Insurers will call the shots in FSA's ruling on co-mingling, says Michael Faulkner
The uncertainty over the handling of client money has finally come to a head. Insurers have come out in favour of maintaining the status quo with a unanimous decision to accept credit risk transfer, at least in principle.
The FSA has listened to the arguments of the insurance industry and allowed the co-mingling of client and insurer (risk transfer) monies.
On the surface, all this appears to be good news for brokers, but scratch the veneer and the reality could prove to be somewhat different.
A co-mingled world may be nearly as troublesome as one in which client and insurer monies must be held in separate trust accounts - a situation that brokers were trying to avoid.
The first problem is that co-mingling is discretionary. Insurers can choose whether to allow brokers to hold client and insurer money in the same accounts, or instead specify alternative means of holding insurer money.
While a number of insurers, such as Royal & SunAlliance and Norwich Union, have declared that they are to allow brokers to co-mingle, others have yet to set out the stall. The word from the ABI is that some insurers are considering not allowing brokers to co-mingle and will require brokers to maintain a separate trust account for insurer monies.
If this proves to be the case, it would place a significant administrative and cost burden on brokers. They would need to hold a number of trust accounts, and be able to identify and separate client money from insurer money for insurers that do not allow co-mingling. The situation would be no better than the state of affairs that co-mingling was designed to avoid.
To make matters worse, it is also at insurers' discretion to specify the type of trust account in which brokers must hold co-mingled money. This will not be a problem if the insurer is happy for brokers to use a simple statutory trust account; but not all insurers are taking that route. Norwich Union, for instance, has specified that brokers must use a non-statutory trust account for co-mingled monies.
It must be remembered that the FSA places a minimum capital adequacy requirement of £50,000 on brokers who wish to use such an account - much tougher than that required for a statutory trust account. How many smaller brokers will have the funds to set up an account of this type? Not many, I would suggest.
Co-mingling is, in theory, a helpful tool for brokers in their efforts to ease the burden of regulation. But if they are unable to use it, then it is of no worth.
The industry has worked hard to persuade the FSA to re-consult on the handling of client money. Its good work should not be allowed to go to waste.