To control or not to control: that is the question…

When it comes to client money; to control or not to control: that is the question… (with profuse apologies to Mr W. Shakespeare!).

Many firms have the permission to ‘hold and control’ client money, but the question is, do they need both hold and control?

For those firms with this permission, we will typically see the following on the Financial Services Register – “This firm may hold and/or control client money but only for its insurance mediation activities.”

So, what is the difference?

Holding client money is quite straightforward and common. It is receiving premiums from the client, refunds, or claims payments from the insurer, and holding in a separate designated trust account.

Controlling client money is less common, although it is equally as common for firms to have this permission. It arises primarily from those heady days in 2004 when we were all completing our FSA applications. I know that when I did the application for the insurance broking firm I worked for, I just ticked both Hold and Control boxes just in case.

What does controlling client money mean?

Let’s look at what the FSA (yes, it is still called that!) Client Money Guide tells us (pg.17):

A firm must have written authority from its client to control that client’s assets or liabilities.
Controlling a client’s assets or liabilities would include:

  • Having access to the client’s bank or building society account including taking direct debits in the firm’s favour; and

  • Holding a client’s credit card details including debiting money from the credit card.

Firms that have written authority from their client should:

  • Have an up-to-date list of clients who have given authority with details of any special conditions placed by the client (for example, must not debit more than £x from credit card in any six month period) or the firm’s management (for example, client B’s bank account must not be debited until the Managing Director has approved it);

  • Record all transactions entered into using the client’s authority; and

  • Have appropriate internal controls to ensure that:

    • the client’s money is controlled according to the written agreement and any special
      conditions set by the client or the firm;

    • instructions are given and received according to the written agreement; and

    • where a firm holds a client’s passbook or similar documents, it safeguards against loss, unauthorised destruction, theft, fraud or misuse and it keeps a record of what it holds

Insurance brokers rarely have direct access to a client’s bank account and many firms will not hold credit card details, other than what is stored on the back-office systems; these are very secure, and usually, only the last four digits are only ever visible. To be clear, we refer to holding credit cards openly on a client file when we talk about control.

Therefore, we can see that controlling client money may not be an issue for many firms.

We could then recommend that firms that do not control should seek to vary their permissions. If you are varying your permissions for other reasons, then you could ‘tidy up’ your client money permissions at the same time.

Of course, we still see firms who do not hold client money (because all the money that is received from clients for onward transmission to the insurer is subject to a verifiably written risk transfer agreement with each of their insurers and wholesalers); yet they still have client money permissions. So why do you need these permissions? We have covered this matter in previous Insight articles, but should you wish to discuss any aspect of this please speak to your RWA Regional Business Manager.

About the author

Terence is the Compliance Director at RWA. He has over 35 years' experience in the Financial Services environment, covering general insurance, investments and mortgages. Before joining RWA, Terence worked for a large PLC insurance brokerage in Manchester, overseeing some 20 acquisitions. He was made a Director of RWA in 2011 and has worked with insurance broking firms of all sizes across the UK. He has a particular interest in Financial Crime and the protecting the insurance broker. Terence is also Executive Chairman of the Association of Professional Compliance Consultants (APCC), the professional body for the compliance consultancy sector.

Terence Clark

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