Remember your principals

With regulation just around the corner, it is time for brokers to take action. The consultation process is almost over and registration has begun.

Industry insiders predict that around 20% of general insurance brokers are still undecided whether to apply for authorisation, to become an appointed representative or exit the market.

Becoming an AR is not a soft option. ARs still have to comply with the Financial Services Authority rules, although it is the principal responsible for their compliance who is directly authorised. Brokers should seriously consider the options and look long and hard before committing to a principal firm - deciding whether to become an AR is entirely a commercial decision.

Consider the annual income from regulated business, the type of service you want to provide, and the relationship you have with product providers.

For those not already making arrangements with a chosen principal, the choices are baffling. Insurers, networks and brokers are now starting to declare their interest in becoming principal firms. No doubt, each will claim to have the widest, most innovative offering, one that is easy to use and the best for compliance. But detail is thin on the ground and there is little in terms of concrete proposals. The most important question is how much will it cost to be an AR?

Brokers should also bear in mind that any business that advises, arranges or gains commercial benefit from the sale of insurance, subject to some exclusions, must be fully authorised or become an AR. This could include shops/retailers, motor dealers, car hire firms, doctors, dentists, vets, employers, trade unions, affinity groups, and sport and social clubs and associations. As such, brokers may have to rethink their scheme arrangements.

According to the FSA, an employer that offers health insurance is not gaining any commercial benefit and is excluded from the list.

Brokers that intend to become principals for agents such as motor dealers must be able to carry out checks to ensure their sub-agents are compliant.

They should also consider whether becoming a principal is worthwhile in terms of financial reward and administration.

Remember, principal firms that are not currently authorised cannot guarantee they will get FSA authorisation by 2005. ARs could be left in a very difficult situation if their chosen principal's application is rejected, with little or no time to find an alternative. The FSA is expecting more than 20,000 firms to apply and is urging companies to apply early to avoid a last-minute rush.

Perhaps the best advice is to hedge your bets. Those deciding to go for AR status could also line up an alternative principal and start preparing for direct authorisation just in case.