Regulation funds

Q. What capital resources will I need to put aside under Financial Services Authority regulation?

A: Under the Financial Services Authority regulatory regime, an insurance intermediary will be expected to maintain adequate capital resources as part of the adequate resources threshold condition. 'Adequate' will be interpreted not only in terms of amount but also in quality and availability.

Relevant matters in assessing adequate capital are your ability to meet debts as they fall due, historical indications of problems such as time spent in administration, and the steps you have taken to identify and measure any risks of regulatory concern.

The capital rules proposed (the final rules will not be published until March 2004) are at two levels, depending on whether the intermediary handles client monies or not. There is less risk of loss to customers if client monies are not dealt with by the intermediary and, therefore, there is a lower hurdle. This is calculated as the higher of £5000 or 2.5% of annual income from its regulated activity.

Annual income is defined as the amount of all brokerage, fees and commissions and other related income. The FSA's examples of other related income include over-riders and profit shares, but there is no mention of interest income.

Historically, income generated on the cash insurance funds of an insurance intermediary are deemed to arise as part of that activity, so they could well be caught by this definition.

For organisations that handle clients' monies, the hurdle is effectively doubled and is the higher of £10,000 or 5% of annual income from its regulated activity.

A review of your clients and how the monies flow to and from the insurers might be appropriate, therefore, as you could halve your regulatory burden by ensuring that client monies are not handled.

If you handle a limited number of clients' monies, it might be worth looking to share brokerage on these clients with another broker authorised to hold client monies.

Alternatively, it might be worth finding a different market for clients' risks that enables monies to flow directly between the insurer and the client.

You also need to consider the cost of the additional capital that may be required as a result of any interest earned on client monies.