Regulator threatens stringent measures if inconsistencies and accountability do not improve

Brokers face tougher regulation over the handling of clients’ money and assets after the FSA raised a number of concerns with chief executives.

The FSA sent a letter and report to chief executives of 1,000 medium to large insurance brokers and investment firms that hold money or assets on behalf of clients. Some smaller firms were also notified.

In the letter, the FSA revealed fears over the way some brokers handled cash after it carried out visits and threatened firms with regulatory action if they did not improve.

It follows a similar FSA letter posted to chief executives in March 2009, which explained companies’ obligations to protect clients’ money and assets, and set out the regulator’s intention to conduct further visits to firms over the course of the year.

One of the FSA’s biggest concerns identified in its report centered on inconsistencies between terms of business arrangements (TOBAs) and client money calculations. The FSA said the quality of TOBAs was “variable” and insurance TOBAs were “not always consistent with how client money calculations were performed, leading to over or under segregation of client money”. In addition, there were concerns that a number of insurance TOBAs were signed by people without the authority to commit the insurer.

Other areas of poor practice include unclear allocation of duties by senior management and a lack of senior-level responsibility and accountability for client money processes.

The FSA said it intends to reintroduce client money reporting for investment firms as it seeks to gather more robust information. A similar decision for brokers would involve further consultation.

“It is simply unacceptable that firms are not ensuring that consumers get the appropriate protection,” managing director of risk Sally Dewar said, adding that follow-up visits would be made later this year.

The FSA said it has already taken measures against a number of the firms that it visited, including referring two firms to enforcement, freezing a company’s assets, and enforcing a ban on taking on new business.