Brokers have a limited period in which to exercise the right to take credit write-backs (“CWBs”) before the window closes sometime in late 2016. What’s more, stringent new rules come into force later this year covering the last 13 months in which CWBs will be allowed.
The potential value of credit balances which brokers may be able to write-back are substantial, but compliance with the rules is of course critical. This was the clear message from the Financial Services Authority (as predecessor to the Financial Conduct Authority, or FCA) in Consultation Paper (CP12/20) in 2012.
Through CP12/20 the FCA carried out a consultation on client money rules for insurance intermediaries and proposed a set of new draft rules, including an interim 13 month window, during which firms can take CWBs to deal with legacy client money balances. After that window, CWBs will no longer be permitted, except in very limited circumstances.
The new rules are expected to come into force during 2015. This is expected to trigger commencement of the interim 13 month period. Intermediaries who wish to take CWBs will need to have procedures in place when that period commences to give themselves time to comply with the onerous investigation obligations in the rules.
For a number of reasons, brokers often find that there are balances in their client money accounts which can be difficult to reconcile. The CWB is an accounting process used by brokers to “write back” to their own accounts money in their client accounts which is deemed not to be due, or for some reason cannot be paid, to their clients, insurers or other third parties.
However, the FCA does not see CWBs as consistent with Principle 10 (“A firm must arrange adequate protection for clients’ assets when it is responsible for them.”). This has been clear since the FSA’s statements in February 2008 in its paper “Credit write-backs: An articulation of the FSA’s position”.
To address the inconsistency the FCA proposed a new procedure in CP12/20, which allows a period of 13 months for intermediaries to deal with legacy balances (i.e. those held since at least 14 January 2005) in client accounts ahead of imposing a general prohibition on CWBs towards the end of 2016.
What does this mean for brokers?
“Thorough” investigations and “best endeavours”
Brokers should familiarise themselves with the draft rules, which will allow them to put in place the necessary internal procedures to allow them to take CWBs during the interim 13 month period, to obtain value from balances held in their client money accounts since 14 January 2005.
The draft interim rules are onerous and require:
- “thorough” investigation of balances to establish whether the money is held for a client, insurer or third party, or whether it is due and payable to the intermediary itself, and sets out certain minimum requirements; and
- use of “best endeavours” to determine current contact details for a relevant client, insurer or third party.
Whether a broker has complied with the requirements is to be determined by the FCA and ultimately the Courts. However, it is clear that the standard of investigation (of both the proper beneficiary and their contact details) is onerous and not far short of absolute. To take a CWB in accordance with the interim rules a broker could be required to expend considerable efforts, and will often have to incur financial cost.
What to do where the credit balance is clearly the broker’s money
Money which is clearly due to the broker, such as bad debts and FX differences, should be removed from the client account immediately and can be, rightly, taken by the broker.
What to do where the credit balance is a third party’s money
Where investigations in accordance with the rules establish that money is due to a client, insurer or third party, the broker must notify the client, insurer or third party in accordance with the notification procedure in the rules. Then:
- Where the client, insurer or third party claims the money, it must be paid over in accordance with the rules.
- where the client, insurer or third party expressly refuses to accept payment of the money, a credit write-back in accordance with the rules is possible.
- where the client, insurer or third party does not respond to make a claim for the money, then the broker is permitted to stop treating the money as client money, but must then transfer it to a registered charity.
What to do when it is not possible to identify for whom the money is held
Where it is not possible to identify the person for whom the money is held, then during the 13 month period the broker will be permitted to stop treating it as client money and transfer the money to its own account in accordance with the rules.
In all circumstances, where a broker makes a decision to cease to treat money held in its client money account as client money, an unconditional undertaking must be made to make good any valid claim in the future. This is an important factor which brokers must keep in mind when considering whether to take any CWB.
Brokers need to be prepared for the commencement of the new rules so that they are ready to take advantage of a relatively short window where CWBs will still be possible. To do this, brokers need to have internal procedures in place that comply with rules.