Blasting out of the blocks

With banks restricting funding and the financial services industry in well-publicised trouble, you would expect to see fewer start-ups but this is far from the case. Start-ups continue to be successful, such as Prizm Solutions, named as Midlands Business of the Year after only 12 months of training. Cobra's new offering for broker start-ups - Genesis - has more than 10 interested parties each month applying for membership from across the UK that are "diverse in areas of business and approach".

Eric Galbraith, chief executive of the British Insurance Brokers' Association, believes that the market will continue to see more start-ups as a result of consolidations: "Not everyone wants to be part of a consolidator. Issues make people want to break out and start on their own and this dynamic will not change: it is human nature. Some brokers are also moving over to the general insurance side from mortgages as the mortgage market is narrowing."

With so many brokers starting up, many see differentiation as key. "Each broker has its own individual skills and strengths to deal with clients and sell products. It is up to the broker manager to create an image that purveys these particular skill sets and help develop them further," says Galbraith.

In August 2008, the Open GI new business team reported an increase in the number of new brokers contracting for its e-commerce solution on the basis of growing online opportunities. Mike Joseph founded Right Choice Insurance Brokers in February 2008 and believes that the internet is an area with great promise for start-ups. He chose internet-focused trading as RCIB's key differentiator and 60% of its business is now traded online. "As a start-up broker, technology is a key consideration. With a small staff base, we needed a system that could make us as efficient as possible and could handle quote volumes on the web. We see a great future in internet trading, particularly if you specialise in a niche market like non-standard motor," remarked Joseph.

Keep it simple...

However, Mark Peasey, director at Cobra Network, warns against differentiation for its own sake: "How a broker positions itself will depend upon the area of the market in which it operates and the personality of the principal. It is not always necessary to reinvent the wheel to be successful."

Joseph believes that good relationships with insurers have been key to the success of RCIB: "It takes a great leap in faith from the insurers to help provide the tools needed to be a success; a good previous relationship and track record is vitally important."

Networks give brokers a helping hand onto the ladder and have become a popular choice of partner for start-up brokers. Networks are beginning to assemble start-up focused sub-networks, such as Cobra Genesis and the Broker Network start-up offering, for brokers that are looking for help in developing insurer agencies.

Joining a network can bring other benefits. Ross Barnitt, sales manager at Broker Network, believes that start-up brokers can find the support they may need by joining a network: "The risks a broker is exposed to are far greater when going it alone. We use our experience to cover some of that risk. We get our broker partners up and running, offering sample business plans, marketing and branding services and advice on Financial Services Authority authorisation, alongside securing insurer agencies."

However, joining a network does not suit all new start-ups because some cherish their independence and some may even have decided to start their own broker due to a lack of independence at their previous employer. Matthew Southall, co-founder of Birmingham-based Southall Harries, chose not to join a network despite the extra work required while putting together his business: "We had taken a decision to remain 100% independent, so a lot of work from the outset was required."

FSA authorisation is a daunting hurdle for many start-ups. First, a firm needs to submit an application that will then be assessed against the threshold conditions for authorisation. The threshold conditions are: legal status (the firm must be correctly registered with details of ownership supplied on application); the firm must be based in the UK; the FSA must be satisfied that the firm's 'close links' will not have an adverse affect on the effective supervision of the firm; the firm must have adequate financial and non-financial resources to conduct the proposed business; and individuals at the firm must be assessed as 'fit and proper'.

As a retail intermediary business, brokers must also produce a series of documents to support their FSA authorisation applications. These documents include a staff organisational chart, business plan information, compliance procedures, details of professional advisers, an opening balance sheet, a forecast closing balance sheet after 12 months trading, a monthly profit and loss account for the first years of trading, a monthly cashflow forecast and a professional indemnity insurance quote.

The FSA is entitled to take up to six months to approve an application. "Authorisation is a long process. It can be difficult to know what forms need filling in, as well as when and what is required," comments Barnitt.

However, Joseph believes that, despite the challenges they present to broker start-ups, the processes required by the FSA for authorisation are vital: "The application process requires a sound, three-year business plan but if the application process is a problem then it probably means that the business wouldn't have been sound or survived. The biggest problem is timing; the FSA requires certain things to be in place (lease, systems and professional indemnity cover) before final sign off. We didn't want to put these things in place too soon before we were able to trade (in order) to avoid burning money, however many insurers and banks will not consider an application until full FSA status is confirmed. It's a real chicken and egg situation."

Confinement

Restrictive covenants also pose a challenge to many broker start-ups. Intermediaries can find it hard to resist approaching former clients when setting up their own businesses, especially where strong relationships have been formed. In July 2007, Towergate received a substantial settlement of £825,000 from Bob Beckett and his co-defendants over the breaching of restrictive covenants by Mr Beckett and former Towergate employees who joined him at Insurance Risk Solutions in Bury St Edmunds at the start of 2007.

Southall believes that restrictive covenants are more of an issue for brokers that set up after leaving large brokers: "Restrictive covenants cause an issue where persons involved in setting up a new brokerage are leaving bigger brokerages - such as consolidators - and are exposed to a legal action from an organisation with substantial funds that maybe is prepared to drag the proceedings on for as long as possible in an attempt to exhaust the funds of the new brokerage, regardless of the rights and wrongs of the legal action."

Galbraith highlights that the issue of restrictive covenants will not go away and it is important for start-ups to approach sensibly any covenants that they or their staff may be under: "Brokers need to have their interests protected and need time to restructure. People need to know that they can't create an organisation at the expense of another. Certain restrictions are reasonable, others are not. It is all part of the process; people just have to deal with them professionally. It does not do our sector any good for customers to see us fighting."

The current state of the economy poses an obstacle for many start-ups because banks are lending less. "The type of financing options available to us when we commenced in 2006 have somewhat changed in view of recent economic events, although with a strong business plan there are still investors looking at start-up businesses. The economy would certainly add to the challenges of any new start-up broker," says Southall.

Joseph believes that, in the present economic context, a broker start-up should avoid external finance where it can: "We were in a position where the business was funded solely by the shareholders; nothing in the business is financed and this leaves us in a stronger position to take things forward. Various finance options were available but we felt that we would be better to avoid this and keep our monthly outgoings and commitments to the minimum amount possible; this is a big factor in us now achieving profit on a monthly basis."

Despite the challenges faced, Barnitt is upbeat and believes that the market will continue to see increasing numbers of start-ups despite the economic challenges: "Bank and third-party investments are still available despite the current economic issues, as brokers are cash-generative businesses and therefore a good investment in uncertain times."

Case study: Southall Harries

Matthew Southall, co-founder, recounts the story behind starting his broker.

Starting up was a carefully planned process. First, we considered how we would handle the products that we intended to write and we selected the correct staff and business premises. There were challenges: from the initial application to the FSA for approval - which we commenced with five months before trading - to obtaining agencies from the insurers. We took the decision to remain 100% independent and not to join any networks, creating more work.

We needed to ensure that any clients requesting us to quote for their business were fully aware of our background and the levels of service that they could expect from a new broker. We invested in a website and provided potential clients with corporate literature. Both Marc Harries and I are in our mid-thirties and have built our business on the strong relationships that we forged with our commercial clients; we work towards a set level of service standards.

We selected offices and an information technology system that could support our infrastructure over a five-year period. We did this, not only from a client point of view, but also looking at staffing and compliance. While the economic position of the UK has not assisted with our growth, Southall Harries grew the business in its second year by 22% and hopes to achieve a similar level of growth in its third year of trading. We would hope to see a return at the end of this financial year.