Credit write-backs - Clarity on accountancy headache

On 17 November, the Financial Services Authority released a guidance paper on credit write-backs based on its handbook and Generally Accepted Accounting Principles for directors.

Credit write-backs: An articulation of the FSA's position is the first guidance from the regulator to address credit write-backs, although they can occur where there are complex transactions with many parties on one contract and many entries on a broker's ledgers.

David Roberts, partner at accountant Littlejohn, said: "Where overpayments are made, it can be difficult to ascertain whose the extra money is. The problem is that brokers often do not have enough information to judge the situation, especially as these problems often arise in acquisitions or changes in technology systems where not all information is moved across. There is a lot of residual credit out there."

An FSA spokesperson told PB that the credit write-back guidance was released due to market demand: "Certain firms have requested a clarification of the position, so we decided that now was the right time to remind firms of their responsibilities in relation to credit write-backs."

Transparent

Roberts agreed that the FSA needed to spell out its position: "The FSA has focused on the regulation of client monies, whereas credit write-backs are primarily an accounting issue. Brokers were often given confusing and sometimes conflicting guidance."

However, Roberts warned that the guidance also brings with it new FSA standards: "The paper sets out clearly what the FSA understands the circumstances, accounting position and responsibilities of directors to be. The regulator has made it clear that the trust law-related sanction is for where directors reviewing ledgers decide in good faith to write credit back that then turns out to be wrong; they then have to put the money back into the client accounts, no matter that the original write-back was in good faith. The FSA will infer there has been a failure of systems where any problems arise, therefore the burden of proof is on the firm."

An FSA spokesperson explained what sanctions it will take against brokers that write back credit incorrectly: "Where a firm has poor systems and controls or has taken inappropriate credit write-backs - for example, it is not able to provide appropriate supporting evidence - then we may consider regulatory action. This could include requiring the firm to commission a Section 166 skilled persons report, which investigates the effectiveness of the firm's systems and controls and the validity of any credit write-backs."

Required

As guidelines, the FSA paper does not lay down any rules. However, Charles Galloway, insurance sector director at Corporate Training Partnerships, highlighted that, alongside standard client-money systems and controls, "firms should also apply a documented procedure for the credit write-back process with such procedure clearly detailing the measures the firm must have and the process to escalate potential credit write-back requests to directors."

The paper explains that the FSA expects brokers to retain records of credit write-backs for three years from the date the record was made. "These records will need to be able to establish if the credit write-back relates to pre or post-regulation transactions and whether or not the commitment relates to wholesale or retail business," noted an FSA spokesperson.

The document advises brokers to consult auditors "as to the appropriateness of any credit write-back in the context of fair presentation of financial statements in line with relevant GAAP" and to seek independent legal opinion.

Roberts believes that the paper is a sign of further clear and consistent guidance to follow. He told PB: "This paper demonstrates that the FSA is moving towards a greater acknowledgement of commercial reality while still realising legal actuality."

WHAT ARE CREDIT WRITE-BACKS?

An FSA spokesperson explains the regulator's definition:

"We understand the term credit write-back to mean an accounting transaction (the reduction or elimination of a creditor balance) that may or may not be followed by a cash transfer out of client money accounts. Where the credit write-back results in a cash transfer, this tends, in the main, to represent the net of overpayment to a broker and unclaimed balances held on behalf of customers, insurers, reinsurers or third parties."