UK: New FSA rules on Third Party Processors but narrower VAT exemption for insurance

Last Updated: 28 July 2005
Article by Nick Paul and Peter Mason

On 1st June 2005 new FSA rules came into force regarding firms acting as third party processors ("TPPs") carrying on regulated mortgage activities or insurance mediation activities (in relation to non-investment insurance contracts) or both, for another authorised firm (the "main firm") under an outsourcing agreement.

Under the terms of that outsourcing contract, the TPP acts in the name of the main firm in its dealings with consumers. The consumer is not aware of the existence of the TPP or its involvement in the transaction and at all times thinks it is dealing with the main firm.

On 8th July 2005, HM Revenue and Customs published their proposed change to the UK VAT exemption for insurance. These changes will mean that many insurance related outsourcing arrangements might lose the benefits of the current VAT exemption from 1st January 2006.


FSA regulation of mortgage activities came into force on 31st October 2004 and regulation of general insurance mediation activities came into force on 14th January 2005. Prior to FSA regulation there were no such restrictions on this type of TPP arrangement. However, since FSA regulation, FSA rules required the TPP to disclose to the consumer its existence and involvement in the transaction.

TPPs argued that these disclosure requirements are unduly onerous and disproportionate and that disclosing their involvement may confuse consumers. Whether there is any benefit to the consumer in knowing that they are dealing with a third party is questionable since it is the outsourcing firm that will be responsible for the transaction. TPPs also argued that requiring the TPP to disclose its identity could deter firms from outsourcing.

Previous General Waiver Regime

In recognition of the merit of these arguments the FSA agreed to consult on some changes to the rules that would mean TPPs would not have to disclose their identity. While FSA was consulting it implemented a waiver/modification regime where a firm had to apply to FSA individually for a general rule waiver of the disclosure requirements under ICOB and MCOB. The general rule waiver was due to expire in September 2005.

New rules

After consultation the FSA has now produced the Third Party Processors Instrument 2005, which came into force on 1st June 2005. There is consequently a new Handbook definition of "third party processor". The definition broadly follows the requirements set out in the general waiver, however there are additional conditions, namely that:

  • the main firm (as well as accepting full responsibility for the acts and omissions of the TPP when carrying on the outsourced activities) must pay any redress due to the customer
  • the TPP must undertake to comply fully with the main firm in relation to any complaints arising from the TPP's performance of the outsourced activities, even if the complaint is made after the TPP has ceased to carry on any outsourced activities for the main firm.

The exemption to the disclosure requirements in ICOB and MCOB are now available to all those authorised firms who fall under the definition of TPP in the Handbook Glossary. It is no longer necessary to apply to FSA for a general rule waiver.

Consequences of the new rules

Choice to comply- a firm cannot represent itself to consumers as the main firm on some occasions and as itself on other, it must be consistent. Should a firm choose to disclose its identity to customers rather than that of the main firm, it would not fall under the definition of TPP.

Responsibility for acts or omissions of TPP - the main firm has responsibility for the acts and omissions of the TPP and so should have such a provision in the outsourcing agreement. As both the main firm and the TPP are authorised firms, FSA may hold the TPP as well as the main firm responsible for breach of Handbook requirements.

Sub-outsourcing - under the definition of TPP, a TPP may sub- outsource some or all of the activities covered in the outsourcing agreement to authorised third parties where these third parties are identified by name.

Under this outsourcing agreement, the main firm must accept full responsibility for the acts and omissions of that third party when carrying on the activities that are outsourced to it by the TPP.

VAT implications

The proposed changes to restrict the UK VAT exemption to insurance following the European Court of Justice decision in the Arthur Andersen case (Case no. C-472/03) were considered at a recent CMS Cameron McKenna breakfast briefing. These changes may have an adverse impact on those seeking to operate under the new FSA rules.

Please click on next page link below for details of the recent breakfast briefing:

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 27/07/2005.

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This article is part of a series: Click Insurance business - will your company suffer when the VAT exemption changes in 2006? for the next article.
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