from the FSA on application numbers make interesting reading. At the 3 September, 5,004 brokers had applied for authorisation, up slightly from the 4,893 who applied by the 14 July 'deadline'.

One would imagine that by this date most brokers who wanted to apply would have done so, so the final number of applicants is likely to remain around this figure. A final pool of 5,000 or so brokers applying for authorisation is a good number to have achieved.

In contrast, however, the number of secondary intermediary applications raises serious questions.

The FSA's latest figures show that only 4,147 secondary intermediaries have applied for authorisation. In its initial forecast, the regulator estimated that around 25,000 secondary intermediaries would be affected by the general insurance regulation.

Even if one gives the FSA a generous 50% margin of error in its estimate, this still leads to a significant shortfall.

So where have all the secondary intermediaries gone? Some will have chosen to become appointed representatives (ARs) to avoid direct authorisation. Such a move is clearly the sensible one for secondary intermediaries to take, as direct authorisation has never been seen as the appropriate option for this section of the market.

It is very difficult to tell how many have opted for this route; the number does not show up in the FSA's figures, as these relate to direct authorisations only. Anecdotal evidence would suggest that this is not a huge number, certainly not enough to fill the shortfall in the FSA's figures.

A few AR networks have been set up, but in the main these have not been very large.

Other secondary intermediaries will have decided to pull out of general insurance business. But it is impossible to tell how many have made this decision.

The worry is that the FSA has not reached a large number of secondary intermediaries. The concerns of the regulator were evident at the Biba conference when Sarah Wilson, head of the FSA's high street firms division, took the unusual step of announcing an advertising campaign to raise awareness.

But has this worked? The fact that the FSA continues to warn insurers of the need to examine their distribution chains to ensure that each link will be authorised suggests that concern still exists.

If it transpires that there are large numbers of secondary intermediaries trading without authorisation in 2005 then the FSA is unlikely to look too kindly at the insurance industry.

When it takes over the regulatory reigns next year, one would expect the FSA to police the perimeter very tightly. Unauthorised firms will be treated harshly and those that do business with them will be punished too.

The regulator is likely to want to stamp its authority on the insurance industry. The 'scalp' of an insurer or broker who supports an unauthorised secondary intermediary is likely to make more of an impact than the punishment of the secondary intermediary alone.

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