FSA client money shake-up will cause brokers pain

The FSA’s planned shake-up of client money rules will cost insurance intermediaries more money and take up more of their time, according to accountancy and insurance consultancy firm Moore Stephens.

The FSA plans to tighten brokers’ client money account audits and ban conditional risk transfer, according to the regulator’s consultation paper, Review of the client money rules for insurance intermediaries. The paper is designed to simplify and improve the current client money rules, protect consumers and reduce financial crime.

Moore Stephens partner Stuart Markley said the FSA has “never been entirely comfortable” with how intermediaries hold client money, and it believes insurance brokers have a poor understanding of the rules.

He added: “This is borne out by the results of FSA thematic compliance reviews, which show evidence of poor compliance practices and widespread record-keeping errors involving missing or incomplete documentation. This puts at risk the objective of protection in the event of failure.”

The FSA suggested that brokers carry out client money calculations more frequently than the current rota of one calculation every 25 days.

Markley said: “This will be of concern to firms with limited IT resource or man-hours.”

The regulator has also proposed that time limits are put on the credit extended by brokers to clients or insurers, and that the money must be replaced after these limits run out.

Markley said this would force brokers to look more closely at their credit arrangements. He added: “Even though brokers may already have systems in place to deal with this, these would have to be updated to ensure that no credit provided breached the rules.”

Another FSA suggestion is for brokers to reconcile their client money with their bank accounts two days after a client money calculation, rather than the 10 days allowed at the moment.

Markey said: “Again, this has potential to cause concern for those brokers with limited resources.

“The changes proposed by the FSA are sure to stir some debate and bring about some concern, not least because they could result in further time and expense being spent on client money obligations, with additional checks and controls being put in place. If brokers and other intermediaries fail to respond to the FSA by the due date, they will lose an important opportunity to state their case.”

The consultation closes on 30 November.