The FSA has written to the chief executive officers of large insurance brokers in response to concerns about the handling of client money and assets.
The FSA alerted firms to its concerns about compliance with rules on handling client assets in March 2009. In a ‘Dear Compliance Officer’ letter, the FSA reminded firms of their obligations under Principle 10: ‘A firm must arrange adequate protection for clients’ assets when it is responsible for them’.
At that time, the FSA identified that some firms had failed to comply with basic requirements in the Client Asset Sourcebook (CASS). In particular, the FSA set out a list of certain requirements in the context of a potential insolvency scenario. Potential problems identified included the need for firms to keep adequate records and be able to distinguish client assets from the firm’s own assets at any time in accordance with CASS 5.5.84R. In addition, terms of business agreements (TOBAs) should be executed properly with signed agreements kept on file and audit trails made when clients contact firms about their money or when firms operate a buffer in the client money account.
The FSA also identified that firms did not have appropriate acknowledgements of trust letters in place. In accordance with CASS 5.5.49R when a firm opens a client bank account it must require the bank to acknowledge that money is held by the firm as trustee.
Furthermore, the FSA found that firms had failed to exercise adequate due diligence in their choice of bank or credit institution in order to ensure that they are suitable institutions in which to place client money (an obligation contained in CASS 5.5.43R).
Following a series of visits to brokers during 2009, the FSA identified widespread failings which suggested that firms had not paid sufficient attention to the problems identified last March.
The FSA has now decided to write to the chief executives officers of insurance brokers to highlight the problems which have been identified and to set out future regulatory work in this area.
A report is published alongside the letter to CEOs entitled 'Client Money and Asset report'. This report identifies the following problems which insurance brokers will need to address as a priority:
- poor management oversight and control;
- lack of establishment of trust status for segregated accounts;
- unclear arrangements for the segregation and diversification of clients’ money; and
- incomplete or inaccurate records, accounts and reconciliations.
The FSA has already taken measures against a number of the firms that it visited including referring two firms to enforcement, freezing a firm’s assets and commissioning skilled persons reports.
For further information: FSA outlines concerns about the handling of client money