Toba parties

You are right: the Financial Services Authority has done some thematic work, mainly telephone-based, on client money.

As with most areas of regulation, it found a mixture of good and bad practice, in this case roughly two-thirds positive and one-third where some improvement was needed.

Below are some of the key areas for you to check with your compliance consultant or, where relevant, your accountant, to see how your firm measures up.

On risk transfer, the regulator found that a number of firms had such agreements in place with all of their insurers and, as a consequence, did not need permission to hold client money. You say that you have not looked at your procedures since 2005; back then, a number of insurers had not confirmed their stances or have since moved to RT, so this is something that needs checking. You have an up-to-date list of all the insurers with whom you deal, detailing those with whom you trade on a RT-basis, don't you?

Client money reconciliation is another area in which firms are not spot on. In particular, the FSA commented that commission surpluses were not being removed at the 25-day reconciliation date. While you may have been around long enough to remember the days when a surplus in the old clients' account gave grounds for comfort, let me remind you that, today, the account could fail the test of a pure trust account by being polluted by funds that should not be there.

A lack of written procedures for handling client money was another failing of some firms. While the watchdog's rules do not insist on such a document - and you may say that "all my staff are experienced and know what they are doing" - you need to consider emergencies, such as illness and holidays, arriving simultaneously: would it not be helpful if the volunteer stepping into the breach had some guidelines for what they were doing?

Can you honestly say that sufficient numbers of your staff could handle competently, and teach someone else, the correct routines for handling: taking commissions; banking procedures; clients' cash handling; petty cash; office banking reconciliations; credit and debit card procedures; management account production; and payment authority and requisitions?

Having this all documented makes life easier and is also a good exercise in reviewing current procedures, making sure that they would pass muster if challenged.

Another area in which many firms come up short is the annual audit of the client money account. A common misunderstanding is that many firms claim the small firm exemption to a full audit of their financial affairs. Sadly, they (and often their accountants and auditors) fail to appreciate that, irrespective of this election, if they hold more than £30,000 at any one time in a statutory trust account - or if they operate a non-statutory account - then they are obliged to have the client money audit carried out.

One final point on terms of business agreements with insurers: if you co-mingle RT and client money, does your toba in each case allow you to do so? In the run-up to January 2005 and immediately after, there was a rush by insurers to re-issue (or issue) tobas that purported to lay down the rules on co-mingling. Our consultants regularly report that they come across examples in which caveats are placed or the wording is so complicated that there was doubt as to the true intention.

Almost five years on, it might be an idea for you to review your tobas and, where any do not reflect what happens or are impossible to operate, go back to insurers and have them amend the wording. You need to keep on the right side of the regulator on this but it is also good business practice to understand the terms under which your suppliers are prepared to trade with you.

If you are not sure, refer your query to your internal compliance manager or director, or to your external compliance consultancy.