Tips on money rules

You may be helped in your review or it may be brought forward if you are one of the 200 firms selected by the Financial Services Authority for a visit to check on compliance with the money rules The FSA's view is that many brokers have failed to grasp the rules and, if they find this has been wilful, then they have said that they will take action.

Some of the things we have seen, and have worked with firms to put right, range from a failure to exchange letters with the bank to set up the trust account correctly, failure to perform the monthly client money calculation properly - or not at all in one case - and not obtaining informed consent from clients when a non-statutory trust has been adopted.

Also, in terms of the operation of trust accounts, the FSA has expressed concern that incorrect operation and wrongly mixing firms' money with client money could lead to a problem in the event of the insolvency of a firm. If firms' money 'polluted' the client money trust account, a receiver could argue that the trust rules had been broken, and what was perceived as client money could be used to meet other debts of a firm. It is easy to see why the FSA would be very concerned about this type of breach, as it breaks one of their four fundamental principles, protecting the public.

I could write pages on risk transfer, co-mingling and some of the misunderstandings there. Suffice to say that from the evidence we have seen, some firms have read a bit of the rules, and adopted their practices without fully understanding the whole scenario. Confirmation of the maxim that a little knowledge is a dangerous thing!

Other areas where firms have come unstuck are the management of premiums collected by their agents, and also failure to clarify the position over risk transfer with premiums paid to wholesale brokers in an upwards chain.

There is a lot more to be considered, but I hope that these points set you thinking. If you are in any doubt, I would recommend that you seek external professional help, preferably before you make it on to the visit list.

You can also refer to the guide that the FSA issued in May 2006 on money rules. You can download it from the FSA website.

Always remember that the FSA will look more favourably on a firm that has identified, where appropriate reported, and is working to rectify breaches. Remember, FSA principle 11 is 'to deal in an open and co-operative way with the regulator'.

- Ian Ritchie, Managing director, RW Associates.