During 2009, the FSA conducted thematic visits to a range of intermediary firms to review compliance with client money and custody requirements. This project was driven by the FSA’s specialist CASS Risk Team created in March 2009, following identification in the 2009 Financial Risk Outlook that more difficult market conditions meant an increased risk of intermediary firms entering into insolvency. This January, the FSA published the results of its work in the form of a “Dear CEO” letter and an accompanying report document.
The FSA has concluded that there is still a significant amount of work for firms to do in order to ensure client money and assets are adequately protected. Nearly all of the FSA’s visits resulted in actions for firms to improve their compliance with the FSA’s CASS rules. Its tolerance for CASS compliance failures is low. For insurance brokers visited by the FSA, the following failings were found:
- senior management did not ensure a clear allocation of duties leading to confusion between staff and lack of effective accountability;
- inconsistencies between Terms of Business Arrangements and client money calculations;
- inadequate evidence of review and sign off processes surrounding client money calculations and reconciliations;
- failure by some firms to perform adequate due diligence on acquisitions to assess client money risks;
- unallocated cash and legacy balances not being reduced promptly enough;
- firms overreliant on CASS audit reports rather than performing their own compliance checks; and
- non-statutory trust bank accounts being used for non permitted purposes.
Action taken by the FSA on its findings have included referrals to enforcement, private warnings, imposition of skilled person reports, and even freezing of assets and restrictions from taking on new business.
Though the front line regulatory responsibility for its compliance with CASS rests with the insurance broker, insurers should be alive to the fact that the behaviour of their brokers in this respect also presents an important risk management matter for insurers and raises wider customer treatment issues.