The recent fine of One Call, an insurance broker, serves as a fresh reminder that the FCA’s interest in CASS is not waning. It is a prompt for all with CASS obligations, whether on the insurance or investments front, to assess afresh that current arrangements are capable of meeting the regulator’s high expectations.
One Call Insurance Services Limited has been fined £684,000 by the FCA for failures in the client money sphere. This penalty is accompanied by an even more costly ninety-day restriction on the firm, making the firm unable to charge renewal fees to customers for that period – this will cost the firm an estimated £4.7 million.
One Call has not just been given a slap on the wrist. They are being hit to the tune of £5 million, which is all the more shocking when considered against the £30 million turnover (as at 31 October 2013) cited in the final notice. This isn’t a fine that can be readily absorbed and explained away as the cost of doing business – this is the FCA giving a clear message.
There is always scope for considering the fairness of such fines and some might question this one. As is often the case with CASS, the customers were not harmed. Indeed, the risk to which customers were exposed must surely be news to them. But on the other hand, there are rules and firms have to play by them and it has never been a secret that a CASS fine is usually hefty even where the customers experience no loss. One Call were foolish to find themselves in this place.
Insurance intermediaries have two options when it comes to dealing with the issue of client money. The first is to avoid client money obligations through the use of a risk transfer agreement. The second is to put in place the systems and controls needed for the segregation of any client money held.
One Call’s first problem stemmed from trying and failing to go down the risk transfer route, thus leaving them with unmet CASS obligations. Risk transfer in the CASS sphere is the act of an intermediary passing the risks that come with client money onto the insurer. The insurer becomes responsible for any losses and accordingly, the intermediary, who becomes an agent of the insurer, does not need to segregate the funds. But as One Call discovered, if you take this approach, the terms under which you do business need to be bulletproof. In this case, the FCA found that relevant terms of business did not transfer risk in a way that meant that One Call could cease to segregate the funds.
Furthermore, funds that customers transferred to One Call to cover premiums (which the FCA correctly deemed client money) were not only not segregated, they were also being used by One Call for their own purposes – perhaps the deadliest of all the CASS sins. Failure to recognise money as client money meant that such funds were inadvertently used to cover the firm’s capital requirements and fund payments to directors.
These errors were compounded by the fact that the firm’s auditor had warned them about their treatment of client money.
The rest of us can use the One Call fine as an opportunity to reassess our activities with a view to avoiding the mistakes they made. So, what can we learn from this?
- Staffing: The final notice highlighted that One Call was hampered by a lack of skilled CASS personnel. Indeed, it is apparent from reading the final notice that someone with a good knowledge of CASS 5 could have spotted and rectified these errors sooner.
- Total Capture: All insurance intermediaries should undertake a total capture exercise to ensure that all areas of CASS exposure are identified. This exercise should involve analysis of each business line to determine where CASS obligations arise and how they’re dealt with.
- Terms of Business: If using the risk transfer approach, assemble your terms of business with appropriate care and with the necessary legal advice. It might be expensive to engage a lawyer, but that cost shrinks when considered against the punishment handed out to One Call.
- Product Approval: The FCA called out the lack of appropriate due diligence on new products in the final notice. Part of the approval process for any new products should be a detailed analysis to determine if and how the new product creates a fresh CASS exposure.
- Audit Scrutiny: Auditors play a vital role where CASS compliance is concerned. You should pick an auditor that has real CASS pedigree – this will stem primarily from experience conducting CASS audits at firms of a similar business model to yours. When you have the right auditor, remember that their comments are much more than friendly advice – if they warn you about CASS, take swift action.
- Culture: Ultimately, errors such as those at One Call often stem from a poor compliance culture. Things are missed because compliance is not the priority. It is wise, therefore, to consider compliance as central to the success of a business. Indeed, One Call’s punishment is testament to the fact that a commercial business needs to be a compliant business.
One Call may be a new story but we have seen many of the problems before. If you are concerned that any portion of your CASS operation is falling short of FCA standards or if you just want a second opinion on your approach, CASS expertise at Bovill leaves us well placed to identify problems and to implement solutions that are both commercial and compliant.