Becoming a Directly Authorised Insurance Broker

Welcome to another episode from SMF Capital. Today, we're looking at how insurance brokers can become directly authorised by the Financial Conduct Authority, the people they need in place, and how to prepare for the application process.

Whether you're establishing a new brokerage or leaving a network after operating as an appointed representative, direct authorisation offers greater independence. But it also means taking responsibility for compliance, governance, financial resources and regulatory reporting.

Read our full guide here:

Becoming a Directly Authorised Insurance Broker

Two routes to authorisation

The first route is setting up a new brokerage. The founders need to establish the business model, regulatory policies, financial arrangements and senior management structure.

The second is leaving an existing network. An appointed representative must replace the support previously provided by its principal, including compliance oversight, file checking, training, complaints handling, financial promotions approval and regulatory reporting.

In both cases, the FCA needs to be satisfied that the firm meets the relevant threshold conditions, including having suitable people, adequate resources and effective systems.

Which senior managers are required?

For most directly authorised insurance brokers, the Senior Managers and Certification Regime is central to the application.

A typical structure includes an SMF1 Chief Executive or SMF3 Executive Director and an SMF16 Compliance Oversight function.

The founder may hold the executive role, while a specialist compliance officer oversees the regulatory framework. At a smaller brokerage, the compliance officer can be fractional, provided there is sufficient time and authority to perform the role effectively.

An SMF17 Money Laundering Reporting Officer may also be required, depending on the firm's activities. General insurance alone is generally outside the Money Laundering Regulations, but firms arranging life or investment-related insurance need to assess their obligations.

Each relevant Senior Manager needs the appropriate application documentation, including a Statement of Responsibilities and evidence of fitness and propriety.

Financial requirements

Insurance brokers must meet the applicable prudential requirements under the FCA's MIPRU rules.

The fixed minimum capital requirement depends partly on whether the firm holds client money:

• No client money: £5,000 fixed minimum.
• Statutory trust: £10,000 fixed minimum.
• Non-statutory trust: £50,000 fixed minimum.

Income-based calculations also apply, and the firm generally needs to meet whichever requirement is higher.

Capital isn't the only consideration. The FCA will also expect realistic financial projections, adequate working capital, suitable professional indemnity insurance and a credible plan for remaining viable.

The current FCA Handbook requirements should always be checked when preparing the application.

Client money: decide early

Some brokers arrange for premiums to be paid directly to insurers or use appropriate risk transfer agreements. Others receive and hold client money themselves.

That decision affects capital requirements, accounting systems, controls and audit obligations under CASS 5.

Where client money is held, the firm needs appropriate accounts, calculations, reconciliations and oversight.

The choice also influences the experience required from the compliance officer and finance team.

For more detail, see SMF Capital's CASS 5 guide.

Preparing the application

Applications are made through FCA Connect. A strong application should explain how the firm will operate and demonstrate that its regulatory arrangements are practical.

Key elements include:

• A regulatory business plan covering customers, products, distribution and risks.
• Senior Manager applications and Statements of Responsibilities.
• Compliance and financial crime policies.
• A compliance monitoring plan.
• Financial projections and capital calculations.
• Evidence of professional indemnity insurance.
• Arrangements for overseeing appointed representatives, where applicable.
• Training and competence arrangements for relevant staff.

Policies should reflect the actual business rather than relying on generic templates. A commercial insurance broker, for example, needs controls suited to its customers, products and distribution model.

Under section 55V of the Financial Services and Markets Act, the FCA has six months to determine a complete application and twelve months for an incomplete one. These are statutory decision periods, not guaranteed approval dates.

Build the team in the right order

First, appoint the compliance officer. An experienced SMF16 can help shape the business plan, policies and monitoring programme before the application is finalised.

Second, establish whether an MLRO is required. This depends on the firm's activities and the Money Laundering Regulations.

Third, arrange finance support. Someone needs to manage capital calculations, financial projections and future regulatory returns.

Fourth, confirm governance. Decide which Senior Managers will hold each function and prepare appropriate Statements of Responsibilities.

Finally, submit a complete application. The directors and proposed Senior Managers should understand the business and be ready to explain how its controls will operate.

Allow several months to prepare before submission. Recruiting an experienced compliance officer early can reduce the risk of gaps emerging late in the process.

Leaving a network

An appointed representative leaving a network needs to plan carefully.

The principal may previously have provided compliance monitoring, file checking, training, complaints handling, financial promotions approval and reporting. The new directly authorised firm must establish its own appropriate arrangements.

Plan the exit early, agree how existing business and complaints will be handled, and identify the compliance officer before giving notice where possible.

Many former ARs use a fractional SMF16 during their first year, reviewing the arrangement as the business grows.

Common mistakes

Problems can arise when firms leave the compliance appointment until late, underestimate capital requirements or submit generic Statements of Responsibilities.

Another mistake is assuming a consultancy contract automatically provides an approved SMF16. The firm needs to identify the individual holding the relevant function and establish clear accountability.

Directors must also understand their own responsibilities rather than relying entirely on an external adviser.

A practical example

Imagine three experienced commercial brokers leaving a large network to establish their own brokerage.

Their initial application names the managing director as compliance officer, despite that director also having a demanding sales role.

A better solution may be a fractional SMF16 with direct insurance broker authorisation experience.

The compliance officer can tailor the Consumer Duty and product governance policies, establish the monitoring programme and clarify whether the business falls within the Money Laundering Regulations.

The firm can then submit an application supported by a more credible governance structure.

How SMF Capital helps

SMF Capital helps insurance brokers identify the senior professionals required for authorisation and ongoing regulatory compliance.

Depending on the firm's needs, this may include fractional, interim and permanent compliance officers, MLROs and other senior regulatory professionals.

We consider the firm's business model, permissions, size and growth plans before identifying suitable candidates.

For a new brokerage, that may mean a fractional SMF16 and part-time finance support. A larger firm may need a broader senior management team.

Every broker recruitment search is overseen by Adrian Lawrence FCA, founder of SMF Capital.

Final thoughts

Direct authorisation creates independence, but it also brings responsibility.

A successful application needs suitable people, adequate financial resources, effective governance and compliance arrangements that work in practice.

The best approach is to plan the management structure early, involve the compliance officer before the application is complete and ensure that every policy reflects the actual business.

Whether you're launching a new brokerage or leaving a network, the right senior appointments can provide a stronger foundation for authorisation and future growth.

For further guidance and recruitment support, visit SMF Capital's guide to becoming a directly authorised insurance broker.