Client Money – Reminders and Tips

One of the biggest and most important tasks of an insurance broker is handling client money. It is also one of the hottest topics within the FCA and the regulator will have little sympathy for any firm who fails to follow the client money rules.  While a lot of brokers are comfortable with their procedures, recent experiences have suggested that a timely reminder would not be a bad thing.

Some brokers are also unable to show whether or not they have risk transfer, co-mingling or subordination of interest from insurers and wholesalers/MGAs. The Terms of Business Agreements (TOBAs) from those parties should have a section covering these requirements.

Where an insurer grants risk transfer to an intermediary it means that the client money is in fact the insurers’ money as soon as the intermediary receives cleared funds: and money received back from insurers (such as refunds or claims payments) is insurer money until paid to the client.

Risk transfer must be granted in a written agreement. This is usually shown in an Insurer/Wholesaler/MGA TOBA.

If an insurance intermediary wants to co-mingle risk transfer monies with other client monies in either of the two client accounts detailed below, then the insurers must also have agreed in writing that:

• they will allow co-mingling and also that,

• they will subordinate their interest in the money to that of the firm’s other clients.

Brokers should create an insurer list that refers to the latest insurer TOBA. This list will show that risk transfer is granted as well as co-mingling and subordination of interest. It will also usually show what other conditions apply i.e. credit period, when commission can be taken etc.

The FCA will expect to see such a list in the event of any enquiry.

Basically, there are two ways that brokers can collect and distribute monies collected from client:

• If a broker decides that they do not want to handle client money, then they can set up an ‘insurer or risk transfer non-statutory trust account’. In this case, their permissions will not include being able to control and handle client money, or

• The broker can apply for client money permissions from the FCA and, if granted, they can set up a statutory trust or non-statutory trust client money account.

Whichever route you choose, there are a set of very strict rules that need to be followed.

Insurer Trust Account (Risk Transfer Funds)

• This is a separate trust fund that is set up with the bank and has its own trust deed. There is a standard industry deed that will need to be used.

• All monies contained in the fund are for the insurers concerned.

• Money paid by one client may be used to pay another client’s premium.

• A monthly insurer money calculation has to be made.

• An auditor’s confirmation may need to be obtained annually to confirm that the account is being operated in accordance with the deed.

• All insurers that grant risk transfer have the right to ask for an account audit, this will normally be in their TOBA.

• Only risk transfer money may be paid into this account and the insurers must have agreed to co-mingle their monies with monies from other insurers.

• If an insurer does not agree, then you must set up a separate account for the benefit of that insurer only.

A Client Statutory Trust (There is NO trust deed document as it is a statute)

• This is a separate trust that is governed by statute, the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012. The trust rules are contained in the FCA Handbook.

• All monies contained in the fund are firstly for clients and then for insurers that have granted risk transfer.

• Money paid in by a client can only be used for that client’s premium.

• A monthly client money calculation has to be made and this is a breach of the FCA rules if it is not.

• Client money can be paid into this account together with risk transfer monies providing that the insurer concerned has agreed to co-mingling and subordination of interest.

• Firms that hold client money in a statutory trust account and the balance on that account has exceeded £30,000 in the financial year will need to have a Client Money Audit each year, called a Client Asset Report. The audit checks that the systems and controls are in place and have been complied with to satisfy CASS 5.

• If you pay your risk transfer money into this type of account, then those funds become client money and if required audited as such. The mere fact of holding risk transfer money in a client account creates the client money environment.

A Client Non-Statutory Trust

• This is a separate trust fund that is set up with the bank and has its own trust deed. There is again a standard industry trust wording that can be used.

• All monies contained in the fund are firstly for clients and then for insurers that have granted risk transfer.

• Money paid by one client may be used to pay another client’s premium, so premiums must have been received as cleared funds before an insurer is paid and likewise return premiums cannot be allowed until the money is received as cleared funds from the insurer.

• A monthly client money calculation has to be made and this is a breach of the FCA rules if it is not.

• A FCA Client Asset report must be obtained from a qualified auditor annually, irrespective of how much or little is held in the account. Failure to do so will be a breach of CASS Rules.

• Client money can be paid into this account together with risk transfer monies providing that the insurer concerned has agreed to co-mingling and subordination of interest.

• If you pay your risk transfer money into this type of account, then those funds become client money and if required audited as such. The mere fact of holding risk transfer money in a client account creates the client money environment.

One of the main reasons that some brokers ‘fall down’ on their handling of client money, is their failure to carry out a ‘client money calculation’ every 25 working days. This should then be followed, within 10 working days, by a bank reconciliation. Where discrepancies occur that can be explained, then an adjustment in or out would be necessary. If there is any discrepancy between the figures, that cannot be explained, then the higher figure should apply and any funds required transferred in.

This is by no means a comprehensive guide to client money - more of a reminder of how important it is for you to get it right.

You can view the CASS handbook for further information.