Top 10 client money mistakes

Broker client money handling has been brought under the spotlight again by the FSA’s consultation paper on the issue, which was published last week.

The paper, Review of the client money rules for insurance intermediaries, aims to simplify and improve the client money rules, protect consumers and reduce financial crime.

However, in the paper, the FSA also noted several areas where brokers commonly make mistakes when handling client money. Here are the top 10 areas that worry the regulator and often trip brokers up:

1.       Confusion about the rules

The FSA noted that many brokers were confused by the current client money rules laid out in the regulator’s Client Asset Sourcebook 5 (CASS 5). In the new paper, the FSA said: “Various concerns have arisen during the course of our review of CASS 5, which include poor understanding of the rules and subsequent poor compliance, missing or incomplete documentation such as trust deeds and trust letters.”

2.       Lending client money

The regulator said some firms do not keep tight control over the money they loan from non-statutory trust accounts. The FSA is worried this could cause delay to clients being refunded their money in the event of these brokers going bankrupt. The paper added: “In addition, some of these debts may not be recoverable and this would leave a shortfall in the amount of client money available for the benefit of clients.”

3.       Holding risk transfer money in a client bank account

Some brokers have been breaking the FSA’s client money rules by holding risk transfer money in a client money account but without getting authorisation from the regulator. The FSA consultation paper said that this could lead to brokers unwittingly breaking their risk transfer agreements with insurers, as well as breaching the regulator’s rules. The paper added: “We take these breaches seriously and strongly urge firms to review their risk transfer agreements to ensure that they are treating the money properly.”

4.       Taking too long to segregate client money

At the moment, the CASS 5 rules let brokers put aside an estimated amount of client money coming from appointed representatives and agents, then calculate exactly how much to put aside at a later date. The FSA has not set a time limit for brokers to work out the exact amount of client money to put aside, and this has led to some brokers taking longer than the regulator expected. The FSA paper said: “We are concerned about the period some firms use when complying with the rules regarding periodic separation so are proposing that the maximum period should be no longer than three calendar months.”

5.       Broker bosses not overseeing client money

The FSA paper said some firms “do not maintain appropriate oversight of client money at a sufficiently high level within the organisation”. To tackle the problem, the FSA has suggested all brokers should pick a “sufficiently senior” FSA-approved person from their business to ensure the firm complies with the client money rules. The regulator wants this to happen even if brokers do not hold client money. For these cases, the approved person would make sure the broker does not hold client money at any time.

6.       Brokers not auditing properly

The consultation paper also noted that some brokers do not hold client money account audits, even though they are supposed to. At the moment, all brokers with a non-statutory trust account containing more than £30,000 in one year must organise an audit the following year, but they do not have to pass the results on to the FSA. The FSA is consulting on whether it should check these audits. If a broker does not hold client money, or if its non-statutory trust account holds less than £30,000 in one year, then the FSA has suggested the broker’s board must officially approve that an audit is not required.

7.       Bad form-filling

The FSA is worried that many brokers do not properly fill in section C of the Retail Mediation Activities Return forms on client money handling. The consultation paper said: “We have concerns around the accuracy and consistency of the data which is being submitted, as firms may use different methods to calculate the figures required.” The regulator plans to overhaul this form in the future, or publish more guidance on how to fill it.

8.       Lack of client understanding about their cash

The regulator noted that many brokers’ clients are unaware how insurance intermediaries will use their money, with many assuming their cash is always kept segregated and that no loans are made out of it. Clients are often also ignorant that if a broker fails and the client money pot is low, then all clients might share the loss. The FSA paper said: “This results in weak market discipline in this area, as firms do not have sufficient incentive to ensure that their client money arrangements are appropriate.”

9.       Dipping into the client money pot

Broker compliance experts report that many brokers break FSA rules by using their client account money to shore up shortfalls in their own accounts. Often these brokers rely on the fact that they can repay the money before the client money gets handed over to insurers. Compliance expert Branko Bjelobaba said: “I have worked with firms that have paid me for advice that they have not gone with, that have used that money as a temporary overdraft facility.”

10.   Infrequent client money reconciliation

The FSA relies on brokers reconciling their client money accounts to pick up on fraud and client money abuse. At the moment, brokers are required to reconcile their client money accounts to their bank records every 25 working days. The regulator has suggested reducing the time allowed to do a single reconciliation from 10 to two business days.