Branko Bjelobaba examines the finer details of Biba's Insurer Trust bank accounts

Biba, without much fanfare, has released final details of the Insurer Trust bank accounts that will enable brokers who handle no client money at all to operate outside the FSA's extremely complex CASS rules. But is this the news we have all been waiting for?

For 18 months now, firms with a permission to hold client money have struggled with the FSA's CASS rules, and while risk transfer may have been given by many insurers to many of their brokers, the risk transfer wording has been inconsistent and buried within insurer terms of business agreements that have grown in size and complexity.

Where risk transfer has been given in one hand it has been taken away by the other, where the insurer has then asked the broker to comply with certain elements of the CASS rules. This behaviour was not the intention when risk transfer was first agreed by the FSA.

Risk transfer is where the insurer bears the risk of the premium not turning up - the customer should be left with no exposure. Insurers should not have been invoking any FSA rules in their risk transfer wordings because those rules protect the handling of client money and risk transfer money is not client money.

The FSA has already found "worrying" levels of failure with these rules in both the wholesale and retail broking sectors and is set to visit 200 firms in September. Earlier this year it even published a 42-page 'guidance' paper on the CASS rules to assist firms' understanding.

Julian Adams, head of wholesale insurance firms at the FSA, said: "We will consider taking enforcement action against any firm, where we see wilful non-compliance or an inability to handle customers' money in line with our requirements."

It has been a serious issue - so does Biba's solution help the poor broker?

A broker can decide to hold no client money at all. This will mean all premiums (and refunds and claims monies, if relevant) are held under a proper risk transfer agreement. These can be held in an 'FSA-badged' client account (statutory or non-statutory trust) if they are then co-mingled with 'real' client money - money that is not held under a proper risk transfer agreement.

Some insurers have already agreed with some brokers that their money can be held outside of the FSA-badged account and the Biba model expands this.

When the FSA decided to allow co-mingling, which is holding of insurer and client money in the same client account, on a permanent basis, its intention was that to co-mingle, a firm would need to hold both client money and risk-transferred monies in the account.

FSA-badged account
However, the way the rules have been written has not closed the door to 'just' risk-transfer (insurer) money only being held in an FSA-badged client account - and the rules were not designed for this eventuality, that is, the protection of insurer monies.

If a broker holds risk-transfer money in a statutory or non-statutory trust account, the following needs to be considered:

  • Where monies are held in accounts set up under FSA client money rules, the intermediary will need to have FSA permission to hold client money
  • All the monies will be subject to the detailed and complex rules as set out in CASS 5
  • The capital adequacy requirements will be based upon holding client money,
    that is, a minimum requirement of £10,000.
  • Where a firm holds only monies held under risk-transfer agreements and has a restriction on its FSA authorisation that prevents it from holding client money, the firm is unable to hold these monies in a FSA-badged client account.

    Biba has been in discussions with the ABI for many months, working on suitable banking arrangements for monies that are exclusively risk transferred and has now arrived at a solution.

    So should a broker decide that it no longer wishes to handle client money and does not wish to retain an FSA-badged client account what does it have to do?

    Firms are now able to set up and use a bank account that resembles the FSA's non-statutory trust account. This can be done in the following way:

    1. An exchange of letters with the firm's bank

    2. You will need the agreement of the insurers which have granted risk transfer to the firm. You wil need to send a copy of the deed to them individually for their agreement

    3. Finally, you ill need to set up and sign off the trust deed.

    Step 1 is the easiest stage and step 3 in itself should not cause a problem, although there are some key issues with the new trust deed (see below). What causes some surprise is the second requirement, as it was hoped insurers would have welcomed such proposals automatically and with open arms.

    Imagine that every primary broking firm now wishes to operate outside FSA rules, as it will only handle insurer money.

    Let's assume that there are 7,000 firms where insurance is their primary function (there are 18,000 firms that have a general insurance permission at the FSA) and that those firms have an average of, say, 25 insurer agencies.

    Too much paper
    That will mean each firm will need to send a letter to each insurer. That is, write 25 letters. Multiply that then by 7,000 and you have 175,000 letters being sent to insurers and insurers (assuming that they are up to speed on this) will send back some 175,000 letters.

    All of this will use up at least 350,000 pieces of A4 paper, or 700 reams of A4 - a stack that would reach 35 metres in height.

    In addition to the paper cost, this will cost around £80,000 in postage,using second class stamps.

    I would have hoped insurers could have revised their business agreements and then offered two options: insurer trust or FSA-badged client account that co-mingles.

    Once you have a trust account, the firm no longer needs permission to hold client money, assuming that all insurers are in agreement to the above and can rescind this permission.

    Also the firm can then maintain lower capital requirements of £5,000 or 2.5% (whichever is greater) of insurance income.

    Has it been worth the wait? "Yes," is my answer.

    But don't think going down this route means very easy or no compliance requirements for the use of the insurer trust account.

    ' Branko Bjelobaba is the founder and principal of Branko, a general insurance compliance consultancy

    What you can and cannot do with your trust account
    The deed you will execute and agree to places quite onerous conditions.

  • The intermediary will hold a trust account for the benefit of all insurers
  • The account has to be called an Insurance Brokers Insurers' Trust Account
  • Commissions can only be taken in line with the insurer business agreement/agency agreement. This will mean on a received and not earned basis - that is, the client will have to have paid you before you can have your commission - you can't have it until you have been paid and that payment is clear
  • The firm cannot use monies in the account to make advances to itself
  • The firm will provide access to any insurer (or its auditor) for checks to take place
  • The firm will need to have annual auditor sign-off that the account is being operated correctly, as is the case for most firms that operate under CASS rules
  • At least once every 25 working days a formal reconciliation will be needed (just like the CASS check)
  • Any interest earned belongs to the firm and not insurers
  • Investment of insurer monies can only be done in line with FSA CASS-designated investments definitions and the firm is responsible for any shortfall should there be one.