On 28 August 2012, the FSA published a Review of the Client Money Rules for Insurance Intermediaries (CP 12/20*** is available here).

  • The Review proposes fundamental changes to the client money regime. If these changes are made, they will:
    • Require firms to:
    • Carry out more frequent client money calculations (in some cases, every 7 business days, instead of every 25);
    • Carry out more frequent client money reconciliations (within 2 business days of every calculation, instead of within 10);
    • Create and maintain a Resolution Pack so that, if the firm fails, the insolvency practitioner ("IP") will have the information he needs to take control of the firm's    client money;
    • Make an existing controlled function holder responsible for client money oversight, and client money reporting;
  • Stop firms:
    • Depositing more than 20% of their clients' money with an affiliated bank;
    • Using credit write backs;
    • Holding client money in designated investments.

Because some of these changes are driven by Lehmans, they also include:

  • Requiring the IP to complete open insurance transactions;
  • Allowing the IP to sell some or all of the business to another broker, together with the associated client money, but only if the sale is completed within 3 months. (If it isn't, the client money must be returned.)

These are big changes. They're also:

  • Expensive: The FSA estimates that a small broker will incur spend £7,000 preparing for, and £40,000 a year complying with, the new regime. The equivalent figures for a large broker are £684,000 and £632,000;
  • Likely to be difficult to satisfy: as the consultation paper explains: one "key consideration ... is the practicality of" these proposals.

The FSA's Consultation is open until 30 November 2012. The FSA will make the new rules in the second quarter of 2013, with most of them will come into force a year later.