Going Directly Authorised: The Capital and Client Money Questions Brokers Underestimate

When an insurance broker plans to leave a network or start up as a directly authorised firm, most of the attention goes on the business plan, the policies and the Senior Manager applications. Those matter. But the questions that cause the most FCA follow-up for brokers tend to be financial ones: how much capital the firm will hold, how its professional indemnity insurance is structured, and exactly how premiums and claims money will flow. This article looks at those questions and the people a broker needs to answer them well.

Why the FCA Focuses on the Money

The FCA’s threshold conditions require a firm to have appropriate resources, both financial and non-financial, and to be capable of being effectively supervised. For an insurance broker, the most direct risks to customers are financial: client money going missing, a firm failing with premiums unpaid to insurers, or a broker without the resources to meet claims against it. So the FCA reads the financial parts of a broker’s application closely, and inconsistencies between the business plan, projections and policies are a common reason for questions.

Question 1: What Is Your Minimum Capital?

Insurance intermediaries’ capital requirements are set out in MIPRU 4. The minimum depends on whether the firm holds client money and how:

Firms that also carry on other regulated activities, such as home finance mediation or investment business, may face different or additional requirements. The FCA will want to see not just that you meet the minimum on day one, but that your projections show you will keep meeting it with sensible headroom as the business grows and through the first year, when commission income can arrive later than expected.

Question 2: Is Your PII Adequate?

A directly authorised broker must hold professional indemnity insurance meeting the minimum limits in MIPRU 3, with policy terms that meet the FCA’s requirements. The FCA may ask for evidence of cover or a quote, and it will check that the excess is affordable relative to the firm’s capital. Brokers moving from a network sometimes discover that the network’s group cover won’t follow them, and that cover for a new firm costs more than expected. Build the quote into your projections early.

Question 3: Will You Hold Client Money at All?

Under a risk transfer agreement, money received from a client is treated as received by the insurer. It isn’t client money and CASS 5 doesn’t apply to it. Many brokers aim to place as much business as possible on risk transfer terms. But it needs checking insurer by insurer, for claims money as well as premiums. If any part of the business falls outside risk transfer, the firm holds client money and the full regime applies to it. SMF Capital’s guide to CASS 5 for insurance intermediaries explains the rules in detail.

Question 4: Statutory or Non-Statutory Trust?

A statutory trust is simpler and suits most small brokers. A non-statutory trust allows the broker to advance credit to clients or insurers, for example paying a premium before the client has paid, but needs higher capital, a trust deed and auditor confirmation that systems and controls are adequate. Choosing the non-statutory route “to keep options open” is a common and expensive mistake. SMF Capital’s article on client money decisions at a new brokerage walks through the choice.

Question 5: How Will You Run and Evidence the Controls?

If the firm holds client money, the FCA will want to know:

• which banks will hold client accounts and whether acknowledgement letters are in place or ready;
• who will perform the client money calculation and reconciliation, and how often (at least every 25 business days under CASS 5);
• which Senior Manager is responsible for CASS;
• how the broking system will produce the data needed; and
• who will be the CASS auditor.

A broker that can answer these clearly, with named people, will move through the process much faster than one whose application refers to procedures yet to be written.

Question 6: Do the Documents Tell One Story?

This is where many applications slip. The financial projections assume risk transfer; the compliance manual describes a non-statutory trust; the capital calculation uses the statutory trust minimum. Each document may be reasonable on its own, but together they suggest nobody has thought it through. The fix is not more documents, but having the people who will run the firm write and check them together.

The People Behind the Answers

Three roles do most of the work on these questions.

• The compliance officer (SMF16): designs and oversees the client money controls, writes the compliance monitoring plan and makes sure the regulatory story is consistent. For a small broker this is often a part-time or outsourced appointment. See SMF Capital’s guide to the compliance officer role at insurance brokers.
• The finance lead: builds the projections, calculates capital, runs reconciliations and prepares regulatory returns. At a start-up this might be a part-time finance director or an accountant with FCA-regulated clients.
• The directors: who must understand and own the financial position, because the FCA will test their understanding at interview.

Appointing the compliance officer and finance lead before the application is written is the most effective way to avoid inconsistencies. SMF Capital’s 12-month plan for leaving a network sets out when each decision should be made.

When the Network Exit Affects the Numbers

Brokers leaving a network should check how the move affects their income in the first months. Commission on renewals may continue to flow through the network until policies move across, some clients may take longer to transfer than expected, and new insurer agencies can take time to agree. Those timing effects feed directly into the capital calculation and the cash flow forecast, so they should be modelled rather than assumed away.

A Worked Example

Consider a commercial broker with projected first-year income from insurance distribution of £900,000. Under a statutory trust, its minimum capital would be the higher of £10,000 and 2.5% of £900,000, which is £22,500. Under a non-statutory trust it would be the higher of £50,000 and 5%, which is £45,000, so £50,000. If all its insurers grant risk transfer and it holds no client money, the minimum would be the higher of £5,000 and 2.5%, so £22,500 again. The choice of trust therefore more than doubles the capital requirement for this broker, for flexibility it may never use. These figures are illustrative only; firms should take advice on their own position and the detail of MIPRU.

Questions the FCA Commonly Asks Brokers

Every application is different, but brokers going directly authorised often receive questions along these lines:

• Please confirm which insurers have agreed risk transfer, and for which classes of business.
• Please explain how premiums received from clients will flow to insurers, and how long they will be held.
• Please provide a capital calculation showing how the minimum requirement has been determined.
• Please explain how the firm will remain solvent and meet its capital requirement if income in year one is 20% below forecast.
• Please confirm who will perform client money reconciliations and who will review them.
• Please provide evidence of professional indemnity insurance or a quote meeting MIPRU requirements.

Each of these is easier to answer with the right people already in place. A broker whose compliance officer and finance lead have been through a directly authorised application before will often have answered them in the application itself, before the FCA needs to ask.

Stress-Testing the Projections

A sensible business plan includes more than one scenario. The FCA is more comfortable with a broker that has modelled what happens if a major client is lost, if an insurer withdraws an agency or if renewals transfer from the network more slowly than hoped, and shows that capital stays above the minimum in each case. Owners who have only modelled the optimistic case should expect questions.

After Authorisation

The financial questions don’t stop once a broker is authorised. Capital must be maintained and reported, client money controls must be run every month, and the first CASS audit will test whether the controls described in the application are working. Brokers should plan for the first year to be heavier than the steady state, and should keep their compliance officer’s days under review. Regulatory returns through RegData also need to be scheduled and owned.

Final Thoughts

For brokers going directly authorised, the financial questions are as important as the regulatory ones, and they are usually answered best by people who have done it before. Settle your client money model, check your capital and PII, make sure every document tells the same story and appoint experienced people early. SMF Capital’s guide to becoming a directly authorised insurance broker covers the full process. For the rules themselves, see the FCA Handbook’s MIPRU sourcebook and CASS 5.