C-day for retail brokers

Ann Hesketh reports on the complex job ahead for firms

Last month the FSA gave wholesale brokers until the end of August to show compliance with client money rules. Its thematic reviews had found widespread non-compliance within the Lloyd's and London market, and it must now get its house in order.

With wholesalers scrambling into action, the FSA is now set to clamp down on retail brokers that are failing to comply with this complicated area of the rule book, with investigations set to start in September.

An FSA spokesman says: "We have identified the need to look into the retail market but we are not prejudging the outcome, which should be by the end of the year or early next year."

While the FSA will not be drawn on the likely findings of its review, it is recognised that the client money rules are some of the most complex for brokers.

Biba regulation and compliance manager Steve White says: "The rules on handling client money are extremely complex and many brokers find it difficult to understand them."

The FSA says it is willing to help brokers to get on their feet. The spokesman says: "We have rules in place and expect brokers to abide by them. But these are new regulations and we understand that brokers have a lot to get to grips with to make sure they are compliant."

In addition, Biba is organising a number of activities to support brokers, including workshops in England, Scotland and Northern Ireland, and has produced a template letter for brokers to exchange with their banks to help them set up an FSA bank account.

It also produced a compliance manual which sold over 500 copies. "This is the most successful product we have ever launched," says White. "We've never had this kind of penetration with our customers before. It shows how seriously they are looking into this."

Wholesale failures
The FSA's review of the wholesale market's handling of client money found a wide range of failures. These included firms whose client money accounts were in deficit or without the correct trust status, as well as failures to perform regular and timely calculations.

It also found firms whose terms of business agreements (Tobas) were not in line with those of insurers, clients and other brokers. Some Tobas said the broker would retain interest generated from a retail customer's account - without having obtained client permission.

Alex Always, chief executive of Jelf, warns that smaller brokers could struggle with the client money regulations, saying they "may find it difficult to set aside time to [review requirements and ensure procedures are in place] at the same time as looking after their business and clients."

But he adds: "It is essential that we show the highest degree of discipline when dealing with clients. We are in full agreement with the FSA."

Despite the difficulties, Biba said there is enough information out there to help brokers get their heads around the new regulations. "The combination of our compliance manual and workshops gives brokers all the ingredients they need to become compliant. There is no choice; they have to do it," says White.

A key issue for brokers is making sure they fully manage compliance issues when dealing with the Tobas of different clients and insurers.

Nic Hamblin, managing director of John Eke & Partners, says: "We would have preferred it if the FSA had required insurers to have a standard Toba. The more standardised the Tobas, the easier it is for us to standardise and manage the way we handle client money."

He adds: "While most mainstream insurers standardised relatively quickly, many others did not. But recently we have seen insurers, especially in the Lloyd's and London market, standardising their Tobas, which is good."

Hamblin says he is now "pretty confident" he knows exactly what is expected of him. But he adds: "The regulations are intellectually challenging - with some open to so much interpretation that they should be clearer. And some FSA staff are not capable of giving straightforward advice, which has added to the problem."

The compliance exercise may be as complicated for retail as it is for wholesale brokers, depending on the size of their operations and the number of providers they have on board.

Information mismatch
Stephen Pennock, Oval's group compliance officer, says: "The issue is even more complex for acquisitive brokers because each business comes on board with its own agency."

He says: "We are trying to rationalise without affecting individual businesses. We deal with around 100 different providers, which is simply not realistic for all classes of insurance."

Pennock continues: "Some insurers offer risk transfer and other don't, some allow co-mingling to be passed down to the broking chain, and others don't.

"The mismatch of information needs to get to the business unit so it knows how each insurer allows you to deal with client money.

It is only when firms start to get down to the nitty-gritty and tackle this exercise that they realise how complicated it can become."

Despite the rules' complexity and the pressure from the FSA, brokers say they are confident they can deliver.

Pennock says: "This will concentrate everyone's minds and we will come out of it in a much better shape. In a nutshell, we need to collate the information, review it, spot any gaps and work on those." IT