Management Clinic: Reviewing client money arrangements

This is a situation that we are now seeing with client brokers on a regular basis. When regulation came in five years ago, the widely held view was that insurers would not support broking firms if they went under and that there was a deficit in the client or insurance broking account. If you remember back then, insurers often tended to pick up the shortfall on an informal basis if a broker went under and a client could prove that they had paid the premium.

Financial Services Authority regulation created a much more black-and-white situation and, initially, a number of insurers granted what became known as 'risk transfer'; also, in order to satisfy rules, agency agreements had to refer to the co-mingling of client and insurer money and give precedence in the event of failure to client money. This is known as subordination.

Gradually, more and more insurers have granted risk transfer and it is fair to say that many brokers are now in a situation whereby all their insurance business is placed with insurers on that basis.

Yet care must be taken to check on an insurer-by-insurer basis before taking any action. You must also review any arrangements that you have in place in which you deal as part of a chain to ensure that any risk transfer offered by the insurer cascades to you. It is vital to ensure that you have such confirmation in writing from the cascading broker.

You also need to look at any situations where you are offering a similar facility to brokers that use your contracts as an access point to any particular insurer. Again, if you grant this, ensure that it is covered in your terms of business arrangement or wholesale agreement.

Keep a carefully dated, minuted note of your findings before making the decision that the permission to hold client money is no longer required.

The process to dispense with the holding money permission is relatively straightforward and I am sure you will be pleased to hear that there is no fee payable to the Financial Services Authority for reducing permissions.

If you are able to go down that route then you will be able to dispense with the monthly client money reconciliation, though make sure that these are up to date to the point that you revoke the permission.

You will also be able to dispense with the formal annual audit of client money, so there will be a financial saving there.

Furthermore, you can reduce the amount of capital that you are required to hold from 5% to 2.5% of commission and fee turnover.

If this all sounds a bit complex, talk to your compliance consultant, which will be able to walk you through the requirements and assist with the cancellation of the client money permission.

Remember that the FSA does not want firms to have permissions that they do not need, so once you have satisfied yourself that you are not holding client money, there will be no problem in dispensing with the permission.