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Client Money Rules for Insurance Intermediaries

The FCA have this week issued a Statement on a Consultation Paper from 2012 – CP12/20: Review of the client money rules for insurance intermediaries.

18th August 2016

Insurance Intermediaries: Client Money Rule Changes

At the time the CP12/20 was published, the Financial Services Authority had conducted a review of the applicable client money rules following the regulation of general insurance intermediaries in 2005. IN particular, the FSA focused upon whether enhancements could be made to the regime itself or details in the rules for this sector and how they hold client money.

Four years on from CP12/20, the Financial Conduct Authority (FCA) has this week written to firms to provide an update on this topic and, in particular, where the regulator had proposed some rule changes in CP12/20 for the rules and guidance in Chapter 5 of the Client Assets Sourcebook (CASS).

From working closely with the industry and trade bodies in the period between the consultation and now, the FCA informs that the industry has increased its focus on protecting client money. In addition, the industry has also increased its engagement with the FCA regarding their policies on client money.

Furthermore, the regulator advises that a number of initiatives have taken place which are also paving the way for improvements within the insurance industry, these being:

• An updated reporting requirement, which is enabling the FCA to collect more robust information from firms (applicable to general insurance intermediaries holding client money, RMA-C); and
• Informed by the review of Audit reports from around 400 firms, an enhanced proactive CASS supervision strategy has been introduced for general insurance intermediaries.

The regulator has informed that they will “continue to work with general insurance intermediaries to mitigate risks such as conditional risk transfer and incorrect client money calculations and reconciliations”.

In addition, where poor practice comes to light, the regulator will take appropriate steps to ensure the protection of client money.

Purpose of the Client Money Consultation

The aim of the consultation is to encourage stakeholders to provide the FCA with their views so that the ‘right policy’ can be developed prior to finalising any rule changes.

The FCA notes that it would not be proportionate to proceed with the proposed rule changes at this time. This is in light of receiving feedback from the original proposals of CP12/20 in addition to a re-consideration of costs and benefits from the Financial Services Act 2012, plus a review of collected additional data related to the impact of the proposals on smaller firms.

The regulator have now stressed that they will not pursue any rule changes to Section 5 of the Client Assets Sourcebook without undertaking a new consultation.

As a result, the existing rules within CASS 5 remain in place. General insurance intermediaries that operate under risk transfer agreements or that hold client money are therefore reminded that they must comply with these requirements.

Relevant News:

Client Money Fine: Towergate Underwriting Group Limited.

Most recently, Towergate Underwriting Group Limited was fined for failings in relation to its protection of both insurer and client money.

On 13 July 2016, the FCA fined Towergate Underwriting Group Limited, an insurance intermediary, £2,632,000 in relation to its failure to protect client and insurer money.

As noted in their final notice, Towergate had accumulated a shortfall of £12.6 million within its client and insurer money bank accounts that went undetected for several years due to weaknesses within their systems and controls.

Towergate’s Client Money Officer and director, Timothy Philip was also given a fine of £60,000 and banned from ever having direct responsibility for client and insurer money again.

The Director of Enforcement and Market Oversight at the FCA, Mark Steward warning there can be no excuses given the regulator’s repeated warnings over client money protection and said:

“Senior management are ultimately responsible for ensuring that firms are following our rules and it is very clear that Mr Philip failed in that regard, falling well below the standards we require.”

Client Money Support Services

Compound Growth can assist firms of all sizes to ensure they have the necessary procedures in place to remain compliant with the regulator’s rules pertaining to client money and client assets as set out in the CASS Sourcebook.

If you would like to discuss client money or client assets further, please feel free to contact us or email enquiries@compoundgrowth.co.uk.

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