Dear CEO | Release Date: 2nd July 2021
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a directive to CEOs of general insurance intermediaries focusing on the imperative to uphold and enhance client money arrangements. This communication follows a review that revealed potential widespread non-compliance in the sector, particularly following the financial strains induced by the coronavirus pandemic. This summary delineates the FCA’s findings, expectations, and the requisite actions for firms within this regulatory scope.
Overview of FCA Findings
Throughout the last year, following the completion of financial resilience surveys, the FCA engaged with firms identified as potentially at risk of failing to maintain adequate financial resources. This scrutiny led to the discovery of common deficiencies in how general insurance intermediaries manage client money, indicating a sector-wide issue of non-compliance with established regulatory standards.
Regulatory Expectations and Obligations
Principle 10 Compliance
Firms are reminded of their duty under Principle 10 of the FCA’s Principles for Business, which mandates adequate protection for clients’ assets under their control. Additionally, Principle 3 compels firms to organise and control their affairs responsibly and effectively, with a specific emphasis on client money protection.
Continuous Compliance Review
Firms are expected to conduct regular reviews of their client money handling practices against the Client Asset Sourcebook (CASS) Chapter 5 rules. The FCA’s ‘Guide to Client Money for General Insurance Intermediaries’ provides a framework to aid in these evaluations.
Specific Areas of Concern
Client Money Calculations
A significant issue identified involves firms’ failure to accurately perform client money calculations in accordance with CASS rules, leading to potential mismanagement of client funds. The FCA stresses the importance of performing these calculations at least every 25 business days, with a recommendation for more frequent assessments in larger firms.
Timely Execution of Responsibilities
Firms must ensure that any identified discrepancies in client money calculations are rectified promptly by the close of business on the day the calculation is performed. This prompt action is crucial to prevent the escalation of client money protection failures.
Management of Client Money Bank Accounts
All client money must be segregated from firm funds and held in designated client bank accounts. Firms are required to maintain updated acknowledgement letters for these accounts, explicitly confirming the trust status of the funds and the account’s exemption from set-off or counterclaim rights by the bank.
Required Actions for Firms
Internal Review and Action Plan
CEOs are instructed to discuss the contents of this letter with their boards or equivalent governing bodies and devise a plan to address any deficiencies in their client money handling procedures. This plan should ensure that all practices are in line with FCA expectations and regulatory requirements.
Engagement with Auditors
Firms subject to client money audit requirements must ensure that their auditors are informed of the FCA’s expectations as outlined in this letter and other referenced materials, such as the Client Money Guide.
Potential Regulatory Actions
The FCA explicitly warns that non-compliance with client money protection rules could lead to enforcement actions, including fines, restrictions on business activities, and other disciplinary measures. The regulator underscores its commitment to take necessary actions to mitigate any risks posed by inadequate client money protections.
Conclusion and Takeaways
Firm’s Accountability
Firms must not outsource their regulatory responsibilities and remain accountable for ensuring the adequate protection of client assets. Senior management is expected to maintain stringent oversight over their firm’s compliance with client money rules.
Proactive Compliance
Firms are encouraged to seek external advice if there are gaps in their understanding or implementation of the client money requirements. Proactive compliance and transparency in client money management are vital in maintaining client trust and regulatory compliance.
Continuous Engagement
Firms are reminded of their obligation to report any significant issues related to client money management to the FCA as part of their ongoing regulatory reporting duties.
This letter from the FCA serves as a crucial reminder of the importance of robust client money protections in maintaining market integrity and protecting consumer interests. Firms are urged to take immediate and effective actions to address any identified gaps in their practices and ensure compliance with all regulatory expectations.