Brokers claim they are compliant with the FSA's client money rules, according to a survey by Insurance Times. Yet the FSA says otherwise.

Last week, the FSA reported the findings of two studies on brokers' compliance with the client money rules. The studies found "worrying" levels of non-compliance among the small sample of brokers reviewed.

The FSA is now set to conduct a larger scale review looking at about 200 brokers; not only to determine whether the compliance problems are as a widespread as the pilot studies showed but also to encourage the broking community to raise its game.

The regulator has also published a 40-page guide to the (notoriously complex) client money rules in a bid to help brokers understand what they need to do.

The publication of the FSA's findings coincides with Insurance Times' own survey, in association with Premium Credit, on brokers' experience of the client money rules.

While not as forensic as one assumes the FSA's reviews were, the surveys asked brokers how they rated their understanding of the rules and the extent to which they thought they were compliant.

It also asked for views on the quality of the help and guidance provided by the FSA and trade associations on the client money rules.

About a hundred brokers responded to the survey.

In contrast to the worrying levels of non-compliance discovered by the FSA, brokers responding to Insurance Times' survey were remarkably up-beat about their understanding of the rules and their perceived compliance with them.

Nearly 60% rated their understanding of the rules as good or very good, and more than 90% thought it was at least "okay" (see below).

When the responses were broken down by size of broker, the results were broadly in line with this. The exception was for brokers with a turnover of between £500,000 and £1m, where 45% of respondents said their understanding of the rules was either poor or very poor (see below right).

Looking at the aspects of the client money rules that were difficult to implement in practice, 43% of respondents said the rules on co-mingling caused them problems (see box below right).

Performing the client money calculation and reconciliation were also difficult, with 42% highlighting these areas. Thirty seven per cent said they had difficulty understanding what information had to be put in clients' terms of business agreement.

In contrast, 81% of brokers found selecting the most appropriate trust account easy to do.

The difficult areas highlighted by brokers, tallies with the some of the problem areas found by the FSA in its surveys (see box right).

Despite, the FSA's worries about broker compliance levels, brokers themselves were positive about their performance in this area: 81% said their compliance level was good or very good, and only 5% said it was poor or very poor (see top right).

So how can the FSA's finding be reconciled with Insurance Times' survey? Steve White, regulation and compliance manager at Biba suggests that brokers may not understand the client money rules as well as they think they do.

"The FSA didn't find evidence of people wilfully not complying with the client money rules. But the rules are misunderstood; they are complex and written in legal language."

White points to the FSA's new guide on the client money rules as an opportunity for brokers to improve their understanding and, as a result, their compliance levels.

"Firms need to read and implement the document. Client money is at the top of the FSA's agenda. Sooner or later it will lose patience with firms," he says.

Brokers, however, were less than impressed with the quality of the guidance provided by the FSA on the client money rules. Nearly half (45%) said the regulator's performance was poor or very poor; less than 20% said it was good (see top right).

The survey was conducted before the FSA released its guide to the client money rules, so it remains to be seen whether this changes brokers' views on the quality of the guidance provided.

Trade associations, such as Biba and the IIB, faired better when it came to brokers' views on the quality of the assistance provided on the rules. Twenty five per cent of respondents rated the help as good or very good, while only a third (33%) said it was poor or very poor.

So what conclusions can be drawn from the survey? First, brokers generally think they understand the rules and are mostly compliant with the FSA's requirements.

The reality, however, is somewhat different. As the initial findings from the FSA's own studies discovered, many brokers are not compliant. While the regulator looked at only a small sample of firms (about 40), it would not be surprising if similar issues are found in the larger scale review to be conducted later in the year.

While brokers claim they understand the rules, anecdotal evidence from compliance experts and the FSA's own research indicates this not to be the case. The FSA points out that brokers are generally willing to comply with the rules, although - despite the enthusiasm - they are failing to do this in the regulator's eyes.

Certainly, some of the areas that brokers admit to having difficulty with mirror the problems that the FSA has discovered, such as performing the client money calculation and risk transfer agreements. Brokers should make a particular effort to ensure they really do understand the rules in these areas.

The FSA's new guide to the client money rules should be required reading for all brokers. IT

FSA's findings
The FSA's two studies of how brokers are dealing with the client money rules discovered a range of problems. The most serious issues found were:

  • shortfalls in client money accounts that could not be corrected;
  • brokers failing to do the client money calculation correctly (with some not doing it at all) or on time;
  • failure to observe trust law and potentially risking client money;
  • non-compliance with the terms of risk transfer agreements;
  • failure to account for money held at third parties;
  • a general lack of awareness of the requirement to have client money systems and controls audited; and
  • clients not told about matters affecting their money.
  • But the regulator also found some positive results, including:

  • Some improvements in client money systems and controls in firms since last year +Statutory and non-statutory trust accounts set up correctly;
  • Risk transfer agreements were generally compliant but, where they were not compliant, firms were segregating client money in trust accounts until they had a compliant risk transfer agreement;
  • Capital requirements met;
  • Brokers able to distinguish client money from their own money and correctly record, bank and pay client money on; and,

  • A willingness by most companies to be compliant.