The final rules in PS174 raise some important issues for brokers when dealing with client money. First, there appears to be an inconsistency between the FSA and the Inland Revenue on the treatment of commission which could leave brokers out of pocket.
The PS174 proposals require brokers to operate on a "received basis" rather than an "earned or accruals basis", with the effect that commission cannot be removed until the insurers have been paid and commission has been confirmed.
The Inland Revenue, however, has made it clear that accounts should be on an "accruals basis" in line with virtually all other businesses. The logic behind this is that sales invoices are raised only when a contract has been entered into between policyholder, insurer and intermediary. This distinction is potentially problematic.
Take the situation of a broker which has received instructions from a client and raised an invoice just before year-end. That broker would have to account for the money and pay tax on it during the financial year when the client is invoiced. No problem if the client pays during that period. But what if it doesn't?
Under the FSA rules no money can be taken until the client has paid, forcing the broker to fund it himself.
The inconsistency operates unfairly against brokers. I hope the FSA will clarify the matter and give brokers some flexibility.
A further problem relates to account reconciliation. The FSA requires reconciliation once every 25 days, but many smaller brokers will find this difficult to achieve.
The standard systems currently available are not accountant friendly and do not provide proper reconciliation, so brokers will not know how much relates to each insurer. The major brokers have bespoke systems, but smaller brokers do not have the time and resources to develop them.
Without the systems to provide proper reconciliation it will be almost impossible to comply strictly with the FSA's requirements.
Brokers will be hide-bound by their IT. Hopefully the software providers will incorporate this facility into future releases and upgrades.