Client money requirements have been at the forefront of many insurers’ thinking in the last 12 months. In part, this is because the FCA has indicated its intention to increase the scrutiny insurers are placed under for their CASS compliance.
Almost eight in 10 insurance firms we surveyed indicated that they are either confident or very confident that their client money processes would stand up to such scrutiny by the FCA.
While this is reassuring, those insurers who are less confident will need a thorough understanding of their client money obligations.
What is client money?
According to the FCA:
“Client money is money of any currency that a firm receives and holds for its client (or clients of appointed representatives, field representatives or other agents) when carrying on insurance mediation. It can include premiums, claims money and premium refunds.”
Whenever an insurer handles client money, it must comply with the rules laid out in chapter 5 of the CASS handbook.
There are two ways for insurers to hold client money:
- Statutory trust client money bank account is where money is held in trust for the client. For this option, insurers must have a client money acknowledgement letter in place
- Non-statutory trust client money bank account allows a firm to extend credit on the client account to pay insurers or the client ahead of receiving the funds. This option comes with additional requirements including client disclosure and agreement, as well as additional capital requirements
Client money calculations and reconciliation requirements
The fundamental requirement for insurers is for them to complete a client money calculation every 25 business days.
CASS calculations can be done in two ways:
- Used by 68% of firms we surveyed, the accruals method calculates the aggregated sum of the insurance money held for creditors (i.e., clients, insuring firms or other third parties)
- Used by 32% of firms we surveyed, the client balance method calculates an individual client balance for all clients before comparing it against the resource
Where these two calculations show a surplus or deficit, insurance firms are expected to take corrective action.
The following requirement for firms will be to perform an external bank reconciliation within 10 business days. Insurers are expected to reconcile internal records against the external banking partner where client money is held.
How important are client money calculations and reconciliations?
Client money calculations and reconciliations are key aspects of CASS requirements. In two Dear CEO letters released over the past year, the FCA reaffirmed the importance of protecting client money in accordance with the rules of the CASS handbook.
First Dear CEO letter
Issued in September 2020, this letter emphasised the importance of:
- Adequate client money arrangements following the impact of COVID-19
- Safeguarding client money effectively
- Senior management oversight
- Several focus areas such as application of rules, client money calculations, reconciliations and oversight
- Firms being able to explain any actions taken
Second Dear CEO letter
In its second letter, issued July 2021, the FCA expressed concern at a number of failings it had identified at firms regarding their client money arrangements.
The letter spoke in terms of:
- Shortcomings in firms’ client money arrangements
- The importance of client money protection – firms now expected to review arrangements
- The importance of senior management oversight
- Specific issues with client money calculations such as correctly calculating the requirement and resource, as well as the timeliness of performance and subsequent actions
The FCA expects firms to take note of these letters, discuss their implications at board level, and take action where appropriate. Any firms that fall short in this regard will receive disciplinary action.
Why did the FCA issue these letters?
- We’ve seen much disruption in the last 18 months because of the pandemic. These letters are a partial response to that as regulators want to ensure that the industry is resilient to disruption and changes in the working environment
- There has been a considerable amount of consolidation due to the increased mergers and acquisition activity. As a result, client money calculations have become more complex
- The insurance space of today is dominated by a small number of very large firms. Regulators will be watchful that if these firms fail their client money obligations, it will have a large knock-on effect across the wider industry
- The last few years have seen a rise in challenger insurer business models, many of which use a delegated authority model. The FCA will be checking that these emerging firms remain compliant as they gain market share
What role will automation play in 2022?
With the FCA set to increase their investigations in 2022, our research shows that 23% of insurance firms are unsure if their client money processes would meet the required standard. In our conversations with insurance clients, we find that firms who are yet to automate express the most concern in this regard.
As data complexity continues to grow year-on-year, investing in solutions that eliminate manual intervention will be a top priority for many across the insurance industry. While automating client money calculations and reconciliations will be a necessity for larger firms, even smaller firms should consider the clear limitations of Microsoft Excel as they continue to grow and scale operations.
Looking ahead, we can expect more insurers to embrace automated CASS software to satisfy regulatory obligations and drive efficiency.