Moore Stephens Warns Brokers

Tuesday, September 06, 2005
Financial and insurance consultant Moore Stephens has warned brokers and other intermediaries to ensure that their systems and controls covering the treatment of client money meet the regulatory requirements laid down by the Financial Services Authority. Moore Stephens notes that the FSA has recently visited the offices of 15 intermediaries and reviewed their handling of client money, in addition to addressing the issue in a similar number of risk assessments involving other firms. The FSA has written to the chief executives of all general insurance intermediaries with its findings, and this will doubtless make uncomfortable reading for brokers and intermediaries.

The FSA recognizes that its client money rules represent a significant change for general intermediaries, but says it is nevertheless 'disappointed' to find a large number of failures in systems and controls. This has prompted the FSA to ask all firms to revisit the systems and controls that they have in place to monitor their compliance with client money rules, with particular reference to weaknesses identified.

These weaknesses include, in the most extreme case, a firm that had a deficit in its client money account of which it had not previously notified the FSA, and which could not be rectified. This resulted in direct regulatory intervention and, although it concedes that this was an isolated case, the FSA says it uncovered a number of issues at other firms, including a failure to ensure that any shortfall or excess recognized when performing client money transactions was either paid into or taken out of the client money account by the close of business on the day of calculation.

The extensive list of weaknesses uncovered during the FSA visits also included a failure by some firms to ensure that balances on their broking system agreed with accounting systems, and therefore with the figures used in the client money calculation.

Among a number of other things, the FSA has specifically asked intermediaries to ensure that client money accounts are not in deficit, and have the correct trust status. It has emphasized that client money resource calculations are performed on a regular and timely basis, at least every 25 business days, and that client money account balances are reconciled with the balance set out on statements issued by banks within ten business days of performing the client money calculation.

Intermediaries have also been asked to ensure that any shortfall or excess is either paid into or out of client money accounts by close of business on the day of the client money calculation; that the status of firms' client money accounts agrees with the Terms of Business Agreements concluded with insurers, clients and others brokers; that balances recorded in broking and general ledger systems and used in the client money calculation are in agreement; and that client money from appointed representatives is correctly accounted for. Moore Stephens partner Simon Gallagher says, "Intermediaries could soon face visits from the regulators during which they will be asked to provide documentary evidence that they have complied with the FSA's requirements. And they will need to be sure that they are fully acquainted with exactly how they account for money paid to them by their clients, or else face the consequences."

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