The FSA has acted to resolve the confusion over client money rules, says Steve White

BIBA has been receiving an increasing number of compliance-orientated inquiries from its members. While these inquiries cover a wide range of topics, from application form completion to perimeter issues (such as who needs to be authorised), the most popular area has been the FSA's client money rules, and in particular risk transfer.

It is clear from the questions we receive that intermediaries are becoming increasingly confused about the whole risk transfer issue - what is it and when will it occur?

So let us start by considering what risk transfer is. Risk transfer, put very simply, involves two elements:

  • The risk that, when a customer pays a premium to an intermediary, the customer's premium may not reach the insurer
  • The transfer of that risk from the customer to the insurer, so that in the event of the intermediary's inability to pass the premium on, it is the insurer rather than the customer that bears the loss.
  • When will risk transfer occur? Risk transfer takes place when an intermediary receives or handles premium or claims monies as the agent of the insurer, rather than as agent of the customer.

    This might typically happen where the intermediary has the insurer's authority to bind a risk - arguably by writing a motor cover note, or using a hold-cover authority or a delegated authority arrangement.

    Where an intermediary holds money as agent of the insurer (that is, risk transfer applies), the FSA rules require the intermediary to enter into a written agreement with the insurer, stating that the monies are held as its agent and that customers are informed through its terms of business that it is acting in this way.

    So why is risk transfer such an issue? The FSA's client money rules apply only in respect of 'client money' - money that is not subject to risk transfer. The rules detail the two types of account, statutory trust and non-statutory trust, into which intermediaries will have to segregate client money. The rules do not cater for the banking arrangements in respect of risk-transferred money - the implication being that the FSA will allow the insurers and intermediaries to sort this out for themselves.

    The FSA recently issued a guide to its Handbook of Rules and Guidance, which is aimed at smaller intermediaries. Part 3 of the guide (in chapter 2) provides an explanation of the client money rules and Biba has been encouraging its members to download the guide and work through it. It can be viewed on the FSA website at

    In drafting these rules, however, the FSA has recognised that there will be significant costs involved for intermediaries in both

    separately identifying and then banking money that is client money and money that has been risk-transferred. It has decided that intermediaries will be allowed a 12-month transitional period from 14 January 2005 to implement this separation requirement and that during this period intermediaries may, if they wish, 'co-mingle' client money and risk transferred money in the same statutory or non-statutory trust account.

    Furthermore, Sarah Wilson, director of the FSA's high street firms division, announced on stage at the recent Biba conference that the FSA will be re-consulting on the issue of co-mingling. This decision has been made largely in response to representations made by Biba concerning the likely costs and will now give the industry the chance to establish and then present a solution not only to protect customers' interests in the event of an intermediary failure, but also to recognise the position of the insurers.

    The term 'co-mingling' does not yet appear in the dictionary, but over the next few months it is likely to be a term you will be hearing more and more about.

  • Steve White is Biba regulation and compliance manager