Do brokers REALLY understand client money and risk transfer? Why fined One Call may not be alone

Unwary brokers may be misunderstanding client money rules, putting themselves at risk of fines and restrictions, but it is their responsibility to make sure they follow the rules.

That is the message from compliance experts in the wake of One Call’s client money fine. 

Broker One Call was recently fined £684,000 and had restrictions imposed on it expected to cost £4.6m over 121 days, after then-managing director John Radford inadvertently misspent £17.3m of client money.

Now, compliance consultants have urged brokers to check their terms of business agreements (TOBAs) and make sure that their knowledge of the FCA client money rulebook is up to scratch.

When is money ‘client money’?

Depending on TOBAs with individual insurers, when brokers receive money from clients it either falls under client money rules, which means they will be responsible for it until it passes to the insurer, or risk transfer.

Under risk transfer, the insurer takes responsibility for the money even when it is in a broker’s possession.

Risk transfer agreements are not regulated by the FCA but are instead a commercial agreement that brokers and insurers are expected to honour.

“Some insurers are very, very vague as to what they mean by risk transfer,” explains Branko compliance consultant Branko Bjelobaba, “So basically it means the insurer accepts the risk if the client pays you and you don’t pay them. The insurer should then stipulate how that money is to be held. Most insurers specify a generic trust account for the benefit of all insurers.”

A majority of insurers will offer risk transfer.

However, even when a broker is using risk transfer, things can still be confusing, especially when they have agreements with multiple insurers where a minority do not include risk transfer in TOBAs.

The problem with mixing

Things can get especially muddy when a broker is handling client money and risk transfer in the same bank account, and they must be aware that any money in the same account as client money is subject to FCA regulation, no matter what their TOBAs say.

It is up to a broker whether they agree to handle client money or not, but if they do then they must reconcile it at least every 25 days, and have a yearly client money audit.

“I regularly see instances where firms have misunderstood the client money rules and they have breached them through a lack of understanding of what the rules require of them,” says Thistle compliance specialist Rick Double.

One way brokers can counter this confusion is to set up two separate accounts for risk transfer and client money. However, this can be operationally expensive and time-consuming, Double concedes, especially when it comes to keeping track of which premiums are meant to go in which account.

Check your TOBAs

Client money handling mix ups and breaches of TOBAs usually occur “unwittingly”, rather than because a broker is willingly breaking the rules for its own benefit, according to Double.

For example, a broker may take a chunk of commission from the account as soon as it has cleared, despite one insurer’s TOBA stipulating that the broker must wait until the net premium has been paid to the insurer.

“Every TOBA is different,” Double warns brokers. “Every TOBA is differently worded, because it’s a legal team at that insurer that has put it together. So, the wording of the TOBA in relation to client money is driven by the insurance company’s legal team, not by the FCA. But it should make it clear enough whether you have risk transfer.”

Double suggests that brokers need to make sure that they are accountable for client money handling at board level. Even if calculations are carried out by someone else, they should be signed off by a senior executive.

In addition, brokers should keep a spread sheet with a list of all their insurers and TOBAs, so that they don’t get caught out.

Both Bjelobaba and Double stress that it is imperative that firms are aware of client money rules, and the risks they run by not following them.

It is not good enough, says Double, to rely on your external auditors to catch you out. 

One Call’s recent problems should serve as a warning: brokers must take responsibility for understanding their TOBAs and client money rules, or they run the risk of hefty fines.