Broker systems will suffer if co-mingling is not allowed, says Grant Ellis
The IMD requires that firms segregate clients' money from other creditors' money, and the FSA is charged with ensuring that their rules reflect this.So far so good, but in what I believe to be an overzealous attempt to comply they are in danger of placing the whole of the UK insurance industry at a huge commercial disadvantage, while at the same time damaging consumer protection. Not really in keeping with their stated aim of "proportionate consumer protection" is it? Let me try and explain why.It would seem that it's all down to the definition of what exactly is client money and what's not. The FSA believes that insurer money is not client money, and cannot therefore co-mingle with it. They also believe that if an insurer allows a broker to grant cover on their behalf then they are acting as the insurer's agent when receiving monies, and not the clients.So let's just think about the practical implications of this for a moment. If monies are client monies, then they must be held in a trust account, but if they are not, (i.e. they are insurer monies) then they must be held somewhere else. This leaves such monies open to be used to pay any creditors, even though they could, and indeed should, be earmarked for only paying on to insurers.
Database problemsAlso, nearly all brokers will need to have at least two accounts into which "premiums" must be paid. So how are the existing IT systems going to cope with multiple bank accounts attached to a single database of customers? They won't of course. Balancing of trust accounts, and indeed settlement of accounts to insurers, will be at least doubly complicated.We will face increased bank charges from running a plethora of different accounts; remittances from a single customer covering more than one policy may often have to be split to accommodate the rules, and customers will inevitably be confused due to the differing forms of protection provided, depending on whether their particular policy was written via a "binding authority" or not. And all this is supposed to be in the interests of consumer protection?The FSA say it is disappointed the industry did not raise these issues during the consultation period, but I think that is a little unfair. No one could have anticipated how narrowly it would interpret the requirements of the IMD.Fortunately the FSA has taken the pragmatic step of permitting the co-mingling of client and other monies until January 2006, to allow it time to carry out more due diligence. It will not, however, be minded to change their opinions unless and until the whole industry gets off its collective backside to help provide strong and persuasive arguments against their current thinking. If we all leave it to somebody else it may be just too late.