The FSA's Client Money rules are extremely complex and there is evidence that some brokers are misunderstanding some of the issues involved. The FSA's Client Money rules can be found in Chapter 5 of the Client Assets sourcebook (CASS).

This paper attempts to explain some of these issues in simple terms.

As an intermediary, any monies received from customers are held by you either as agent of your customer, or as agent of the insurer.

In the absence of a written agreement from the insurer to the contrary, the monies you collect from your customers are received as agent of the customer. Monies that you hold as agent of your customer are defined by FSA as Client Money and subject to the FSA's Client Money rules. In this instance, the customer is exposed to the risk of the monies not reaching the insurer.

Risk transfer occurs where the insurer confirms in his TOBA (or agency agreement) that you act as agent of the insurer for the handling of premiums. Where you have this written confirmation, the risk of the monies not reaching the insurer transfers from the customer to the insurer. From the customer perspective, the money is then deemed to have reached the insurer.

Where you hold money under risk transfer, the CASS rules require you to disclose this fact to your customer.

In our experience, most insurers in the UK market have granted risk transfer to most intermediaries. Where the insurer has granted risk transfer in their TOBA, they will go on to set out how they want their money banked. Most insurers are allowing most intermediaries to co-mingle the risk transferred money the intermediary holds as the insurer's agent, with client money that the intermediary holds as agent of his customer. Monies that are co-mingled must be held in accordance with FSA's Client Money rules.

The CASS rules do not apply to risk transfer money on its own and such monies cannot be held in the accounts mentioned below.

Where an insurer permits an intermediary to co-mingle, the insurer must state in their TOBA that they subordinate their interests to the rights of your customers, so in the event that your business fails, the insurer agrees to take his place in the queue of creditors behind your customers.

So what do the FSA Client Money rules require intermediaries to do with client money and co-mingled money?

The CASS rules state that the intermediary must withdraw commission within 25 business days of the commission becoming due. Commission becomes due in line with insurer's instructions in their TOBA. In our experience, most insurers are stating that commission becomes due when the intermediary receives the premium.

The CASS rules do not permit the withdrawal of commission prior to receipt of the premium. In cases where a part payment is received, only the commission element of that part payment can be withdrawn at that stage.

The CASS rules specify two types of bank account into which client money and co-mingled money can be placed.

The first type of account is a statutory trust. This account is simply created by an exchange of letters with your bank.

The rules governing the use of a statutory trust account do not permit a firm to use client money balances to provide credit for clients i.e. you cannot settle the customer's item on the insurer's account until the customer has paid you, unless you use your own funds.

Where a firm operates a statutory trust, returns of premium cannot be refunded to customers from this account until the item appears on the insurer's account.

The second type of account is a non-statutory trust. This account is created by the same exchange of letters with your bank and in addition you need to execute a trust deed. The rules governing the use of a non-statutory trust account do permit a firm to use client money balances to provide credit to clients (but not to provide credit to the firm itself).

Where a firm operates a non-statutory trust, the CASS rules require that the firm adequately explains and obtains the customer's informed consent to the holding of client money in such an account.

Firms that operate a non-statutory trust are required to have adequate resources and appropriate systems and controls. These include:

1. a minimum capital resources requirement of £50,000 if retail customer client money is being held in the account;
   
   
2. the appointment of a client money manager;
   
   
3. having and maintaining systems and controls to ensure the firm can monitor and manage its client money transactions and the resulting credit risk; and
   
   
4. obtaining written confirmation from your auditor that the systems and controls are adequate.

The CASS rules require an audit of the client money account in the following circumstances:

1. Where a firm holds more than £30,000 at any one time in a statutory trust;
   
   
2. Where a firm operates a non-statutory trust.

The CASS rules require that the client money account be reconciled at least every 25 business days.

Where an intermediary passes Client Money to another firm who themselves do not have risk transfer, the rules require that the first intermediary continues to account for their liability until the other firm provide confirmation that the money has reached the insurer.

In respect of interest that you might earn on client money you hold, the rules require you to obtain the informed consent of your retail customer if the interest is likely to exceed £20 per transaction.

Summary of terms

Client money – monies held by you as agent of your customer.

Risk transfer – a formal written agreement from the insurer confirming that the intermediary acts as the insurer's agent for the collection of premium.

Co-mingling – the holding of client money and risk transfer money in the same account.
Subordination – where the insurer permits you to co-mingle his risk transfer money with monies you hold as the customer's agent, the insurer agrees in his TOBA to subordinate his interests to the rights of your customers in the event of your business failing.

Statutory trust – an account that can hold both client money and co-mingled monies where the client money balance cannot be used to fund credit to customers.

Non-statutory trust – an account that can hold both client money and co-mingled monies where the client money balances can be used to provide credit to customers. This account has more onerous operational controls.

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