Firms Must Obey FSA Rules to Ensure Client Money is Protected

Article, Insurance DayJune 2010

Insurance / Corporate

Ben Hobby examines the FSA rules on client money.

The UK Financial Services Authority’s (FSA) rules on client money require regulated entities to hold client money in trust accounts. This means in the event of insolvency, the client money is ring-fenced and does not form part of the funds available to be distributed to creditors.

The recent case of Lehman brothers International (Europe) v CRC Credit highlighted the fact client money is only protected providing firms comply with the FSA’s rules.

At any point in time, a significant proportion of underwriters’ cash balances may be held by third parties, such as coverholders and third-party claims administrators (TPAs). However, the FSA does not have regulatory control over all these entities, particularly where they are located outside the UK.

Given this, underwriters may wish to ensure the following are implemented with all of the coverholders and TPAs to protect their position:

  • The use of separate trust accounts to manage premium funds on behalf of each underwriter ensures funds for each underwriter are ring-fenced in the event of insolvency;
  • Where loss funds are controlled by a third party, a separate trust account should be created for each book of business and year of account. This is particularly relevant where there are co-insurers, whose share varies from year to year;
  • Any reconciliation of premium prepared by the coverholder should start with the policy listing/bordereaux, trace the total premium received by the coverholder for each policy and then the total amount paid to underwriters for each policy to ensure a full audit trail;
  • Similarly, a reconciliation of claims should reconcile to claims bordereaux, the amount of funds provided by underwriters to date and funds paid to policy holders;
  • Any agreement between underwriters and the coverholder/TPA should clearly state the accounting commissions, bank interest and charges so that there is no ambiguity regarding these matters;
  • Where a TPA holds loss funds on behalf of underwriters, a regular review of the adequacy of these funds should be performed to ensure there is no need for the TPA to use their own funds to settle claims.

In addition to the above, underwriters should perform periodic audits of balances held by third parties to ensure compliance with the FSA rules, as well as good practise, to reduce the risk of misappropriation.

 

As appeared in Insurance Day, June 2010.

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