The Handbook contains the rules and guidance with which regulated firms must comply. The changes relate mainly to the high level standards and financial safeguards that these firms will need to have in place in the future.
The Treasury has brought general insurance into the scope of FSA regulation in order to implement The Insurance Mediation Directive (IMD), which sets common minimum standards across EU countries for the regulation of the sale and administration of insurance. It had previously announced that mortgage lenders, administrators and intermediaries would be regulated by the FSA.
To implement the Treasury’s decision, the FSA has developed a series of proposals for mortgages and general insurance covering the regulatory framework and appointed representatives. Proposals on fees, the implications for designated professional bodies and reporting requirements will be published in due course. From early in 2004, firms will be able to start applying for authorisation with the mortgage regime being switched on at 31 October 2004 followed by general insurance at 14 January 2005.
The proposals are set out in Consultation Paper 174: 'Prudential and other requirements for mortgage firms and insurance intermediaries.' They include the following financial safeguards for consumers:
• Compulsory professional indemnity insurance (PII) – this is a requirement for insurance intermediaries under the IMD. As PII is a valuable safeguard for both firms and consumers, ensuring valid claims for redress can be met even if a firm cannot afford to do so out of its own resources, the requirement will be extended to mortgage lenders and intermediaries as well.
• Segregated client money - insurance intermediary firms holding client money will be required either to maintain segregated client accounts under a trust, or to transfer risk by arranging for the product provider to assume responsibility for the funds.
• Minimum capital resources requirements for all new firms. The CP introduces capital resources requirements for mortgage and insurance intermediaries. Most types of currently regulated firms, with the exception of investment firms and credit unions doing insurance or mortgage intermediation business, will find their financial resources requirements are unchanged.
• The Financial Services Compensation Scheme – it will be extended to insurance intermediaries so that in the event of insolvency, consumers would receive 100% of the first £2,000 of the claim and 90% of the remainder.
This paper also includes guidance to firms (Annex 3) on whether they are, or will be, subject to FSA regulation for insurance mediation. The FSA has previously consulted on regulating mortgage sales in CP146. The deadline for responses is 13 June. The feedback and a policy statement will be published in the autumn.
