Context
The FCA has issued a ‘Dear CEO’ letter to general insurance intermediaries. The letter highlights that firms must continue to safeguard the client money it holds for customers, ensuring that their oversight of the systems and controls remains effective and reminding firms that the requirement to notify the FCA of any concerns remains in force.
The ‘Dear CEO’ letter links with a recent FCA letter issued to Senior Partners & Directors of financial services auditors to remind them of their duty to report with reference to significant matters arising from work undertaken with financial services firms. The FCA has reminded auditors that this duty to inform becomes binding as soon as uncertainties arise. The duty to inform covers areas such as when an entity is likely to be unable to continue as a going concern; it is expected that auditors raise such issues proactively and without delay.
The FCA intends to continue to conduct assessments of firms’ client money arrangements and to review the annual independent external auditors’ client assets reports. It will be contacting firms in the future and will expect firms to be prepared to explain the actions taken in response to the letter.
Key points to note
The FCA expects the firm’s senior management to have appropriate oversight of client money arrangements. The letter outlines the key areas for consideration and the key expectations for each area. These are:
Application of client money rules to firm’s business model
- Firms should understand how the client money rules apply to their business.
- Firms should conduct a review of their client money arrangements to ensure these remain adequate and robust in the current environment.
- For a non-statutory client money trust – firms must ensure that a properly executed trust deed is in place which complies with the conditions for using the non-statutory trust as set out in the client money rules.
- Firms should ensure that they fully understand the content of their contractual agreements and operational arrangements with insurers and that these terms are robust.
Governance and oversight
- Firms should have adequate governance arrangements in place to be able to identify material risks to their client money arrangements and ensure appropriate monitoring of those arrangements.
- This should include appropriate oversight by the Senior Manager responsible for client money as well as monitoring and testing by compliance and internal audit where relevant, with focus on the specific risks identified within the business.
Oversight of third parties, including due diligence
- Firms are required to carry out periodic due diligence reviews on third parties holding client money.
- Firms should be able to identify where any client money is deposited with any institution in the EEA. They should review their due diligence on such institutions to ensure there is no increased risk due to changes arising from the end of the EU withdrawal transition period and should manage any identified risks appropriately.
- Firms should make ensure that existing safeguards and protections for client money, especially in the event of insolvency, remain effective from the end of the transition period.
- Firms should have systems and controls in place to monitor the activities carried out by Appointed Representatives on their behalf. This includes ensuring that procedures are in place to ensure that client money is handled properly, and accurate records are maintained.
- Where a firm permits Appointed Representatives to receive client money, it should ensure that the Appointed Representative protects client money in accordance with the client money rules for either immediate segregation or periodic segregation.
- If a firm elects to operate periodic segregation, it should ensure that it holds in a segregated client bank account an estimated amount of client money that is likely to be received and held over a given time period by its Appointed Representatives or agents. Periodically reconciling this estimated amount against actual details of how much client money the Appointed Representatives or agents have received and are holding. Ensuring that once the reconciliation is complete, any necessary payments into or withdrawals from its client bank account are made to ensure that there is neither an excess nor a deficit.
Client money calculations and reconciliations
- Firms are required to conduct frequent reconciliations in a timely manner with all discrepancies and breaks appropriately recorded and resolved promptly.
- Client money calculations help verify the accuracy of the balances held for clients and confirm that they are held in client accounts. Where a firm uses the accruals method, it should value any client money advanced to clients or insurers from the non-statutory trust prudently and consistently, so that its books and records remain accurate. Where bad debt is written off and a deficit is identified, the firm will need to top up the client money account with its own funds.
Acknowledgement letters
- Firms should ensure that all client money bank accounts have an acknowledgement letter, in line with the client money rules.
- The letter must make it clear that the balances held in credit in those accounts are held for the benefit of the firm’s clients.
- Firms should ensure they maintain adequate arrangements to assure themselves of the completeness and accuracy of the acknowledgement letters.
The FCA also reminds firms that (in accordance with SUP 15.3 and Principle 11) it is a requirement to notify the FCA of any material issues or concerns a firm identifies with its client money arrangements.
Next Steps
Firms should consider their approach to client money handling ensuring that their systems and controls are robust, documented and meet the requirements laid out in the Client Assets Sourcebook (CASS)