All firms will need to have systems in place to track the passage of client monies to insurers, says Louise Gill

Under the new FSA rules all intermediaries will need to know whether they are regarded by the FSA as being a 'client facing' broker as this could have implications for their detailed compliance requirements. One such implication relates to the credit risk for client monies. A 'client facing' broker is usually the first intermediary in a chain servicing and often collecting client money from a customer. A broker may also be considered 'client facing' if it is the first broker receiving client money from outside the European Economic Area.

Broker chainsLet's assume the 'client facing' broker (broker A) passes client money to broker B who passes it to broker C, who then passes it to the insurer. Under the new FSA rules, broker A will be responsible for the client money until it reaches the insurer, unless broker B or C has risk transfer from that insurer.The rules require broker A to establish procedures to record the amount of client money held in the chain until it has received confirmation that it has reached either the insurer or his agent (such as a broker with risk transfer). These amounts then have to be included in the FSA client money resource calculation, which must be completed at least once every 25 business days. The FSA seems to expect that this confirmation will be provided by broker C, when it has transferred the client money to the insurer, notifying broker B who will in turn notify broker A. It is deemed that as the money passes through the chain then the 'client' changes as well - A is in fact B's client and B is C's client. This impacts on how the funds can be held, in that while broker A may elect to operate a statutory trust, broker B could choose to use a non-statutory trust, as could C, unless broker A says otherwise. This means in essence that broker A could be funding the business of either broker B or C if it does not take steps to control how the funds are held through the chain. Some brokers, however, may be given little choice in the matter, as in order to find a home for their business they may have to give in to pressure from brokers further along the chain. With the first client money resource calculation required to be completed in February 2005, all firms will need to have procedures in place to capture information on the passage of client monies through to insurers. Brokers in a chain will also need to prepare themselves for providing 'client facing' brokers with details on the safe passage of client money through to insurers or brokers with risk transfer.With time quickly running out on an area that cannot simply be rushed in at the end of the year, these risks and their management should be a priority for the majority of firms.

  • Louise Gill is a senior compliance consultant for FSA Solutions