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A second Dear CEO letter on client money warns general insurance intermediaries to expect swift action if they’re found not to meet FCA standards. The letter, sent to intermediaries in July, follows the Dear CEO letter of September 2020 in which the FCA reminded all firms of the need for robust client money controls.
The six page document: Maintaining adequate client money arrangements – general insurance intermediaries follows the FCA’s financial resilience surveys and follow-up work it did with firms identified as being at risk of failure. The follow-up work included looking at client money controls and led to the FCA identifying common shortcomings.
Importantly, the letter flags that the FCA will continue to assess client money arrangements at general insurance intermediaries. The FCA letter goes further than before in outlining its intention to act where it identifies failures. It details various courses of action that could be taken, including limiting business activities, banning individuals and varying a firm’s permission.
If you haven’t already done so, now is the time to review your CASS compliance arrangements. The letter advises CEOs to discuss its contents with governing bodies. You will need to make sure that the governing body understands the CASS risks the firm has and how those risks are managed. The FCA letter flags that firms can’t outsource compliance but it does urge firms to seek external advice if support is needed in understanding the applicable client money requirements.
Let’s take a look at some of the failings the FCA have highlighted, and how you should address them.
Dear CEO letter to general insurance intermediaries – what you should consider
Client money calculation
This is one of the key areas where firms in all industries have problems. The FCA rules and associated guidance set out in detail how the various components that feed into the client money calculation should be calculated. The letter suggests that many firms are struggling with setting their calculations out in a way that demonstrates compliance. There also appear to be issues with the frequency of the calculation with firms relying on the minimum requirement of every 25 days rather than increasing frequency when appropriate for the business. Another area highlighted is the need to make sure that surpluses and shortfalls are rectified on the day they’re identified in order to ensure that client money is adequately protected.
Suggested action: Consider the process you currently run against the rules in CASS 5.5. If the two aren’t directly aligned, remediation is needed.
The FCA remind firms of the need to carry out a client money calculation before any commissions are withdrawn from the client money account. This process needs to be followed to ensure that the money to be withdrawn is truly available within the client money account and that withdrawing the relevant amount won’t result in a client money deficit. When the client money calculation is carried out, any surplus identified should correspond to the amount due and payable to the firm. If that’s the case, then the commission can be removed from the client money account.
Suggested action: Verify that the withdrawal of commissions is always preceded by a client money calculation (don’t just check that it’s firm policy – check that it actually happens). If this is not the case, promptly change your policy such that one is required prior to such withdrawals.
Client money bank accounts
This is an area where it’s easy to get things right, but a lot of firms still have issues. All client money should be held in a client bank account, separately from the firm’s own money. The client bank account needs to be set up in a way that makes that clear that the money held in it isn’t firm money, including using the words “client bank account” in the name of the account. In addition, every client bank account must have a compliant acknowledgement letter in place that makes clear that the money in the account is held on trust for clients (or as agent in Scotland). Firms need to make sure that they review acknowledgement letters regularly so that they keep them up to date. For example, if the name or address of the firm or bank change, the letters will need to be updated. Similarly, if any of the accounts listed are closed, the letter will need to be updated and an account closure letter obtained from the bank. On the other hand, even if an account isn’t routinely used and has no balance, if it’s a client bank account it will need a compliant acknowledgement letter in place and will need to be included in the client money calculation.
Suggested actions: 1) Map out all sources of client money and verify that each is appropriately segregated; 2) Introduce an annual review of acknowledgement letters that can determine where adjustments are needed.
Segregation of client money
All client money must be segregated in a compliant client bank account. There are only very specific circumstances in which any money that isn’t client money can be held in client bank accounts. Examples include: minimum sums needed to keep the account open; certain mixed remittances; and interest that’s not yet withdrawn by the firm. The firm may also choose to hold its own money in the client bank account if it’s prudent to do so for the protection of client money. When this is done, appropriate policies and controls will be needed so that it’s clear what amount money in the client bank account is held in this way and why.
Suggested action: If unsure, find out if firm money is ever held in the client account. Where this is the case, ensure that each such instance is allowed under the rules in CASS 5.5.
Comingling risk transfer and client money
If holding money as agent of an insurer and planning to co-mingle risk transfer money with client money, firms must have the agreement of the insurer to do so. The express written agreement must provide for the firm to act as agent of the insurer and it must specify when the firm is acting in this capacity. The agreement must set out that any co-mingled money will be client money in line with CASS 5 and the insurer must agree that their interests are subordinate to the interest of the firm’s other clients.
Suggested action: If you co-mingle risk transfer money with client money, consider afresh your agreement with each insurer – ensure that everything required of each such agreement is suitably covered.
Client money audit
A firm with a non-statutory client money account or with money over £30,000 held in a statutory account at any point in the period is required to have a client money audit. It’s essential that the firm carry out due diligence to assess whether the auditor has appropriate experience and expertise to adequately review and test the client money arrangements.
Suggested action: If you haven’t done due diligence on your auditor, pencil in such a review promptly. Verify that those checking your work are indeed experts in the application of CASS for insurance intermediaries.
Using client money for the intended purpose
A key concept that underpins the client money rules is the need to ensure that client money is only used for the purpose intended. All client money remains beneficially owned by the client and mustn’t be used for purposes it’s not meant for. This means that client money should never be used to meet personal or business expenses, even if just on a temporary basis.
Suggested action: Review the payment controls in place over the client bank accounts and determine whether they provide sufficient assurance that client money is only used for the intended purpose.
The letter urges firms to consider the regulated activities being carried out and if client money is not being held, permissions should be varied to remove the client money requirement.
Suggested action: If you’re unsure whether you’re holding client money in the first instance, make it a priority to find out. If you don’t hold it but have the requisite permission, consider internally whether it will ever be in the firm’s interest to hold it. If not, remove the permission.
We can help
Our specialist CASS team at Bovill has a wealth of experience in complying with the rules of the FCA Client Assets Sourcebook. We have worked on all aspects of CASS including carrying out section 166 project work, audit support, remedial projects and CASS training. We won’t offer you a generic service, we’ll work hard to find a solution that fits your business. Get in touch to find out more.