From January next year, all intermediaries offering insurance on behalf of companies or introducing beneficiaries to insurers will come under the umbrella of the new regulator.
Many charities offer affinity-branded insurance, but law firm DLA is warning that compliance with the new regulatory regime could be too costly for many and they could be forced to stop.
"This process is not just about filling in a form," said Helen Marshall, financial regulation partner at DLA. "Organisations should thoroughly review their businesses and fundraising activities before making any decisions.
For some, ceasing regulated activities may be the most sensible option, as ongoing compliance with the rules may be too costly and time-consuming."
The new rules come into force in January 2005. Charities must register with the FSA by 13 July or stop offering insurance. If they don't they will face fines or possible prosecution.
If they do decide to register they will have to comply with rigorous FSA rules. These include establishing a complaints handling procedure for the sale of products, and ensuring that staff running the business are "fit and proper". This could mean additional training and registration with the Criminal Record Bureau.
"The FSA has identified the charitable sector as vulnerable," said Marshall.
"As the new regulations come into force we have found a widespread lack of awareness and preparedness. Despite the FSA's warnings, many charities have been incorrectly advised by product providers and non-specialist advisers that the new regime does not apply to them."
DLA is warning that even charities which receive donations in return for introducing customers to brokers will fall under the new regulatory regime. "Even if it is an affinity arrangement with an insurance company at arm's length, introducing beneficiaries to them is still a regulated activity," said Marshall.
A spokesman for the FSA said it had established a number of tests to determine whether charities would come under the umbrella of the regulations and were available on its website. "For most it will be very clear-cut, but some 'perimeter issues' will have to be dealt with by the courts."
He said the FSA would be concentrating on "big impact firms" and for smaller charities the regulations would be "less onerous" once they have registered.
Age Concern, which offers insurance through its trading arm, backed the new regulations.