Do you have permissions you don't need? Common questions regarding client money...

Question: A review of our insurer agency arrangements shows that we have risk transfer with all insurers & wholesalers/MGAs that we deal with. Can we cancel our permission to hold client money?

Answer:  This is a situation that we are now seeing with insurance brokers on a regular basis.

At the start, FSA regulation created a black and white situation and initially a number of insurers granted what became known as ‘risk transfer’ and in order to satisfy rules, agency agreements had to refer to the co-mingling of client and insurer money and give precedence in the event of failure to hold client money. This is known as subordination.

Wholesalers and MGAs to a degree followed along.

Gradually more and more insurers granted risk transfer and it is fair to say that many if not all insurance brokers are now in a situation whereby all their insurance business is placed with insurers on that basis. The position with wholesalers/MGAs is more fluid as many still do not cascade risk transfer.

However, care must be taken to check on an insurer by insurer basis, before taking any action. You must also review any arrangements you have in place where you deal as part of a chain to ensure that any risk transfer offered by the insurer is cascaded down to you. It is vital to ensure that you have such confirmation in writing from the cascading broker. You also need to look at any situations if you are offering a similar facility to brokers who use your contracts as an access point to any particular insurer.

Again, if you grant this, ensure it is covered in your TOBA/wholesale agreement.

Keep a careful dated minuted note of your findings before making the decision that the permission to hold client money is no longer required.

The process to dispense with the holding money permission is relatively straight forward and I am sure you will be pleased to hear that there is no fee for reducing permissions. A Variation of Permission application is completed via CONNECT and you will need a letter from your accountant to the effect that you no longer hold any client money.

If you are able to go down that route then you will be able to dispense with some of the day to day issues. But, in reality, much of what you do now, with monthly reconciliations and so on will continue, essentially you will carry on as normal , but in the regulator’s eyes, you will be lower risk as you do not hold client money and this is seen as increasing the protection for the client as once you have received the premium, it is deemed to be in the hands of the insurer, as you act as their agent for premium collection.

You will also be able to dispense with the formal annual audit of client money so there will be a financial saving there.

You will also be able to reduce the amount of capital that you are required to hold from 5% to 2.5% of commission and fee turnover.

If this all sounds a bit complex, talk to your RWA Business Manager who will be able to walk you through the requirements and assist with the cancellation of the client money permission.

Remember that the FCA does not want firms to have permissions that they do not need, so once you have satisfied yourself that you are not holding client money, there will be no problem in dispensing with the permission.

Terence Clark

About the author

Terence 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 served as Compliance Director at RWA from 2011 to 2018 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 previously served as Executive Chairman of the Association of Professional Compliance Consultants (APCC), the professional body for the compliance consultancy sector.

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