The money trail

The Pane

Andy Cook, Insurance Times

Michael Faulkner, Insurance Times

Bob Screen, Vega

Jonathan Davey, Primary Broker Services (PBS)

David Quick, Ceta

Paul Matthews, Footman James

Richard Welsh, Premium First

Michael Whittle, Walmsleys Commercial

Nigel Gregory, Premium First

Andy Cook:Client money and how it is handled is the topic most misunderstood by brokers. Or, rather, the rules the FSA have laid down to regulate the flow of client money are the least understood. So, Michael, just how big is the problem?

Michael Faulkner: The FSSC/Insurance Times survey shows that less than half of all brokers know the FSA rules on handling client money. This is no surprise. It's a complex area, with residual uncertainty about the operation of the rules and potential gaps are still being filled.

The FSA is quite prescriptive over how client money can be handled, especially around trust funds, rules on reconciliations and when commissions can be taken.

Rules also require brokers to distinguish between client money and insurer money - AXA is doing a lot of work to come up with its own special trust account to handle this particular issue.

Going forward there's still a lot for the brokers and the industry to think about, otherwise the FSA will start clamping down very heavily on people who don't follow the rules.

The FSA will be looking for an audit trail to how this money is handled and they'll be looking at the accounts to check that they've been reconciled the right way and that all amendments can be tracked from the customer through to the insurer.

Cook: So how comfortable do you feel with the rules at the moment?

Paul Matthews: My accountant has supplied me with a plain English version. Why is it complex for an ordinary broker to set up a trust account and take commission when received as a start point?

When I worked with Misys only 50% of the brokers bought the Misys FSA module that dealt with that commission transfer. But the majority of those that didn't were the smaller brokers that actually need the help to deal with these sorts of issues.

It's okay for a group like Footman James or Open + Direct - we've had Ernst & Young checking the way we account, making sure we've got the right funding in the right place and signed it all off. Smaller brokers don't have that luxury.

David Quick: Our situation is slightly different from normal brokers because we are a network and most of the people who use us are our independent financial advisers and mortgage brokers. The way we've done it for them is that monies are paid directly to us, so they're not handling client money or the payment plans as everything is made out to Ceta. But from our point of view we have risk transfer with all the insurers. There are some companies that we no longer deal with because they won't give risk transfer. It's more of a major problem in the Lloyd's market.

The main problem is the documentation - you cut down a small tree every time you sell a piece of business and the customers' eyes glaze over. I don't see that's really protecting the customer properly.

Richard Welsh: We're not brokers, but we listen to what brokers have to say. It's amazing how many different attitudes and responses you get from brokers with regard to payment of premiums. We would usually ask a broker: How does it want us to pay it. There are a number of different solutions that we can provide for a broker in terms of payments.

As mentioned before, it's about the traceability - how we can make that as easy as possible. We say to brokers: "In terms of your premium and your commitment, we have to pay the premium to one account and the commission into another account and reconcile that."

Some brokers say it doesn't matter, they just want it all lumped and grouped under one account. That's fine. However, we believe that by giving more options to the broker it's easier for it to satisfy the FSA, as the traceability will be easier to follow.

Some of the areas we have looked at over the past six to 12 months go one step further, integrating with software providers so that transactions are fully reconciled. From a mismatch report brokers can clearly see any differences.

Brokers will need to have different terms with different insurance companies. Some will have 30 days, 60 days or 90 days. By using a premium finance solution, you can make sure the broker has those funds well before he has to pay the insurer, and split that to the net premium and take commission as well, so you've got traceability.

That's what we want to bring to the table - not just a financing solution.

We've also recognised that we need to continue to provide book-keeping functions for the foreseeable future, because it's just not good enough now as a premium finance provider to go to your broker and say 'This is the rate, this is the day'.

We look into the client money issue very thoroughly because it's clearly important. From all the noises I hear from people within the FSA itself, it's clearly one of the areas of concern and we want to be on top of it.

Bob Screen: The administration of this is somewhat more onerous than it was pre-FSA. It doesn't need to be difficult, but it does take more time than it would otherwise, and clearly the wording makes it a little difficult to understand.

We have risk transfer from major insurers as well, but any regional broker will have a slice of its business in the major composites, as well as a large tranche of business in other carriers or wholesale brokers.

That's when it starts getting a lot more complicated in terms of this trail of who's paid the premium to whom. It's difficult and potentially can be onerous as time goes on.

Jonathan Davey: As a virtual insurer, we felt that we had no real choice but to offer risk transfer subordination to our brokers for fear of otherwise being unable to trade with some of the larger, better quality intermediaries, which is our stock-in-trade. We felt that it was fundamental for an FSA broker to have the ability or for us as an insurer to give risk transfer. So we've done that.

Going back to the involvement of premium finance, why is it that you want to reduce the terms and pay the broker more quickly? Why don't you simply pay the insurers?

Welsh: We have a facility where in some cases we will pay the insurer directly.

Davey: If you're using premium finance as a potential solution for this problem within the industry, you have a situation where you're going to pay the broker, the broker has to do something with that money and audit the process and then transfer that to the insurance company via whatever terms of business it has.

Whichever way you look at it, this is another link in the chain that could be removed, with that cost taken out of the channel. If you do this then perhaps the saving could be used to allow the broker to continue to earn margins that are historically earned on premium finance transactions.

Welsh: That's certainly one option that we give to brokers. In some cases we have said the best route is to pay the insurer directly, and we've done that.

Davey: Perhaps brokers should take a long hard look at who they actually trade with on an ongoing basis. As Bob said, most insurance brokers, large or small, will have this transfer granted by the lion's share of the major markets, but look at any broker's agency base of who they deal with and the classes of business. There's a plethora of also-ran insurance companies, agencies or wholesale broking facilities, many of which won't have got down to the point of offer of full risk transfer as part of their terms of business agreement.

Many will in effect be imposing upon a broker a significantly increased audit burden that the broker perhaps at this stage doesn't necessarily understand.

Maybe all brokers should look at that whole plethora of other insurance facilities that they currently deal with and question whether or not they should maintain those post-FSA, because they could be setting themselves up for a significant audit burden going forward for years to come.

Michael Whittle: I just wanted to pick up on the risk transfer issue. It's of concern to us. We're small, we're exclusively commercial and our firm was set up 12 months ago. We put in place a lot of the prudential issues right from the word go, setting up a statutory trust.

A proportion of our business is written away from composite markets and with our statutory trust we have to be very confident that any third party we pass our monies on to doesn't expose our clients' money to any greater risk. Therefore risk transfer is key to us and we have a prescriptive procedure in place to make sure that people understand. It's down to communication, the people who run the business understanding the issues, and cascading that information down to the account brokers so they understand what risk transfer is about and what their parameters are for placing business.

The market has softened significantly and risk transfer is a deciding factor in where to place business. The timing of the market is interesting. Brokers have concerns about whether risk transfer is in place and the issues of the client money calculation and reserving additional funds while the money is in transit to its final underwriter.

Brokers don't have a huge amount of spare money swilling around in their office account that they can put back into the client money equation until it hits its final destination. So risk transfer is a key issue for us and one that we monitor very closely.

Davey: Our broker is responsible for FSA compliance and looking after the consumers' interests. We sit one stage removed from that and yet we carry all of the same costs as anybody else who deals in the multi-distribution channel environment.

So I get a bit sore about the cost issue, because we've a huge amount of cost and in reality the FSA doesn't make a great deal of difference to the way we run our business, in terms of consumer protection. It's a huge cost for no real benefit to the end consumer, and that's what the FSA should be there to protect.

The costs are horrendous and not just recently. Over the past 18 months to two years, there have been massive costs that insurance companies and firms such as ourselves have had to invest in to ensure that we have the appropriate resources in place for training and compliance, making sure that we support our broker base and have Tobas in place, for example. There is no difference in terms of consumer protection pre-FSA or post-FSA in terms of my business.