The FSA has written a “Dear CEO letter” to insurance intermediaries to ensure that they can satisfy themselves that they have adequate financial resources. The FSA is concerned that many firms are unable to demonstrate that the meet FSA requirements in terms of their financial viability.
According to the letter, which was sent out on 23 February, firms have not taken adequate steps to guard against threats to their financial stability.
Amongst the examples which the FSA has seen has been inadequate provision made for obligations to fund additional pension contributions and reliance upon inter-company debts to demonstrate compliance with FSA rules under MIPRU.
The FSA has identified that many intermediaries have weak systems and controls when it comes to the handling of client money. Any failures to manage client money adequately could result in the client money trust status being compromised and client funds becoming vulnerable to other creditors of the firm should it become insolvent.
The letter identifies that although firms are meeting the solvency and capital resources requirement in MIPRU, such requirements are meant to be a minimum requirement which provides for the most basic level of financial protection. In addition, firms are obliged to have adequate financial resources under Threshold Condition 4 (TC4). It is this high-level standard which the FSA is most concerned has not been met. Firms should undertake a Threshold Condition 4 assessment to ensure that they have sufficient resources to conduct regulated business - this goes beyond financial resources to include non-financial matters.
The Dear CEO letter states that the FSA will expect firms to be able to produce a TC4 assessment when asked by the regulator. Further, the TC4 assessment should be kept up to date.
To view the "Dear CEO Letter": Adequate financial resources for insurance intermediaries