Client Money and Client Money Audits – An Auditor’s View

John King, a former FCA Insurance Supervisor who works with UKGI Group in an advisory capacity, recently attended a client money webinar held by the Institute of Chartered Accountants of England and Wales (ICAEW).  John shared the key messages from the webinar and his own insights on the issues arising out of client money audits.

Although the webinar was mainly aimed at auditors, there were some useful points and reminders from the FCA and from John Needham of PKF, as well as from Deloitte on risk transfer and Terms of Business Agreement (TOBA) issues.

Whilst this is a specialist area, it is important that insurance intermediaries have at least a working knowledge of client money, given the potential risks to a firm of getting client money wrong (or even, for those firms that think client money is nothing to do with them, getting risk transfer wrong).

Ruby Bhavra, a Manager at the FCA, said that the FCA receives some three thousand client money audit reports a year (which is likely to be across the whole CASS population rather than just insurance intermediaries), which it reviews and triages. Given how many it sees, the FCA can assess the quality of the audit and auditor. Remember, though, that the FCA will typically not be sent a ‘clean’ audit report for an insurance intermediary – so the FCA may have no feel for the percentage of audits that are ‘clean’ (as opposed to ‘qualified’ or ‘adverse’).

The current CASS 5 landscape (the chapter of the Client Assets Sourcebook that relates to insurance distribution), for the FCA, includes the following:

FCA strategy


·         Reducing and preventing serious harm

·         The role of CASS audits

Common areas of non-compliance


·         Firms understanding the applicability of CASS rules

·         Credit writebacks

·         Client money calculations (CMCs)

Other areas


·         The CASS 5 audit exemption

·         Firms nearing failure

John Needham, Partner, Financial Services at PKF, said that he would be very suspicious of a ‘clean. client money audit report, and suspected that the auditors could not have carried out the audit properly.  He said that only 1 of 130 of PKF’s reports was clean – so less than 1%.  Previously, UKGI Group were aware that PKF believed that only 4% of client money audits we ‘clean’ – so the position appears to have worsened.

PKF’s ‘top-ten findings’ in client money audits are:

  • Inappropriate ‘clean’ audit opinions
  • Errors in the client money reconciliation
  • Weak TOBA register and consistency with TOBAs
  • Misunderstanding the importance of trust status, and the implications on moving money out of the trust (e.g., credit writebacks, closing trust accounts or variation of permissions)
  • A lack of or a poor CASS 5 risk control matrix
  • Mid-month transfers not supported by a client money calculation
  • Fee only transactions not withdrawn
  • Funding (so advancing credit / lending) from Statutory Trust and the use of client-by-client reconciliations
  • Handling of monies by Appointed Representatives
  • Bank accounts (confirmation letters and account naming)

Client Money problems often only come out when a firm is acquired, as a result of the enhanced due diligence typically undertaken.  Even in these circumstances, issues can perhaps not be immediate (as seen in the recent AFL Insurance court case)

Although this case was not discussed during the webinar, Ruby Bhavra did say that she expected auditors to test the underlying client records and not just rely on bank statements. John Needham backed this up by saying those involved should understand where all the data is coming from in a client money calculation, and also check the accounting records to see if anything else should be included. (Sometimes, unearned commission is omitted, which then understates the client money requirement, so firms take too much money out of the client account).

Ruby also thought there was misuse, or at least a misunderstanding, of the CASS 5 audit exemption, meaning firms are not having audits carried out when they should be, because they wrongly assume that the ‘£30,000 less in a Statutory Trust account’ amount is a transaction amount rather than a balance at any time in the year. A similar risk is that firms wrongly maintain that they don’t hold client money because of risk transfer, but then they are not compliant with the risk transfer provisions in their TOBAs.  This was touched on by the Deloitte speaker (George Williams, Director in Regional Financial Services) and by John Needham.

Ruby Bhavra also warned auditors (and compliance consultants should take note) to be wary of firms in financial difficulty, as they are more likely to take from the client money account (as in the AFL Insurance case mentioned above). John Needham made the good point that, if a firm is ever in doubt about what it should be doing, it should think back to “this is a trust account”, and think about what that means, and who the money actually belongs to.

In UKGI Group’s experience, we see many ‘clean’ client money audits reported in section C of the RMAR (RMA-C), usually from a local auditor that we have no experience of.  Our experience of supporting clients who have had PKF undertake their CASS audit is that they are very thorough, and we have heard John Needham comment on the low level of clean audits several times in the past.

Part of the problem for many intermediaries is the selection or availability of the auditing firm; they might not have a huge choice depending on where they are located, and sometimes that auditor only has one insurance intermediary to audit out of hundreds of other non-insurance type clients. In that scenario the auditor perhaps doesn’t have the experience of the auditing rules as they relate to CASS 5, and clean audits can appear to be the norm. The knock-on effect is that the insurance intermediary continues to run the accounts in breach of the CASS 5 rules as they are never educated otherwise.

Unfortunately, after almost 20 years of the FCA CASS 5 rules, the general understanding of how firms are supposed to govern and administer their insurance premium accounts remains poor.

If you need any help with client money understanding or issues, including calculations or risk transfer/TOBA provisions issues, don’t hesitate to get in touch.

About the author

A compliance technical expert, Al is UKGI's Senior Technical Resources Consultant providing 'back-room' technical support which includes everything from assisting Consultant colleagues with challenging or unusual queries, to updating UKGI's compliance manual, to writing and delivering training, workshops and webinars.

Al Haughton UKGI

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