Brokers complain that the client money rules are too complex and unnecessary, are they right? Marcus Alcock reports
Of the many weird and wonderful sectors of the FSA’s regulatory bureaucracy, few can have caused more anxiety and frustration than the client money rules.
These relate to the money that a broker receives and holds for its client and, as such, govern a vast array of income streams from premiums to claims money, and even professional fees.
The insurance conduct of business (Icob) rules might be complex, but they pale into insignificance compared to the arcane sophistry of the client money regulations.
As if this were not enough, with most brokers feeling they need a Harvard MBA just to be able to plough through the rules, there comes the added frustration that excessive client money rules are what the market needs least.
After all, the UK is currently suffering one of the worst credit squeezes in modern financial history, as a result of the fall-out from the US-led sub prime mortgage fiasco and the panic this has created among lending institutions and the money markets in general.
Surely, brokers would argue, the FSA can revisit its onerous regulatory requirements in relation to this issue given the difficult credit situation that many businesses now find themselves in?
For some people the situation is clear: the client money rules just aren’t working. Ian Richens, director of affinity and services at the Bollington Group, says: “The FSA has made it so complex that you almost need to be an accountant to understand the way they’ve written the rules. It could easily have made the client money rules a lot simpler. They’re really far too complicated.”
Besides, he adds, most decent brokers will have had their own detailed and sensible procedures in place long before the FSA came along with its current rules.
“Most brokers of any size and reputation have always run a tight ship anyway,” he says. “The really stupid thing is that if you have a rogue broker, then he’s going to take the money and run anyway, regardless of what the regulations say. So it’s the decent brokers that end up suffering.”
This point of view is backed up by a London market broker, who makes the point that his business has spent a lot of time and money making sure it is compliant to the letter on client money regulations.
But this is not necessarily going to be the case with many smaller outfits which, although they may have ticked the right boxes on their forms, may not have the resources to do what the FSA requires on a daily basis.
Not everyone is convinced that client money regulations are causing as much of a headache for brokers as is sometimes made out, however. According to Steve White, Biba regulation and compliance manager, there isn’t that much of a groundswell of opinion against the regulations any more.
“People have done the hard work and now understand what the rules require of them,” he suggests, adding that if businesses are having a problem with the current credit crunch then it will probably be in relation to the holding of insurers’ money, rather than clients’ money.
Still, the fact remains that a number of brokers are quietly furious about the continuing complexity of the regulations. So is there any hope that the FSA which, until now has been resolute over this issue – and continues to demand extensive procedures are followed – will be willing to adopt a more relaxed approach?
Perhaps there is some hope, according to Ian Richens: “Lots of things seem to be changing when it comes to the regulation of brokers – just look at the Icob rules. So where client money is concerned, things will have to change. It really has become far too prescriptive.”
Client money rules at a glance
According to the FSA, client money is money of any currency that a firm receives and holds for its client when carrying out insurance mediation. It can include premiums, claims money and premium refunds â€“ as well as professional fees due from clients
Money received that is held under a risk transfer agreement, or is not connected with insurance mediation, is not client money for the purpose of the FSAâ€™s rules. A firmâ€™s own money is not client money and must not be held in a client bank account, because it can invalidate the trust status of the account
There are two main approaches which firms can take to ensure adequate protection:
1. Transfer the risk from the firm to an insurer.
2. Segregate client money into trust accounts that cannot be used to reimburse other
creditors if a firm fails.
However, firms can do a mix of both (known as co-mingling)
Firms that hold client money are required to hold more capital than those who do not. In addition, higher minimum resource requirements apply to insurance intermediaries that hold client money relating to retail customers in a non-statutory trust client bank account
If a firm wants to co-mingle money held as agent of an insurer with client money held in a statutory or non-statutory trust client bank account, it must have the insurerâ€™s agreement to do so. That agreement must be in writing and must subordinate the interests of the insurer to the interests of the firmâ€™s other clients.