Secondary intermediaries - brokers' choices

Following indication from the Financial Services Authority that it is receiving a lower than expected number of applications from secondary intermediaries, it has been suggested that this could provide an opportunity for brokers. So, what are the issues that brokers need to weigh up when considering taking on a regulatory role?

There are three choices:

The pure introducer - fraught with complications and limitations over whether a firm is assisting in the completion of a sale or simply seeking to make a tangible gain.

Appointed representative - initially seems the most attractive to secondary providers but is also considered by others as the desperate route.

Authorisation - portrayed as the worst possible outcome for the secondary market by those seeking to maximise the opportunity to benefit; with careful planning it may be the best route to achieving a 'business as usual' outcome.

At first glance, the appointed representative seems to get off lightly, as the burden of ensuring FSA compliance falls directly on the principal firm that offers this status. However, there is an onerous responsibility that comes with this, which is why it is considered by some to be the desperate route. Receiving authorisation as an appointed representative is effectively being granted, under certain restrictions, a licence to operate using one or more of the principal's own regulated permissions.

This brings increased regulatory risk to the regulated firm and, consequently, few firms are willing to take this route unless there are strong commercial grounds for doing so.

The appointed representative may only continue to undertake the activity provided the principal allows them to do so and it is not permissible to enter into another such arrangement with another regulated firm unless approval has been granted by the principal.

This leaves the less-than-popular full authorisation route. Deterrents have prevailed through warnings about impending regulation by the FSA.

This, plus the increased costs, is often being used to discourage serious consideration of authorisation as a viable option. The FSA has no formal definition for a secondary provider, though this is likely to be firms and businesses involved in insurance sales and administration as a secondary activity to their main business. Property managers are an example of such firms.

While the scope of their activity can vary significantly, many will only undertake the more far-reaching regulated activities of assisting in the arrangement process. I believe that secondary providers, through careful planning or partnering with a broker via an agency arrangement, could easily maintain a compliant firm status with minimal additional cost, risk or change to their existing operating practices.

The secondary market is no longer dependent on the support of the principal to continue to provide such services, and the intermediary's ability to limit its risk profile with a concise agency agreement could be the best solution for both parties. While brokers should be aware of the 26-agent limit before ticking the box to make them a network, many will be able to balance the additional costs of an increased regulatory profile against limited additional compliance costs and protection, if not growth, in their secondary income.