Many firms as they complete their application forms for authorisation reach the question relating to client money and then get stuck. Process of elimination helps here, as you can quickly dispense with two of the options to tick if you want to handle client money and then you are left with four: risk transfer statutory trust non-statutory trust a combination of the above
Since many firms will receive cash while acting as agent for the insurers, those firms electing to fill in the form electronically will find that they have to tick the last box simply because the system will not let you tick more than one box. However, that is not going to you help you much when it comes to understanding what you actually need. So let's take a look at each of these in turn.
Risk transfer Under the final FSA rules that were passed as a legal instrument in January this year, you will automatically have risk transfer in place . This is because you either signed a new agency agreement with your insurer to this effect or you are undertaking regulated activities like issuing cover notes, binding business or accepting clients directly on behalf of an insurer. Any money that you collect as a result of the completion of a transaction where you have disclosed that you are the agent of the insurer, taking place after January 2005, will not be client money. The FSA has, following intense lobbying from both the broking and insurer markets, permitted what they call transitional rules to be applied to these funds for up to one year. You may of course elect to operate the actual requirements earlier if you want, and since some more modern IT systems can cope with these requirements now with workarounds you may wish to take advice on what will be easier for your own firms. As to practical implementation, our advice is to wait and see until May on this one, because if there are to be changes to the current thinking then there must be action before then. Watch out for any press coverage and be prepared to respond quickly if you don't like what is proposed. Statutory trust
A statutory trust account has been designed to give the customer the maximum protection possible relating to cash collected on their behalf. The mechanics of it work in a similar way to the IBA accounts system at the moment, except you can't keep non-client money in the account and you cannot pay out money on behalf of one client without first having received it either directly from the client, from a finance company (because you have arranged premium funding), or even from the firm itself because you have made a conscious decision to fund it on behalf of your client. When you are operating this type of account, all the money you receive from your client is paid into this account and there are strict reconciliation rules so that you make sure you take things out at the right times. Commission that you have received as a result of arranging the insurance must be removed from the account in line with your existing accounting policies for income recognition but also in line with what you have outlined to your client in your terms of business. This is a very valuable concession under the new rules that many firms have yet to take full appreciation for in their budgets and financial forecasts into 2005. Because of the maximum protection provided, using this form of account will actually be advantageous for the smaller broker who may be concerned about the higher capital requirements, and equally for those who do not have modern IT systems that can cope with the need to calculate notional interest on funds. The FSA in its consultation papers also expressed a view that using such accounts would reduce its view of your regulatory risk, and that they expected many firms would actually use this type of account for managing client money. Our experience has shown that for firms whose solvency margin is already in excess of the minimum £50,000 required for a non-statutory trust to be operated, the decision of which to operate seems more confusing. It is well worth remembering back to the failure of the Independent, when commercial customers actually lost out more than retail customers because of the lack of available compensation schemes. Firms making their choice between statutory and non-statutory in such circumstances may well be advised to consider that consumers are eventually going to be made aware both by the FSA and, I suspect, by other brokers operating statutory trusts, that a client's money is better protected if the broker uses this type of account than any other for retaining client money. Ironically, such protection will therefore be something that will appeal more to the larger commercial client who has no recourse to the compensation schemes than the retail customer. Smaller commercial brokers will in my view have little option but to operate a statutory trust or expect to be able to reflect the additional risk with a suitable price or service differential. In the second part of this article, I will look at the non-statutory trust. Alex Peterkin is a director of the RWA Group. Email firstname.lastname@example.org