Brokers have had their knuckles rapped for failing to stick to the rules on holding client money. A compliance consultant offers some words of advice
Brokers are under fire when it comes to client money. This is money a broker holds for a client and encompasses a vast array of income streams ranging from premiums to claims money and professional fees.
Earlier this year, the FSA issued a ‘Dear CEO’ letter stating that compliance by brokers with its CASS 5 rulebook for client money was poor. The FSA has since set up a specialist team to monitor the matter, and next year firms that have permission to hold client money could be charged a higher FSA fee.
Published in 2005, CASS 5 protects clients if a firm fails while holding client money or is unable to transfer it. However, the rules are hard to understand and often create more questions than answers.
Undoubtedly, the penalties for non-compliance are severe. In September, the FSA banned former chief executive of Target Underwriting and Professional Insurance Select, David Marriott, for persistent misuse of clients’ money. It stated he had gone far beyond technical breaches of the client money rules and had continued to use client funds while insolvent.
So what are the key issues brokers need to know about client money rules? Here are the top 10:
1 Why are client money rules causing problems?
Brokers remain extremely confused, not only by the FSA’s rules for handling client money, but also by the huge variations contained within insurer terms of business agreements (TOBAs).
2 What do brokers need to know?
Any client accounts operating under CASS 5 must be set up correctly. While non-statutory trusts are allowed for advances in credit to clients and insurers, this arrangement does not permit brokers to take their commission early. Yet some brokers seem to be completely unaware of this and many other basic requirements. It is high time the regulator was perfectly clear when drafting its rules.
3 What do they need to do?
Brokers must observe audit requirements for their client accounts. Some brokers don’t bother or are completely unaware of the requirements. This poses a danger for clients and insurers. The biggest reason for firms ending up in enforcement is a lack of competence and capability. Make sure you are competent and know what you are doing. Don’t assume it is correct until you have checked that it is.
4 Why it this going to be difficult?
At the moment, brokers need incredibly elaborate systems to ensure they comply with everyone, and there is no common wording among insurers. Great pressure should be applied for this to be standardised.
5 What are risk transfer agreements?
According to the FSA, an insurer may agree to let a firm hold money on its behalf under a risk transfer agreement. A written agreement must be in place between the firm and the insurer, stating that premiums – and if the insurer wishes, claims and premium refunds – are held. This ensures the money is protected because the insurer bears the risk for any losses arising from either the firm failing to transfer the money or from the misappropriation of the client money by the firm.
6 Why are insurers’ TOBAs a concern?
The wordings of these agreements can be contradictory. Insurers imply they are giving brokers the flexibility of a risk transfer, but then pass the risk on to the broker by falling back on the CASS 5 client money rules.
7 How can this be improved?
The ABI should lead on this as, clearly, it is not a competitive issue. If it is unaware of the issues, it must make itself aware and provide a service to its members. The London market has done so collectively, but beyond that the picture is abysmal – brokers have to trawl through TOBAs to be aware of an insurer’s stance. The fact that this situation has been allowed to go on for six years is pretty embarrassing.
8 What do brokers need to watch out for?
Working under a non-statutory trust gives a broker more flexibility. The broker is allowed to use credit balances of other clients in the event of a late payment by a client. But they are not always aware of their right to do this. For example, one of the top five mainstream insurers has imposed additional requirements on brokers’ credit control, preventing them using non-statutory trust client money credit balances where brokers have failed to get settlement from the client. This means brokers have to use their own money to make the payment. This contradicts FSA rules and I don’t think brokers that have signed up to this clause fully understand it.
9 What is the ideal solution?
Some brokers were hoping the next regulator would seek to relax compliance in this area, but this is not going to be the case. It is hoped the regulator replacing the FSA will work closely with all parts of the industry to deliver rules that are clear and easy to follow, while providing robust protection for all.
10 What is your advice to brokers?
Brokers must put pressure on the ABI and individual insurers to adopt a consistent approach to risk transfer wordings within their TOBAs. The rules are complex but there’s plenty of help around from compliance experts and trade bodies such as Biba and the IIB. Don’t simply assume you’re okay – if you do, the consequences could be painful. IT
Branko Bjelobaba is managing director of Branko Ltd