Comingling of client money has been clarified, but insurers still have doubts Steve White explains.

So the FSA has at long last published its final rules on the handling of client money.

A process that started in March 2003 with the publication of the consultation paper CP174 has reached its conclusion and both insurers and intermediaries can now move forward with some certainty.

This process has forced insurers and intermediaries alike to look again at several fundamental issues, such as what is client money, when does 'risk transfer' actually occur and how best should insurance monies be handled.

Insurers in particular have had to work through a further set of questions.

These have involved:

- Whether to accept risk transfer other than where it occurs by the actions of the intermediary (for example, by binding the insurer)

- Whether or not to allow risk transfer down the distribution chain and if so under what circumstances

- Whether to allow the co-mingling of their risk transferred monies with client money.

Now the dust has finally started to settle, how does the client money landscape look?

Now we have a situation where most insurers are accepting risk transfer in their terms of business agreements (TOBAs) for most of the intermediaries they deal with.

Intermediary opinion on risk transfer has been divided. Some are looking suspiciously at insurers' long-term motives and the potential downside in voluntarily accepting that for part of the sales process they act as agent of the insurer, rather than a customer.

While insurers have shown a surprising appetite for risk transfer, their position in respect of distribution chains remains unclear.

Some insurers have agreed to accept risk transfer down the chain, where the names are known. Others have decided to allow risk transfer only to their intermediary, but there are a significant number of insurers who seem to be still undecided on risk transfer.

The first draft of the client money rules required that client money and risk transferred (insurer) money be banked separately but, recognising the impact of this, a transitional period of 12 months was proposed during which intermediaries would be permitted to 'co-mingle' both types on money in either a statutory or non-statutory trust account.

This decision prompted the intermediary sector (led by Biba) to successfully lobby the FSA to reconsider the decision to only allow the co-mingling of monies for the 12-month period. To its credit, the FSA took on board the weight of opinion presented and announced in July 2004 that it would re-consult on this issue.

The result of this re-consultation has now been announced and intermediaries will be able to co-mingle where insurer TOBAs permit. In these cases, the co-mingled money must be treated as client money in respect of the client assets rules.

Clearly for co-mingling to work, insurers have to consent to this and to the subordination of their interests to the interests of the intermediaries' customers, reflecting both in their TOBAs.

The wide insurer acceptance of risk transfer is, however, creating a problem. Where an intermediary holds no client money at all - such as where all monies received are subject to risk transfer - he is unable to co-mingle (as he has nothing to co-mingle the risk transferred monies with). In these circumstances, the monies cannot be held in either a statutory or non-statutory trust account set up in accordance with FSA rules, as these only apply in respect of client money.

Biba and the ABI are looking to find an acceptable banking solution.

This may involve the establishment of a trust account for those insurers that the intermediary deals with, and the mechanics of creating such an account.