Small Mortgage and Insurance Intermediaries: Part III - Insurance Intermediaries (additional rules) | Prudential Regulation Authority Handbook & Rulebook

Part

Small Mortgage and Insurance Intermediaries: Part III - Insurance Intermediaries (additional rules)

Printed on: 14/12/2024

Rulebook at: 30/08/2006

Chapters

GIGI 1 Introduction to Part III
GIGI 2 Client Money (CASS 5)
GIGI 3 Insurance:
Conduct of Business sourcebook (ICOB)
GIGI 4 Training and Competence sourcebook (TC)
GIGI App Appendix A: brief description of key terms in Part III

GIGI 1

Introduction to Part III

GIGI 1.1

Using this Guide

01/12/2004

GIGI 1.1.1

The Guide to the FSA Handbook for Small Mortgage and Insurance Intermediaries (the Guide) is in three parts:

(1) Part I covers all the parts of the Handbook that apply to mortgage and insurance intermediaries other than rules on conduct of business, training and competence and client money. Chapter 2 of Part I explains the structure of the Handbook, what parts apply to small insurance and mortgage intermediaries and how to interpret the provisions of the Handbook.

(2) Part II covers the conduct of business and training and competence rules for mortgage intermediaries.

(3) Part III (this Part) covers the client money, conduct of business and training and competence rules for insurance intermediaries.

01/12/2004

GIGI 1.2

Part III

01/12/2004

GIGI 1.2.1

Since 14 January 2005, we (the FSA) have been responsible for regulating insurance intermediaries. This Part of the Guide (together with Part I) is primarily for small intermediaries doing insurance mediation activities in relation to general insurance or pure protection contracts (except long term care insurance), collectively known as 'non-investment insurance contracts', from a permanent place of business in the UK. Insurance companies should be aware that, as this Guide is primarily for intermediary firms, it does not cover all of the obligations that apply to insurance companies in respect of non-investment insurance contracts.

31/05/2005

GIGI 1.2.2

This Part of the Guide (together with Part I) will help small insurance intermediaries to find the rules in the FSA Handbook of rules and guidance (the Handbook) that apply to them. Part II will only be relevant to insurance intermediaries if they also deal with mortgages.

31/05/2005

GIGI 1.2.3

The rules explained in this Part are in:

(1) Chapter 5 of the Client Assets sourcebook (CASS 5) (see Chapter 2);

(2) Insurance: Conduct of Business sourcebook (ICOB) (see Chapter 3); and

(3) Training and Competence sourcebook (TC) (see Chapter 4).

01/12/2004

GIGI 1.2.4

The client money rules and the conduct of business rules do not apply to reinsurance business although if you do reinsurance mediation you will need authorisation and the rules in Part I and the training and competence rules (see Chapter 4) will apply. You can choose to comply with the client money rules for your reinsurance business if you wish.

01/12/2004

GIGI 1.2.5

Do not forget that this Guide is only a tool to help you navigate and understand the Handbook and to find the rules that are relevant to your firm. It is not a substitute for the rules themselves and is not a comprehensive statement of your firm's obligations under our rules. You should use it to help guide you through the most relevant aspects of our regulatory regime.

01/12/2004

GIGI 1.2.6

This Guide is not formal guidance and does not have the status of guidance in the Handbook. You cannot use this Guide to counter a charge of breaking our rules. In the event of any conflict between this Guide and the Handbook, the Handbook takes precedence.

01/12/2004

GIGI 1.2.7

This Guide is current as at 31 March 2005. This Guide does not remove the need for firms to keep up to date with regulatory developments and to consider the potential impact on their business of proposed changes. We will regularly update this Guide but we will not update it each time the Handbook changes.

31/05/2005

GIGI 1.3

Key terms

01/12/2004

GIGI 1.3.1

This Guide uses terms consistent with those defined in the Handbook Glossary. These terms are in italics in the Handbook (though not in this Guide). To help you, Appendix A to Part I contains brief definitions of some of the terms that we use throughout the Guide. Appendix A to Part III explains the key terms used in this Part. In each case firms should consult the Handbook Glossary for the full definitions.

01/12/2004

GIGI 2

Client Money (CASS 5)

GIGI 2.1

Introduction

01/12/2004

GIGI 2.1.1

This chapter explains the rules in CASS 5 which apply to insurance intermediary firms that handle their customers' money. These rules are designed to protect customers if the firm fails or is unable to transfer:

(1) an insurance premium paid by the customer to the insurance company; or

(2) claims monies or returned premiums to the customer.

01/12/2004

GIGI 2.1.2

If your firm handles customers' money you have the following options. Your firm can:

(1) hold the money as agent of the relevant insurance company;

(2) hold the money on trust (or in Scotland as agent of the customer) in a client bank account in which case the money becomes client money; or

(3) 'co-mingle', in the way described in paragraph 2.2.3 below.

31/05/2005

GIGI 2.2

Holding money as agent of an insurance company

01/12/2004

What does holding money as agent mean?

GIGI 2.2.1

When a firm acts as agent for an insurance company (to receive and handle premiums, claims money or premium refunds), the insurance company bears the risk for any losses arising from the failure of the firm to transfer these funds. Such failure could occur, for example, because the money is misappropriated by the firm (or by a third party the firm passed the money to) or it is lost through either party's insolvency. When the insurance company bears the risk of such losses, the industry often refers to this as 'risk transfer'.

31/05/2005

GIGI 2.2.2

Rules and guidance dealing with 'holding money as agent of an insurance company' are in Chapter 5.2 of CASS.

31/05/2005

What does co-mingling mean?

GIGI 2.2.3

Money held as agent for an insurance company is not client money under our rules but it may be held or co-mingled with client money (but not on its own) on trust in a client bank account. Once co-mingled, all the money in the client bank account must be held and treated as client money in line with CASS 5.3 to CASS 5.6.

31/05/2005

GIGI 2.2.4

Firms should note that they will be permitted to co-mingle only if they obtain the relevant insurance company's written agreement in line with CASS 5.1.5A R and (from 14 July 2005) the insurance company's written consent and acceptance that its interest under the trust is subordinated to that of the firm's clients.

31/05/2005

What are the requirements for a firm that is holding money as agent of an insurance company?

GIGI 2.2.5

If your firm holds money as agent for an insurance company, it must enter into a written agreement with the insurance company stating that premiums and - if the insurer so wishes - claims and premiums refunds, are held as its agent in line with CASS 5.2.3 R (see paragraphs 2.2.8 to 2.2.10 for details on written agreements). Your firm must keep a copy of any such agency agreement for a minimum of six years following the date it is terminated.

31/05/2005

GIGI 2.2.6

In addition, where your firm holds money as agent of an insurance company it must notify its clients through its terms of business if their money is to be held in this way.

31/05/2005

GIGI 2.2.7

When your firm is holding money as agent of an insurance company, the insurance company may specify in the terms of the agency agreement under CASS 5.2.3 R the bank account the money must be held in. So the insurer might stipulate that money collected by your firm should be held in a separate bank account for its sole benefit. Alternatively, it may specify that the money is to be held or co-mingled as described in paragraphs 2.2.3 and 2.2.4. In this case, the money can be held on trust in your firm's client bank account. For further details on receiving and holding client money, see section 2.3.

31/05/2005

Written agreements under CASS 5.2.3R when holding money as agent

GIGI 2.2.8

A firm will often have contractual authority to commit an insurance company to risk, i.e. the firm is authorised by the insurance company to enter into an insurance contract on the insurance company's behalf. Such an agreement is often referred to as a 'binding authority agreement'. Our rules require that binding authorities of this kind state that the firm acts as the agent of the insurance company for the purposes of:

(1) receiving and holding premiums (if the firm has authority to commit the insurance company to risk);

(2) claims money (if the firm has authority to settle claims on behalf of the insurance company); and/or

(3) premium refunds (if the firm has authority to make refunds of premiums on behalf of the insurance company).

31/05/2005

GIGI 2.2.9

Other kinds of agency agreements that do not give a firm authority to commit an insurance company to risk may still result in a firm holding premiums or handling claims and refunds of premiums as an insurance company's agent. If, for example, the terms of such an agency agreement make the firm the agent of the insurance company to collect and receive premiums, the agreement will result in risk relating to the premium being transferred to the insurance company.

31/05/2005

GIGI 2.2.10

Some agency agreements between a firm and an insurance company may do no more than facilitate the introduction of business to an insurance company. These types of agreement are unlikely to result in the firm holding money as agent of the insurance company. If your firm is in any doubt on whether it is holding money as agent, you should consult the terms of your written agreements or terms of business with insurance companies. And, if necessary, you should seek clarification with the relevant insurance companies.

31/05/2005

Extending authority to hold money as agent of an insurance company to a third party

GIGI 2.2.11

A firm may, with the consent of the insurance company, include in its written agency agreement a provision for money received by its appointed representatives, field representatives and other agents to also be held as the insurance company's agent. So a single agency agreement under CASS 5.2.3 R may authorise the firm and its agents to hold money as agent of the insurer. With the consent of the insurance company, your firm may also include in its written agency agreement under CASS 5.2.3 R an endorsement authorising another firm that is its counterparty to a transaction (but not its appointed representative or agent) to hold money as agent of the insurance company.

31/05/2005

GIGI 2.3

Receiving and holding client money

01/12/2004

GIGI 2.3.1

Client money is money of any currency that, in the course of carrying on insurance mediation, a firm receives and holds on behalf of a client. It can include premiums, claims money and premium refunds - as well as professional fees due from clients, for example, for onward payment to a loss adjuster. A firm's own money is not client money and must not be held in a client bank account (unless it receives a mixed remittance in line with CASS 5.5.16 R (2) or its own money becomes client money in the circumstances described in CASS 5.5.10 R).

31/05/2005

What should your firm do if it holds client money?

GIGI 2.3.2

Any client money it receives should be held in a client bank account in the form of a statutory trust account as set out in CASS 5.3, or non-statutory trust account as set out in CASS 5.4.

31/05/2005

What are the main differences between the statutory and non-statutory trusts?

GIGI 2.3.3

Both the statutory and non-statutory trust bank accounts are for:

(1) holding premiums received from clients until they are paid directly - or via a third party firm - to an insurance company; and

(2) holding claims monies and premium refunds received from insurance companies or third party firms until they are paid to clients.

01/12/2004

GIGI 2.3.4

The main difference between the two types of trust is that, unlike the statutory trust, the firm acting as trustee may use the non-statutory trust to make advances of credit from the pool of client money held for all of the firm's clients. This enables a client's premium obligation to be met before the firm receives the premium from the client. Similarly, firms can pay claims and premium refunds to a client from a non-statutory trust before they receive those monies from the insurance company. Neither is permitted under the statutory trust, although a firm may provide credit for clients from its own funds.

31/05/2005

What are the conditions for operating a non-statutory trust?

GIGI 2.3.5

Your firm may only operate a non-statutory trust if it can meet these conditions (see CASS 5.4.4 R (1) to CASS 5.4.4 R (5):

(1) Your firm must have and maintain systems and controls that are adequate to ensure it is able to monitor and manage any credit risk resulting from having made credit advances from the trust account.

(2) Your firm must obtain, and keep current, written confirmation from its auditor that it has in place systems and controls that are adequate to meet the requirements in (1). The first such confirmation must cover a period ending no later than 53 weeks after the date of your firm's authorisation.

(3) Your firm must designate a manager with responsibility for overseeing day-to-day compliance with the systems and controls requirements in (1).

(4) Your firm will be subject to a minimum capital resources requirement of £50,000 where it wishes to pay client money relating to transactions with retail customers into the non-statutory trust account.

(5) Your firm must take reasonable steps to:

(a) ensure that its terms of business adequately explain to the client that his money will be held in a non-statutory trust; and

(b) obtain the client's informed consent to the holding of his money in a non-statutory trust account.

31/05/2005

GIGI 2.3.6

In relation to point (4) above, this capital resources requirement only applies to your firm if it holds client money relating to transactions with retail customers in the non-statutory trust bank account. The capital resources requirement for all other intermediaries who hold client money (be it in the statutory or the non-statutory trust) is the higher of £10,000 or 5% of annual income from regulated activity (see Part I, paragraph 7.2.5).

31/05/2005

How does a firm set up either a statutory or non-statutory trust client bank account?

GIGI 2.3.7

With both trust types, no special bank account is required, and a conventional deposit or current account is suitable. When your firm opens a client bank account you must give the bank written notice, requesting it to acknowledge in writing that:

(1) all money standing to the credit of the account is held by the intermediary as trustee (or if relevant in Scotland, as agent) and that the bank is not entitled to combine the account with any other or to exercise any right of set-off or counterclaim against that money for any sum owed to it on any other account of your firm; and

(2) the title of the account sufficiently distinguishes it from any account containing money belonging to your firm and is in the form you have requested e.g. it could be titled 'XYZ insurance brokers statutory trust client account' or 'XYZ insurance brokers non-statutory trust client account'.

31/05/2005

Legal formalities for setting up a statutory and a non-statutory trust

GIGI 2.3.8

The trust status of a statutory trust arises automatically under our rules. A non-statutory trust, on the other hand, has to be created by the firm executing a formal trust deed in line with CASS 5.4.7 R and CASS 5.4.8 R. This is a legal document which must declare that client money will be held for the purpose of, and in line with, the rules in the CASS 5.4 to CASS 5.6. The trust deed must be kept safely by the firm.

31/05/2005

GIGI 2.3.9

Where a firm wishes to make advances of credit on the basis set out in paragraph 2.3.4, the deed must also state that it may do so. The general insurance trade associations have prepared some standard trust deeds for this purpose.

31/05/2005

A firm's selection of a bank

GIGI 2.3.10

A firm must place client money with an approved bank (see CASS 5.5.38 R). In the case of small firms holding relatively modest amounts of client money, this requirement will most likely be satisfied if the firm places client money with an authorised UK clearing bank, for example.

31/05/2005

GIGI 2.4

Payments into and withdrawals from the client money account

01/12/2004

Payments into the statutory and non-statutory trusts

GIGI 2.4.1

When your firm receives money from a client this must be paid into either the statutory or non-statutory trust account as soon as practical and, in most circumstances, by no later than the next business day after you received it.

31/05/2005

GIGI 2.4.2

When your firm receives money for a client, for example in the settlement of a claim, this must either be paid into the statutory or non-statutory trust account or paid directly to the client as soon as possible. This must be no later than one business day after it becomes due.

31/05/2005

What are the rules governing the withdrawal of commission from the client bank account?

GIGI 2.4.3

The provisions relating to how a firm may withdraw commission from the client bank account can be found at CASS 5.5.16 R and CASS 5.5.17 G. In the first instance, a firm can only withdraw commission from its client bank account when it receives the premium from the client (or from a third party premium finance provider on the client's behalf). A firm will also have to ensure that removing commission is consistent with the authority given by its terms of business maintained with its client and with the insurance company the premium will become payable to. This is so both the client and the insurance company are clear about the point when the commission will cease to be client money - that is, when it is earned by the firm and so 'due and payable' to the firm for its own account.

31/05/2005

GIGI 2.4.4

Commission may be withdrawn before you pay the premium to the insurance company, provided your firm has received the premium from the client. But again, the withdrawal must be consistent with your firm's terms of business with both its client and with the insurance company.

31/05/2005

What is a mixed remittance?

GIGI 2.4.5

A mixed remittance is a payment comprising client money and money that is not client money - for example, typically it could contain commission belonging to the firm. Your firm should note that if its terms of business with its client and the insurance company specify that commission will be due and payable to the firm immediately when the client pays the premium, you must treat the premium as a mixed remittance. In this case, the firm must pay the full amount of the payment into the client bank account. The commission that belongs to the firm must then be withdrawn from the account in line with CASS 5.5.16 R (2) i.e. as soon as reasonably practicable and not later than 25 business days of the payment clearing the client's bank account.

31/05/2005

When a client pays a premium to a firm in instalments, how must commission be withdrawn from the client bank account?

GIGI 2.4.6

CASS 5.5.17 G (3) explains that where a client makes payments of a premium to a firm in instalments, the commission payable on each instalment may only be drawn down when it is due and payable to the firm.

31/05/2005

Transfer of client money from a firm to a third party (e.g. another intermediary firm)

GIGI 2.4.7

A firm may pass a premium to a second firm, in line with CASS 5.5.34 R:

(1) if it does so for the purposes of effecting the client's transaction; and

(2) if the client is a retail customer, the client has been notified in the first firm's terms of business that their money may be transferred in this manner.

31/05/2005

GIGI 2.4.8

CASS 5.5.7 G explains that in such a case the second firm will treat the first as its client (if it is also a FSA regulated firm) and will in turn be required to segregate the premium it receives into a statutory or non-statutory trust.

31/05/2005

GIGI 2.4.9

CASS 5.5.33 G explains that when a firm transfers a premium to a third party, it will not automatically discharge its duties to its client as trustee, despite the premium being shown in the firm's client ledgers as paid to the third party. So if your firm pays a premium to a third party firm, the premium will remain client money of your firm until it reaches the insurance company (matched by the right to have the third party account for the sum). Similarly, the premium will be client money of the third party firm held on behalf of its client - your firm - until it reaches the insurance company. That is unless during its transit to the insurance company the money is held, at any time, by a firm that is authorised to hold that insurance company's money as agent. At this point that premium becomes the insurance company's money.

31/05/2005

GIGI 2.4.10

Firms are reminded in CASS 5.5.81 G (3) that they should also exercise appropriate skill, care and judgment in selecting third parties they transfer client money to.

31/05/2005

GIGI 2.4.11

In settling a claim or returning a premium, money passed from an insurance company to your firm may subsequently be transferred to a third party firm before payment to the policyholder. In these circumstances, the claim or premium refund will remain client money of your firm only until it reaches your client (the third party firm).

31/05/2005

GIGI 2.5

The client money calculation

01/12/2004

What is the client money calculation?

GIGI 2.5.1

CASS 5.5.62 G explains the purpose of the client money calculation. It is to verify that the amount of client money segregated into the client bank account(s) (and the value of any segregated designated investments held under the non-statutory trust in accordance with CASS 5.5.14 R), together with the value of client money held by third parties, is sufficient to meet the firm's obligations to its clients.

31/05/2005

GIGI 2.5.2

In performing the client money calculation, you must use your firm's internal accounting records to determine the client money resource and the client money requirement - then compare them. Having done so:

(1) if the client money requirement is greater than the client money resource you must top up the resource - i.e. pay money into the client bank account; and

(2) if the client money requirement is less than the client money resource, you must normally withdraw the excess from the client bank account.

31/05/2005

GIGI 2.5.3

You must carry out this calculation (client money requirement and client money resource) as often as is necessary to ensure the accuracy of your firm's records. And you must do this at least at intervals of not more than 25 business days. You should make any top ups to/withdrawals from the firm's client money bank account(s) by close of business on the day the calculations are performed.

01/07/2005

GIGI 2.5.4

So that an accurate balance of client money held at third parties can be included in the client money calculation, firms will need to await notification that client money they pass to third party firms - most commonly premiums - has subsequently reached the insurance company or was received en route by a firm authorised to hold that insurance company's money as its agent. Your firm may receive confirmation from its third party counterparts that the transaction is complete through receipt of the money by the insurance company or one of its agents. But if you do not, you must assume that the relevant money is still with the third party firm you passed it to and you must include an account of that money in the client money calculation.

31/05/2005

How do you calculate the client money resource?

GIGI 2.5.5

There are two methods permitted for the client money calculation, a cash-based method and an accruals method.

(1) For the cash-based method, the client money resource should be calculated from your firm's accounting records as the total of:

(a) the balances of the firm's client bank accounts, as at close of business on the previous business day; plus

(b) the value of client money held at third parties; plus

Any designated investments must be valued on a prudent and consistent basis.

31/05/2005

GIGI 2.5.6

For the accruals-based method, and from your firm's accounting record, the client money resource must also include:

(1) to the extent that client money is held in the statutory trust, insurance debtors (which in this case cannot include pre-funded items); and

(2) to the extent that client money is held in line with the non-statutory trust, insurance debtors (which in this case may include pre-funded items whether in respect of credit advances of premiums, claims or premium refunds).

31/05/2005

GIGI 2.5.7

The client money resource should be calculated and then compared to the client money requirement.

31/05/2005

How do you calculate the client money requirement?

GIGI 2.5.8

For the cash-based method, you can work out the client money requirement by calculating from your firm's accounting records the individual client money balance for each client and then adding these together for a total client money requirement figure. CASS 5.5.67 R explains that the balance should be calculated as:

(1) the amount paid by a client to the firm (to include all premiums); plus

(2) the amount due to the client (to include all claims and premium refunds); plus

(3) the amount of any interest or investment returns due to the client; less

(4) the amount paid to insurance companies for the benefit of the client (to include all premiums) or due to itself (i.e. commissions that are due but have not yet been removed from the client account); less

(5) the amount paid by the firm to the client (to include all claims and premium refunds).

31/05/2005

GIGI 2.5.9

For the accruals-based method, CASS 5.5.68 R makes clear you can get to the client money requirement by determining from your firm's accounting records the sum of:

(1) all insurance creditors shown in your firm's business ledgers as amounts due to insurance companies, third party intermediaries and clients; plus

(2) unearned commission or brokerage being the amount of commission shown as accrued but not yet earned and payable (a prudent estimate must be used if you cannot produce an exact figure at the date of calculation).

31/05/2005

Examples of the client money calculation

GIGI 2.5.10

Example 1 - client pays £100 premium to a firm on day one, £10 of which will be earned by it as commission. The firm's terms of business - which it maintains with the client and the insurance company the premium will become payable to - state that the commission will be due and payable to the firm immediately when the client has paid the premium.

31/05/2005

GIGI 2.5.11

In these circumstances, paragraph 2.4.5 explains that when your firm receives the premium, you must treat it as a mixed remittance (i.e. £90 client money and £10 the firm's own money earned as commission). CASS 5.5.16 R (2) requires that money that is not client money (i.e. the commission) is paid out of the client bank account as soon as reasonably practical and in any event no later than 25 business days after the payment cleared the client bank account. So the firm settles £90 with the insurance company on day two and transfers £10 commission to its office account on the same day. It carries out the client money calculation on day 25.

31/05/2005

GIGI 2.5.12

Example 1 on a cash basis (for formula see paragraph 2.5.8):

Day

Client money resource

Client money requirement found by CASS 5.5.67R: ((1) + (2) + (3)) - ((4) + (5))

Client bank a/c balance

Office a/c balance

£100

((£100) +(0) + (0)) - ((10) + (0)) = £90

£100 inc £10 commission due

£0

((£100) +(0) + (0)) - ((£100) + (0)) = 0

£0

£10 transferred on day two

31/05/2005

GIGI 2.5.13

Example 1 on an accruals basis (for formula see paragraph 2.5.9):

Day

Client money resource

Client money requirement found by CASS 5.5.68R: insurance creditors + unearned brokerage

Client bank a/c balance

Office a/c balance

£100

£90 + £0 = £90 **

£100 inc £10 commission due

£0

£0 + £0 = £0 **

£0

£10 transferred on day two

* The client money resource is £100 and the client money requirement is £90, resulting in a surplus of £10 representing the commission due to the firm. This surplus is not client money and should be removed from the client bank account (see paragraph 2.4.5 above).
** As the commission is due to the firm immediately, it cannot be included in the client money requirement on an accruals basis as unearned brokerage. Therefore, the unearned brokerage figure is £0.

31/05/2005

GIGI 2.5.14

Example two - The firm's terms of business - which it maintains with the client and the insurance company the premium will become payable to - state that commission will become due 25 business days after it receives the premium from the customer. The firm settles £90 with the insurance company on day 25. It then calculates the client money requirement on day 25 and identifies a £10 surplus (i.e. £10 earned by it as commission). The £10 surplus must be withdrawn from the client bank account and transferred to the firm's office account in line with CASS 5.5.63R(2)(b).

31/05/2005

GIGI 2.5.15

Example 2 on a cash basis (for formula see paragraph 2.5.8):

Day

Client money resource

Client money requirement found by CASS 5.5.67R : ((1) + (2) + (3)) - ((4) + (5))

Client bank a/c balance

Office a/c balance

£100

((£100) + (0) + (0)) - ((0) + (0)) = £100

£100 inc £10 commission

£0

25**

£10

((£100) +(0) + (0)) - ((£100) + (0)) = £0

£10 to transfer to office account by cob

£0

* As the commission is not due to the firm it is client money and is therefore included in the client money requirement (i.e. £10 commission is not deducted as in example 1 above).
** The commission becomes due on day 25. At this point it is no longer client money and cannot be included in the client money requirement. It is therefore deducted from the client money requirement, as is the premium which has been paid to the insurance company. As such, the client money requirement is £0 while the client money resource shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business in line with CASS 5.5.63R(2)(b).

31/05/2005

GIGI 2.5.16

Example 2 on an accruals basis (for formula see paragraph 2.5.9):

Day

Client money resource

Client money requirement found by CASS 5.5.68R: insurance creditors + unearned brokerage

Client bank a/c balance

Office a/c balance

£100

£90 + £10 = £100

£100 inc £10 commission

£0

25**

£10

£0 + £0 = £0

£10 to transfer to office account by cob

£0

* As the commission is not due to the firm it is client money and is therefore included in the client money requirement as unearned brokerage.
** The commission becomes due on day 25. At this point it is no longer client money and cannot be included in the client money requirement as unearned brokerage which should now show £0. The insurance creditors figures is also £0 as the premium has been paid to the insurance company. The client account therefore shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business in line with CASS 5.5.63R(2)(b).

31/05/2005

Reconciliation of client money

GIGI 2.5.17

Having performed your firm's client money calculation, you must also reconcile your accounting record of client money with the balance set out on the statement issued by the bank(s) with which the client bank account is held. If this reveals a discrepancy, your firm must identify the reason for it and correct it as soon as possible - unless it has arisen solely because of a timing difference between your firm's accounting system and that of the bank's.

31/05/2005

GIGI 3

Insurance:
Conduct of Business sourcebook (ICOB)

GIGI 3.1

Introduction

01/12/2004

What does ICOB cover?

GIGI 3.1.1

This chapter provides a guide to the rules in the Insurance: Conduct of Business sourcebook (ICOB). These rules govern a firm's relationship with its customers before, during and after the sale of a non-investment insurance contract. They aim to ensure that firms treat customers fairly.

01/12/2004

GIGI 3.1.2

The table below summarises the content of each chapter of ICOB. Not all of ICOB will be relevant to you and not all the content of any given chapter will be relevant - it will depend on the business you do. For example, some of our rules will apply only when you deal with a retail customer and others will apply only when you deal with a commercial customer. Some rules apply to insurance companies in their capacity as product providers and these are generally not covered in this Guide. At the beginning of each chapter of ICOB you will find a section titled 'Application'. This will tell you if all or part of that chapter applies to you.

01/12/2004

GIGI 3.1.3

This Guide does not cover the rules on distance non-investment mediation contracts in ICOB 8 as we think these contracts rarely exist. You should check the guidance at ICOB 1.7.3 G (4) to see if you provide distance non-investment mediation contracts.

01/12/2004

GIGI 3.1.4

Summary of the content of ICOB

Chapter

Title

Does it apply to you?

What does it include?

ICOB 1

Application and purpose

Yes

•Sets out the scope of ICOB, including to which firms the rules apply, to what activities and where the rules apply
•A summary of which parts of the ICOB rules apply to firms
•Guidance on the application of other parts of the Handbook

ICOB 2

General rules including unfair inducements

Yes

•General requirements that apply throughout ICOB
•Communications to customers must be clear, fair and not misleading
•Rules on inducements
•Prohibition on excessive charges for retail customers

ICOB 3

Financial promotion

Yes

•Requirement for financial promotions to be clear, fair and not misleading
•Rules on comparative advertising
•Rules on the approval of promotions

ICOB 4

Advising and selling standards

Yes

•Information on the status of the firm
•Suitability of advice
•Provision of a demands and needs statement
•Provision of commission information for commercial customers
•Restrictions on unsolicited services (including tacit renewals)

ICOB 5

Product disclosure

Yes - partially

•Responsibilities of insurance companies and intermediaries
•Content of product information and when it must be provided

ICOB 6

Cancellation

No - although the rules will be of interest to insurance intermediaries (see paragraph 3.5.2)

•Cancellation rights for retail customers in relation to non-investment insurance contracts

ICOB 7

Claims handling

Yes - partially

•Obligations on insurance companies
•Obligations on intermediaries to act with due care, skill and diligence and to avoid conflicts of interest

ICOB 8

Distance non-investment mediation contracts

Yes - if you arrange these contracts

•Information to be given to customers
•Restrictions on unsolicited services (including tacit renewals)
•Cancellation requirements

06/03/2006

What activities does ICOB apply to?

GIGI 3.1.5

ICOB applies only to intermediaries who sell and administer 'non-investment insurance contracts' or who communicate and approve 'non-investment financial promotions'. The terms 'non-investment insurance contract' and 'non-investment financial promotion' have a special meaning in the rules - see Appendix A. The defined term 'insurance intermediary' (see Appendix A) includes an insurance company when selling directly. However, as we explained in Chapter 1, this Guide is not designed for insurance companies and does not cover all the rules that apply to them. Where there is a chain of intermediaries between the insurance company and the customer, ICOB applies only to the intermediary in contact with the customer (ICOB 1.2.3 R (2)).

31/05/2005

Which customers does ICOB apply to?

GIGI 3.1.6

ICOB uses the defined terms 'retail customer' and 'commercial customer' (these terms have a special meaning in the rules - see Appendix A for details). 'Customer' means the customer taking out a policy and not other 'policyholders' (see 3.1.8 below for an explanation of policyholder), so disclosures required under ICOB only need to be made to that person unless otherwise stated. The only chapters that apply more widely are Chapter 2 (General rules including unfair inducements) and Chapter 7 (Claims handling).

06/03/2006

How does ICOB apply to group policies?

GIGI 3.1.8

ICOB contains separate provisions for 'group policies' (see ICOB 1.2.15 Rand ICOB 1.2.16 G), which are defined as non-investment insurance contracts that someone (either a commercial or a retail customer) enters into as legal holder of the policy on his own behalf and for other persons who are, or will become, policyholders (group policy is a defined term - see the Handbook Glossary for the full definition). A policyholder includes anyone who is entitled to make a claim directly to the insurance company (ICOB 1.2.16 G (2)). ICOB applies in full in respect of the legal holder of the policy, but only the following requirements must be met by intermediaries as regards the other persons who are, or will become, policyholders under a group policy:

(1) if one of these persons receives a personal recommendation from an intermediary about joining a group scheme, the intermediary must ensure that the recommendation is suitable and give the person a demands and needs statement (see paragraphs 3.3.18 to 3.3.25 of this Guide); and

(2) a commercial or retail customer who is the legal holder of the policy must be given product information to pass on to the other persons (see ICOB 5.4.8 R to ICOB 5.4.9 G - commercial customers, and ICOB 5.3.29 R to ICOB 5.3.30 G - retail customers).

06/03/2006

General requirements

GIGI 3.1.9

There are several general rules that apply in ICOB (set out in ICOB 2) covering:

(1) clear, fair and not misleading communication (ICOB 2.2.3 R);

(2) unfair inducements (ICOB 2.3);

(3) when you can rely on information provided to you by another person (ICOB 2.4);

(4) preventing you from avoiding or limiting any duty or liability you have to a customer under the regulatory system (ICOB 2.5);

(5) general requirements related to distance contracts (ICOB 2.7);

(6) general requirements on record keeping (ICOB 2.8);

(7) general provision allowing information to be sent only to the first-named customer where a contract is effected jointly (ICOB 2.9); and

(8) general provision that an insurance intermediary must ensure its charges to a retail customer are not excessive (ICOB 2.10).

06/03/2006

Key Facts logo

GIGI 3.1.10

We developed the key facts logo following consumer research to highlight key information that customers should read. The ICOB rules say that it can be used on the initial disclosure document (IDD) and that it must be used on the combined initial disclosure document (CIDD) and policy summary (see paragraphs 3.3.7 to 3.3.11 and 3.4.19 - 3.4.20 respectively). You will find the logo on our website at: www.fsa.gov.uk/pubs/other/keyfacts_logo. We also require the logo to be used on certain documents required by our rules in the investment and mortgage markets. The ICOB rules also prevent firms using the key facts logo on other documents (ICOB 2.2.2 R and ICOB 3.8.1 R (3)).

31/05/2005

What do the rules say on excessive charges and when do they apply?

GIGI 3.1.11

You need to ensure that your charges to retail customers for insurance mediation services are not excessive (see ICOB 2.10). In determining whether or not your charges are excessive you should consider:

(1) the level of your charges compared to charges for similar services or products in the market;

(2) the degree to which the charges are an abuse of the trust put in you by your retail customer; and

(3) the nature and extent of information provided to your customer on charges.

06/03/2006

GIGI 3.2

Financial promotion (ICOB 3)

01/12/2004

Introduction

GIGI 3.2.1

Financial promotions include but are not limited to advertisements. A financial promotion is an invitation or inducement to engage in an investment activity (which includes insurance). They can be solicited or unsolicited and can take a variety of forms, such as mailshots and newspaper or TV advertisements. The financial promotion rules relating to non-investment insurance contracts (which we call 'non-investment financial promotions') are in ICOB 3.

01/12/2004

What is the scope of the financial promotion rules?

GIGI 3.2.2

Financial promotions are prohibited unless:

•

they are communicated by an authorised person; or

•

an authorised person has approved the content of the promotion; or

•

an exemption applies.

31/05/2005

GIGI 3.2.3

There is a wide range of exemptions from the financial promotion rules. The scope of the rules, including a list of the exemptions likely to be of interest to you, is set out in ICOB 3.1 to ICOB 3.6.

31/05/2005

GIGI 3.2.4

Even if the rules in ICOB 3 do not apply, because your promotion falls within an exemption, other rules in ICOB still apply. For example, you would still need to comply with ICOB 2.2.3 R, which says that communications must be clear, fair and not misleading. You may also need to give the information required by ICOB 4 (advising and selling standards) and ICOB 5 (product information) as part of the promotion, e.g. if that is the only way to ensure that the customer receives this information before the conclusion of the contract.

31/05/2005

What rules apply to regulated non-investment financial promotions?

GIGI 3.2.5

Where ICOB 3 applies, you must be able to show that you have taken reasonable steps to ensure that the non-investment financial promotion is clear, fair and not misleading (ICOB 3.8.1 R). ICOB 3.8.2 E contains a 'checklist' of matters you should bear in mind when communicating or approving a non-investment financial promotion.

31/05/2005

GIGI 3.2.6

In addition, ICOB 3.8.3 G contains guidance on the clear, fair and non-misleading obligation which includes the following points:

(1) if a promotion is directed at a particular group of recipients who are expected to have particular knowledge of the contract being promoted, this should be made clear;

(2) any quotations of opinion should be a fair representation and it should be made clear if there is a connection between the person expressing the opinion and the firm;

(3) you should avoid using small print to qualify prominent claims;

(4) price quotations, if they are not precise, should be representative of the premium that would be charged for someone in a similar position to the customer;

(5) if a quote is an estimate only, you should make that clear, together with the fact that the actual premium will depend upon individual circumstances; and

(6) if the promotion says you can reduce a premium, give the cheapest premium or reduce other costs, the promotion should contain a prominent statement explaining how this will be achieved, and should explain with equal prominence any significant limitations on the availability of the savings offered.

01/02/2006

GIGI 3.3

Advising and Selling Standards (ICOB 4)

01/12/2004

Introduction

GIGI 3.3.1

This section of the Guide explains the advising and selling rules in ICOB 4. The rules in ICOB 4 cover:

(1) information about your firm ('status disclosure') (ICOB 4.2);

(2) suitability of advice (ICOB 4.3);

(3) statement of demands and needs (ICOB 4.4);

(4) [deleted]

(5) telling commercial customers about your commission (ICOB 4.6);

(6) unsolicited services (ICOB 4.7); and

(7) the language in which information should be provided (ICOB 4.8).

None of these rules apply when you are dealing with a commercial customer insuring a 'large risk' (a contract of large risks has a special meaning in the rules - see Appendix A). An AR that has an insurer as its principal must comply with all the above rules even if its insurer principal benefits from an exemption in ICOB 4 (for example, from status disclosure), but does not need to do so if the AR is acting as a third party processor for the insurer (see paragraphs 3.3.12 to 3.3.14 below).

06/03/2006

What information do you need to give customers about your firm and the services you provide?

GIGI 3.3.2

Summarised below is the information you need to disclose to your retail and commercial customers unless you are introducing (ICOB 4.2.8 R provides a more detailed explanation):

(1) Name and address of your firm.

(2) Your firm's statutory status, using the appropriate wording required by the General Provisions sourcebook (see GEN 4 Annex 1), for example, that you are authorised and regulated by the Financial Services Authority.

(3) That (1) and (2) can be checked on the FSA's Register.

(4) Any holdings you have in an insurance company, and that an insurance company or its parent has in your firm that represent more than 10 per cent of the voting rights or the capital of the insurance company or your firm.

(5) The range of insurance companies you are selecting products from in a sale to a particular customer. This can be from a wide range of insurance companies (which is referred to in the rules as providing a service on the basis of a 'fair analysis' of the market), or from just one or a limited number of insurance companies. You must also tell the customer that he can request a list of the insurance companies you deal with, unless the service you provide is on the basis of a 'fair analysis' of the market.

(6) How the customer can complain to you and that complaints may subsequently be referred to the Financial Ombudsman Service (FOS).

(7) The compensation arrangements if you are unable to meet your liabilities.

31/05/2005

When do you have to give this information?

GIGI 3.3.3

You must provide all the information above before conclusion of the non-investment insurance contract, in a durable medium unless one of the following situations, set out in ICOB 4.2.2 R, applies:

(1) the customer asks for the information to be provided orally;

(2) immediate cover is required; or

(3) the contract with the intermediary is by telephone and the customer agrees to receiving more limited information.

31/05/2005

GIGI 3.3.4

In the first two cases you must give the information at paragraph 3.3.2 orally before the conclusion of the non-investment insurance contract. However, if the contract is concluded over the telephone and the customer agrees to receiving limited information, at least the details listed below must be provided before conclusion of the contract:

(1) the name of your firm;

(2) if you initiated contact, the purpose of the contact;

(3) the name of the person in contact with the customer and his link with your firm; and

(4) that other information is available on request, and the nature of the information.

31/05/2005

GIGI 3.3.5

You must then give the customer all the information in paragraph 3.3.2 in a durable medium immediately after conclusion of the contract.

31/05/2005

GIGI 3.3.6

The information above does not need to be given when contracts are renewed if the information given out at inception of the contract remains up-to-date. If certain elements have changed then you must update the customer on these particular elements but you do not need to send out a whole new set of information (ICOB 4.2.20 R).

01/12/2004

Do you have to use the template documents in the rules when giving information about your status?

GIGI 3.3.7

We have included two template documents in Annexes 1 and 2 to ICOB 4 that you can use to give the status information in paragraph 3.3.2 to your customers. We call these the initial disclosure document (IDD) and the combined initial disclosure document (CIDD). These documents have been developed by us and tested using consumer research. You can download templates of these documents from our website: www.fsa.gov.uk/Pages/Doing/small_firms/general/templates/index.shtml . Using these documents is optional; you can choose to present the status disclosure information in a different format if you wish.

06/03/2006

GIGI 3.3.8

Where you are selling just non-investment insurance contracts, you can use the IDD to provide the status information above. You can use all or part of the IDD, but in all cases you must ensure that all the status information required by the rules is given to the customer. However, if you choose not to use the full IDD then you must not include the key facts logo or the heading and text in Section 1 of the IDD.

01/12/2004

GIGI 3.3.9

Where you use the full IDD, it must be a standalone document and there are certain rules on the use of the key facts logo, for example, on its size, prominence and positioning (ICOB 4.2.6 R). You cannot make changes (including adding, altering or removing text) to the full IDD unless allowed by the notes that accompany the form.

31/05/2005

GIGI 3.3.10

Where you are arranging mortgages and/or packaged products and also non-investment insurance contracts, you can give the customer a CIDD. This means you can describe the service you are providing in relation to all these products in one document. If you choose to use the CIDD, you must use the document in full and make no changes to the text other than those allowed by the notes that accompany the form. Also, unlike the insurance rules, the rules in the Mortgage: Conduct of Business sourcebook (MCOB) and Conduct of Business sourcebook (COB) require you to give the IDD or CIDD on initial contact with the customer.

01/12/2004

GIGI 3.3.11

There are examples of completed IDDs and CIDDs on our website: www.fsa.gov.uk/Pages/Doing/small_firms/insurance/disclosure/idds.shtml and www.fsa.gov.uk/Pages/Doing/small_firms/insurance/disclosure/cidds.shtml.

06/03/2006

Changes to disclosure requirements when your firm carries on insurance mediation activities or regulated mortgage activities for another authorised firm or an AR

GIGI 3.3.12

A waiver and modification by consent has been in force for firms (third party processors) who undertake regulated activities on behalf of another authorised firm. This waiver and modification affected MCOB 1.2.1 R, ICOB 1.2.1 R and GEN 4.3.1 R. This has now been replaced by permanent rule amendments, which came into force on 1 June 2005. See the Third Party Processors Instrument 2005 - 2005/25 - www.fsahandbook.info/FSA/handbook/LI/2005/2005_25.pdf

31/05/2005

GIGI 3.3.13

The rule amendments allow a third party processor (Firm A) undertaking regulated mortgage activities or insurance mediation activities (in relation to non-investment insurance contracts) on behalf of another authorised firm (Firm B) under an outsourcing contract to disclose to customers that it is B where our rules would otherwise require A to disclose its real identity. The outsourcing agreement between the two firms must acknowledge that the firm outsourcing the activities (Firm B) accepts responsibility for the activities carried on by the other firm (Firm A) on its behalf.

31/05/2005

GIGI 3.3.14

The rules also cater for cases where an AR acts as third party processor for its principal, or where an authorised firm acts as third party processor for an AR.

31/05/2005

What do you have to disclose about your firm when you are only introducing?

GIGI 3.3.15

Where you are only introducing a customer to another intermediary (or to an insurance company) you are not required to give the information at paragraph 3.3.2. Instead, you must give the customer the following information in good time before the introduction is made (see ICOB 4.2.9 R):

(1) the name and address of your firm;

(2) your statutory status using the appropriate wording required by the General Provisions sourcebook (see GEN 4 Annex 1R);

(3) details of any fees you will charge for the introduction; and

(4) whether you and the firm you are introducing to are members of the same group.

31/05/2005

When can you tell the customer that you are providing a service on a fair analysis basis?

GIGI 3.3.16

As noted above, one of your options is to disclose that you provide a service on a fair analysis basis. You cannot state that you offer a fair analysis service - that is, that you consider a representative sample of the market when selecting products - unless you have considered a sufficiently large number of insurance contracts in the relevant sector for that particular customer and that consideration is based on adequate knowledge of that sector. There is guidance on how this requirement can be satisfied, including the selection and use of panels and the frequency with which panel arrangements should be reviewed, in ICOB 4.2.12 G to ICOB 4.2.13 G.

31/05/2005

What information do you have to give on fees?

GIGI 3.3.17

You must disclose any fees (actual fees or, where actual fees cannot be given, the basis for calculating fees) you charge to retail and commercial customers for mediation services (ICOB 4.2.15 R to ICOB 4.2.18 G). The information must be given to the customer before they become liable to pay the fee, or before conclusion of the contract, whichever is earlier. So, for example, fees that will be charged for mid-term adjustments must be disclosed before conclusion of the contract. The information can be provided in any medium before conclusion of the contract, and must be given in a durable medium immediately after conclusion of the contract. Fees do not include premiums or commission that forms part of premium.

31/05/2005

GIGI 3.3.18

If you choose to use the full IDD (see paragraph 3.3.9), section 4 requires you to state the amount of the fee you charge for your services, if any, together with an explanation of what the fee is for and when it is payable. If you do not know the exact amount of the fee you may give the basis of calculating it (e.g. £X per hour). If the fee is only payable in certain circumstances then you may state this and cross refer to another document for details of the circumstances. If you use the full IDD you cannot add words to describe what other remuneration you might receive, e.g. commission.

31/05/2005

What are the requirements for advised sales?

GIGI 3.3.19

The rules on advised sales are in ICOB 4.3 (Suitability). These rules apply when you make a 'personal recommendation' (this term has a special meaning - see Appendix A for further details) to a customer to buy or sell a non-investment insurance contract. The personal recommendation must be based on the scope of the service you provide (selection of insurance contracts on a fair analysis basis or from one or a limited number of insurance companies).

31/05/2005

GIGI 3.3.20

A personal recommendation has three elements:

(1) you must give advice describing the merits of buying or selling the insurance contract;

(2) the advice must relate to a specific contract, e.g. 'I recommend ABC's contents insurance'; and

(3) the advice must be to a specific person or specific group of people.

31/05/2005

GIGI 3.3.21

There is guidance on the regulated activity of 'advising on contracts of insurance' in the perimeter guidance in the Perimeter Guidance manual (see PERG 5.8).

06/03/2006

GIGI 3.3.22

If your sale involves a personal recommendation, you must ensure that the contract is suitable for the customer's demands and needs. To do this you should first assess the customer's demands and needs and then assess the suitability of the contract against these.

31/05/2005

What is the statement of demands and needs and when do you have to give it to the customer?

GIGI 3.3.23

You must give all your customers a demands and needs statement when you sell them a non-investment insurance contract, including at renewal (ICOB 4.4.1 R). The statement must contain:

(1) details of your customer's demands and needs;

(2) a statement of whether a personal recommendation has, or has not, been provided; and

(3) where a personal recommendation is made, the reasons for making the recommendation.

31/05/2005

GIGI 3.3.24

The statement must also reflect the complexity of the contract. ICOB 4.4.3 G to ICOB 4.4.6 G includes guidance on the style and presentation of the demands and needs statement. If the contract is straightforward, and you have not made a personal recommendation, this guidance says that you may be able to satisfy the rule by including a generic statement in your product information, for example.

31/05/2005

GIGI 3.3.25

The demands and needs statement must be given before conclusion of the contract, unless the contract is concluded over the telephone. For telephone sales it must be provided immediately after the conclusion of the contract in a durable medium.

31/05/2005

GIGI 3.3.26

The demands and needs statement can be provided orally if the customer requests it or if immediate cover is necessary, but in both cases it must be provided in a durable medium immediately after contract conclusion.

31/05/2005

Do you need to keep records of the advice you give?

GIGI 3.3.27

Where a personal recommendation is made and the customer acts on that recommendation by buying from you the contract you recommended, you must keep a copy of the demands and needs statement. You must keep this for at least three years from the date on which you made the personal recommendation (see ICOB 4.4.7 R). You do not need to keep a copy if the customer does not act on your recommendation.

31/05/2005

GIGI 3.3.28

[text moved to GIGI 3.1.11 G]

06/03/2006

Do you need to disclose the commission you receive?

GIGI 3.3.29

ICOB 4.6 requires you to disclose commission to commercial customers on request. If asked, you must disclose any commission earned by you plus any commission earned by any associate. The commission has to be disclosed in a durable medium and in cash terms. If you cannot indicate it in cash terms, you must give the basis of its calculation, also in a durable medium.

31/05/2005

GIGI 3.3.30

Commission includes remuneration arrangements for sharing profits and payments relating to volume of sales (see ICOB 4.6.7 G).

31/05/2005

GIGI 3.3.31

By associate, we mean any company in the same group, any appointed representative of your firm or a firm in the same group or any other person or firm connected to your firm. Where an associate is part of a distribution chain, you still need to disclose any commission paid to it. But you do not need to give information on the commission earned throughout the distribution chain.

31/05/2005

GIGI 3.3.32

There are no rules requiring you to tell retail customers about your commission although normal agency law requirements apply.

31/05/2005

What do the rules on unsolicited services mean?

GIGI 3.3.33

ICOB 4.7.1 R prevents you from providing services to retail customers in connection with non-investment insurance contracts, where this involves a request for immediate or deferred payment, unless you have obtained the customer's prior consent. This includes entering into these contracts but does not prevent the tacit renewal of these contracts (ICOB 4.7.2 R). For example, this means that the common practice of rolling forward insurance contracts at renewal and continuing to take direct debit payments can continue without breaching this rule. This rule only applies to distance contracts.

31/05/2005

GIGI 3.4

Product disclosure (ICOB 5)

01/12/2004

Introduction

GIGI 3.4.1

This section explains the rules on product information, which are in ICOB 5.

31/05/2005

GIGI 3.4.2

The rules differentiate between the information to be provided to commercial customers and to retail customers. The rules cover:

(1) the responsibilities of insurance companies and intermediaries in terms of producing and delivering product information (ICOB 5.2);

(2) providing information to retail and commercial customers (ICOB 5.3 and ICOB 5.4);

(3) the form and content of the information provided (ICOB 5.5);

(4) white labelling (ICOB 5.6); and

(5) record keeping (ICOB 5.7).

01/12/2004

What are the responsibilities of insurance companies and intermediaries?

GIGI 3.4.3

If both the insurance company and intermediary are authorised and are operating from a permanent place of business in the UK, the insurance company will normally produce most of the product information and the intermediary will be required to give it to the customer (ICOB 5.2.2 R). However, if the insurance company whose contract you are selling does not operate from a permanent place of business in the UK, you will be responsible for producing the information and giving it to the customer.

01/12/2004

GIGI 3.4.4

An insurance company we regulate must enable you to comply with our rules (e.g. to provide information to the customer before the conclusion of the contract) by giving you the information that it prepares in good time to allow you to meet those standards (ICOB 5.2.12 R).

31/05/2005

What information do you have to give retail customers when selling insurance?

GIGI 3.4.5

ICOB 5.3 sets out the information that you have to give to a retail customer before and after conclusion of a contract, mid-term and on renewal. This includes information about the terms of the contract, price, cancellation rights and claims handling. ICOB 5.3 needs to be read with ICOB 5.5, which gives more details about the content of such information, in particular the policy summary and price information.

01/12/2004

GIGI 3.4.6

We distinguish between different types of sale. The information that needs to be given in each case is shown in the table below. The types of sale are:

(1) non-distance sales - where there is some face-to-face contact between you and the customer, even if some of the negotiations take place by telephone, fax etc (see ICOB 5.3.1 R to ICOB 5.3.5 G);

(2) distance sales where you are able to provide information to the customer in a durable medium before the contract is concluded, for example, post and e-mail (see ICOB 5.3.6 R (1)); and

(3) distance sales where you are unable to provide information to the customer in a durable medium before the contract is concluded, for example, by telephone (see ICOB 5.3.6 R (2) to ICOB 5.3.8 R).

01/12/2004

GIGI 3.4.7

Product information requirements for different mediums of sale with retail customers:

Before conclusion of the contract

After conclusion of the contract

Non-distance sales (ICOB 5.3.1 R to ICOB 5.3.5 G)

Policy summary
Price
Directive-required information
Draw attention orally to policy summary and the section on exclusions

Policy document
Claims information
Cancellation information, where applicable
Compensation scheme - extent and level of cover*

Distance sales - where information can be provided in a durable medium before contract conclusion (ICOB 5.3.6 R (1))

Policy summary
Price
Directive-required information
Policy document
Claims information
Cancellation information, where applicable
Compensation information, where applicable, if not already in policy summary*

No additional information

Distance sales where information cannot be provided in a durable medium before contract conclusion (ICOB 5.3.6 R (2) to ICOB 5.3.8 R)

Name of insurance undertaking
Type of insurance and cover
Significant features and benefits
Significant or unusual exclusions or limitations
Total price
Possibility that taxes or costs may exist that are not payable via the intermediary
Cancellation information
Where to notify a claim
The nature of other information available on request (for telephone sales only)

Policy summary
Price
Directive-required information
Policy document
Claims information
Cancellation information
Compensation information, where applicable, if not already included in policy summary*

* The policy summary must state whether or not there is a compensation scheme. The extent and level of cover can be included in the policy summary or be provided separately.

31/05/2005

GIGI 3.4.8

Where our rules require you to give the name of the insurance undertaking, you only need to disclose the first-named undertaking before conclusion of a coinsured policy. If the policy is insured at Lloyd's, it is sufficient to use 'The association of underwriters known as Lloyd's' or similar wording. You need to give details of all the insurers after conclusion. For Lloyd's syndicates it is sufficient detail to identify the syndicates - for example, the Lloyd's agreed abbreviation.

31/05/2005

What information do you have to give a retail customer on renewal of his policy?

GIGI 3.4.9

Before a policy is due for renewal, unless you have a good reason to believe that your retail customer will not want to renew the policy, you must give the retail customer information about changes to the policy, information on price and cancellation and tell him that he can ask for a new policy document if he wishes. This information has to be given to the customer no less than 21 days before his policy expires, or you must tell the customer no less than 21 days before expiry that you no longer deal with the insurance company or it is not willing to renew. Examples of situations when you could assume the customer would not want to renew are short term travel policies and creditor insurance tied to a loan, where the insurance ends at the same time as the loan. The rules on renewals for retail customers are covered in ICOB 5.3.15 R to ICOB 5.3.23 G.

06/03/2006

GIGI 3.4.10

The situation is different for a policy with monthly renewal - see ICOB 5.3.16 R. See also ICOB 6.1.3 G for guidance on when such a policy exists.

31/05/2005

What do you have to do if there is a mid-term change?

GIGI 3.4.11

A retail customer must be told about changes to any term or condition of the contract before the change takes effect, and you must explain to him the implications of any change. This includes changes to the premium, unless the change is in line with previously agreed terms of the contract, for example, a periodic percentage increase. The information must usually be given to the retail customer in a durable medium before the changes takes effect, but if the change has been requested by the retail customer himself, you can if necessary just explain the implications orally and give him the information in a durable medium promptly afterwards. These rules are in ICOB 5.3.24 R to ICOB 5.3.28 G.

31/05/2005

Information for commercial customers

What information do you have to give commercial customers when selling insurance?

GIGI 3.4.12

You must always give your commercial customer information about a contract before the conclusion of that contract, unless the contract relates to a large risk. The amount of detail given can vary depending on the customer's knowledge, experience and ability - the rules simply say that it must be sufficient to allow the customer to make an informed decision. In addition, you must tell your commercial customer the amount of the premium and any fees and certain additional information required under various European directives (ICOB 5.4.1 R).

31/05/2005

GIGI 3.4.13

After the contract is concluded you must give the commercial customer the policy document promptly (ICOB 5.4.5 R) (as previously mentioned, the rules require insurance companies to give you documents in time for you to comply with rules such as this one). The requirement to give the commercial customer a policy document promptly after conclusion also applies (unlike the pre-conclusion requirements) to commercial customers insuring large risks.

31/05/2005

GIGI 3.4.14

These rules are set out in ICOB 5.4.1 R to ICOB 5.4.7 G.

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What happens with group policies sold to commercial and retail customers?

GIGI 3.4.15

If you sell a group policy to a commercial or retail customer and members of the group have a direct right to claim under that policy, you must, promptly after the conclusion of the contract, give:

(1) the retail customer in all cases; and

(2) the commercial customer, where there are members of the group policy who are capable of being retail customers;

a policy document and policy summary. And you must inform the customer that they should provide the policy summary to each policyholder who is capable of being a retail customer and tell them a copy of the policy document is available on request.

31/05/2005

GIGI 3.4.16

The information can be given in any form which is in writing - examples include a booklet or an employer's intranet.

31/05/2005

GIGI 3.4.17

ICOB 5.3.29 R to ICOB 5.3.30 G apply where a retail customer takes out a group policy, and ICOB 5.4.8 R to ICOB 5.4.9 G where a commercial customer takes out a group policy.

31/05/2005

What do you have to do when renewing a commercial customer's policy?

GIGI 3.4.18

A commercial customer must be given renewal terms 'in good time' before expiry of his policy, or be told that you no longer deal with the insurance company or it is not willing to renew, unless you have reason to believe that the customer does not want to renew the policy (ICOB 5.4.10 R to ICOB 5.4.14 R). As explained in ICOB 5.2.13 G, we consider 'in good time' to mean that the customer should receive the information early enough to be useful to him.

31/05/2005

What does the policy summary have to contain and who do you have to give it to?

GIGI 3.4.19

You will need to give a policy summary to all retail customers and also to a commercial customer who takes out a group policy where there are members of the group policy who are capable of being retail customers. The policy summary will usually be produced by the insurance company. The policy summary contains key information a retail customer should read before deciding whether or not to take out a policy. So we require it to be a separate document or - if it is part of another document - to be in a prominent place and clearly identifiable as important information for the customer. It must also include the key facts logo (ICOB 5.5.5 R).

31/05/2005

GIGI 3.4.20

The policy summary can only include the information set out in our rules. This includes the key facts logo, the main features of the policy, and significant or unusual exclusions or limitations. It also has to include signposting from the significant or unusual exclusions or limitations to the policy document, in case the customer wants more information. These rules are in ICOB 5.5.1 R to ICOB 5.5.13 G.

01/02/2006

What directive information do you have to give to retail and commercial customers?

GIGI 3.4.21

The information that you must give the customer as required under various European directives is summarised in ICOB 5.5.20 R. This sometimes duplicates information you have to give customers under other rules in ICOB 5 or in ICOB 4 (Advising and selling standards). ICOB 5.5.17 G explains that you do not have to give information twice unless this is required by a specific rule.

31/05/2005

What does the policy document consist of?

GIGI 3.4.22

The 'policy document' is all the contract terms and conditions, including the terms specific to a particular customer. It is defined as "a policy in a durable medium", and a policy is "a contract of insurance ... or any instrument evidencing such a contract". As explained in ICOB 5.5.27 R to ICOB 5.5.28 G, the terms and conditions can be set out in more than one document, but must be given to the customer at the same time. Our rules require a policy document to be given to the customer before the contract is concluded in the case of distance contracts falling under ICOB 5.3.6 R (1). Provided the full terms and conditions are given to the retail customer before conclusion in or with a document providing evidence of the contract, for example, a cover note, the policy booklet can be provided after conclusion.

31/05/2005

What does the statement of price rule require?

GIGI 3.4.23

The statement of price rule requires you to identify separately certain components of the total price as well as the total price that the customer will pay (see ICOB 5.5.14 R). For example, you must disclose the amount of premium and fees separately.

31/05/2005

GIGI 3.4.24

You will need to give an exact amount for the components of the total price and for the total price as well. You may show the basis of calculation of the amount instead, but only if it is not possible to give an exact amount. For example, if a creditor insurance policy is financed by a loan agreement and it is possible to state the total amount payable in line with the Consumer Credit Act 1974 requirements to show the total price, you will need to state the total price as well as the interest amount payable on the premium.

31/05/2005

What rules are there on white labelling?

GIGI 3.4.25

You may want to make your own brand the main one on documents you give the customer, and to have prominence over the insurance company's name. This is known as white labelling. ICOB 5.6 gives guidance on what is acceptable under our rules.

31/05/2005

GIGI 3.4.26

Our rules do not allow you to give the customer only your firm's name and not that of the insurance company. ICOB 4.2 (status information) and the product information rules in ICOB 5 require the customer to be told of the identity of both the insurance company and the intermediary, and the policy summary must give only the name of the insurance company, and not your firm's name. However, as long as you comply with the rules on financial promotions (ICOB 3) and the general rule that communications with customers must be clear, fair and not misleading (ICOB 2.2.3 R), the way that information is presented to the customer is not specifically regulated by us.

31/05/2005

GIGI 3.5

Cancellation (ICOB 6)

01/12/2004

Introduction

GIGI 3.5.1

This section briefly sets out the cancellation rights that an insurance company must offer retail customers when they purchase or renew certain non-investment insurance contracts. The requirements do not apply to contracts with commercial customers.

01/12/2004

GIGI 3.5.2

The cancellation rules do not apply to insurance intermediaries directly. As such, this Guide does not set out the detail of the cancellation rules, which are in ICOB 6. However, you will find it useful to understand the rules because:

(1) under the product information rules in ICOB 5, you, as an insurance intermediary, must provide information to retail customers about cancellation rights; and

(2) the cancellation rules might affect the arrangements you have in place with the insurance company for payment of commission.

01/12/2004

Which contracts do cancellation rights apply to?

GIGI 3.5.3

In general, cancellation rights apply to non-investment insurance contracts taken out by retail customers. There are, however, a number of exemptions, which are set out in ICOB 6.1.5 R to ICOB 6.1.10 G.

01/12/2004

What must you tell the customer about cancellation?

GIGI 3.5.4

Before conclusion of the contract, you must inform your retail customers of their cancellation rights. These requirements are in ICOB 5.3.12 R. See also Chapter 3.4 above.

01/12/2004

How long does the customer have to cancel the contract?

GIGI 3.5.5

For general insurance contracts, insurance companies must give a cancellation period of 14 days and for pure protection contracts the cancellation period must be 30 days. For mixed contracts which include both pure protection and general insurance policies, the cancellation period is 30 days (ICOB 6.2.1 R to ICOB 6.2.4 R).

31/05/2005

GIGI 3.5.6

For pure protection contracts, the cancellation period starts on the day on which the customer is informed that the contract has been concluded, or the day he receives the terms and conditions in a durable medium, whichever is the later. For general insurance contracts, the period starts on the day on which the contract is concluded or the day the customer receives the terms and conditions in a durable medium, whichever is the later (ICOB 6.2.5 R).

31/05/2005

What happens to attached insurance contracts when the financial services contracts to which they are attached are cancelled?

GIGI 3.5.7

The Financial Services (Distance Marketing) Regulations 2004 require that when a distance financial services contract is cancelled, any attached contracts are automatically cancelled. This is unless the customer gives notice that cancelling the main contract does not cancel the attached contract. This is referred to in guidance at ICOB 6.4.2 G. Broadly an attached contract is one which is subsidiary to the main contract. For example, creditor insurance taken out to protect a loan would be an attached contract and the loan would be the main contract. This means that if the loan (the main contract) is cancelled, then the creditor insurance (the attached contract) would also be cancelled automatically. The reverse, however, does not apply - i.e. the loan (the main contract) would not be automatically cancelled if the creditor insurance (the attached contract) was cancelled.

31/05/2005

Can an insurance company make a charge for contracts that are cancelled?

GIGI 3.5.8

Where a customer cancels a contract, an insurance company must return to the customer any sums paid to it without delay, and no later than 30 days from the date of cancellation, though it may charge for any costs incurred in connection with a general insurance contract (ICOB 6.4.3 R). This might include administrative costs for intermediaries and/or a time on risk charge for insurance companies. The charge for costs incurred must not exceed an amount that is in proportion to the service provided and must not be capable of being construed as a penalty. So the insurance company must not profit from cancellation by a customer and may only retain an amount that accurately reflects its costs. An insurance company is not permitted to make a charge to a retail customer for a cancelled pure protection contract.

01/12/2004

GIGI 3.5.9

As well as returning any sums paid to the insurance company by the customer, the customer must return any sums and property the customer received from the insurance company (such as a motor insurance certificate) within 30 days of cancellation (ICOB 6.4.3 R (4)).

01/12/2004

GIGI 3.5.10

Under ICOB 6.4.9 R, if cover started during the cancellation period and the insurance company has made a charge, the sums and property returned by the customer under ICOB 6.4.3 R (4) must not include any claims money that the insurer paid out in the cancellation period. This does not mean, however, that if the insurance company chooses not to charge, that it has the right to refuse claims made during the cancellation period if cover commenced during the cancellation period.

31/05/2005

Can an intermediary charge for its selling costs if the contract is cancelled?

GIGI 3.5.11

As mentioned above, the insurance company can recover the administrative costs that intermediaries incur in the charges it makes for cancelled general insurance contracts. In addition, where you charge the customer a separate fee for the mediation service you have provided this is unaffected by the cancellation rules in ICOB 6 (although the cancellation rules in ICOB 8 may apply if you have a distance mediation contract and this will affect what fees you can recover). If you charge a fee you will need to disclose it to the customer (see paragraph 3.3.16) and you should make clear that it will not be refundable if the non-investment contract is cancelled if this is the case.

31/05/2005

GIGI 3.5.12

If you charge a fee and also receive commission, then the insurance company is restricted in the amount of commission it can recover from the retail customer when a general insurance contract is cancelled to an amount which, when added to your fee, is sufficient to cover your costs (see ICOB 6.4.5 G(3)).

01/12/2004

GIGI 3.6

Claims handling (ICOB 7)

01/12/2004

GIGI 3.6.1

This section sets out the rules that apply to intermediaries when handling claims on behalf of a customer. These rules are in ICOB 7. ICOB 7 sets out the rules applicable to insurance companies and intermediaries. This section of the Guide deals with the obligations of intermediaries only.

01/12/2004

What are an intermediary's obligations in relation to a claim?

GIGI 3.6.2

Most of the obligations relating to claims handling fall on insurance companies and if you act on behalf of an insurance company in relation to a claim (e.g. you have delegated authority for claims handling) then the insurance company is responsible for ensuring that the rules are complied with. But if you act for the customer in relation to a claim, there are certain rules that you must comply with. These rules are set out in ICOB 7.4. In particular, you must:

(1) act with due care, skill and diligence when acting for a customer in relation to a claim; and

(2) avoid conflicts of interest.

01/12/2004

GIGI 3.6.3

You could have a conflict of interest if, for example, you were acting for both a customer and an insurance company in relation to a claim; or you were acting for two customers that were parties to a dispute over liability. If you face a potential conflict of interest, you must tell the customer(s) of the conflict and ask their consent to continue to act for them. However, if it is not possible to manage the conflict by disclosing it the customer(s), you will need to withdraw from acting for one or both parties.

01/12/2004

GIGI 3.6.4

You may have arranged a policy for a customer, but when it comes to a claim, you act for the insurance company and not for the customer. In these cases, you must tell the customer that you are acting for the insurance company and not for him in relation to the claim.

01/12/2004

GIGI 3.6.5

If you are notified of a claim by a customer, but do not have the insurance company's authority to handle the claim, you must forward the notification to the insurance company promptly or tell the customer immediately that you cannot deal with the notification.

31/05/2005

GIGI 4

Training and Competence sourcebook (TC)

GIGI 4.1

Training and competence

01/12/2004

Introduction

GIGI 4.1.1

This chapter of the Guide summarises the training and competence requirements that apply to insurance intermediaries, which are in the Training and Competence sourcebook (TC).

01/12/2004

What are the training and competence requirements?

GIGI 4.1.2

You must ensure that, for any staff who give advice to retail customers, you comply with Chapters 1 and 2 of the sourcebook (TC 1and TC 2). For any other employees who are associated with insurance mediation activities, only TC 1 applies.

01/12/2004

GIGI 4.1.3

TC 1 contains the Commitments. These provide guidance to Principle 3 (management and control) of the Principles for Businesses (see Part 1 Chapter 3). Under the Commitments it is your responsibility to ensure that individuals:

(1) are (and remain) competent for the work that they do;

(2) are appropriately supervised;

(3) have their competence regularly reviewed; and

(4) have a level of competence appropriate for the nature of their business.

01/12/2004

GIGI 4.1.4

TC 2 contains more detailed rules and guidance about recruitment, training, attaining and maintaining competence, supervising and monitoring and record keeping. There is no requirement for insurance intermediaries dealing with non-investment insurance contracts to pass an examination as part of the process of attaining competence.

31/05/2005

GIGI 4.1.5

Our rules do not specify the level of competence required. It is a matter for firms to decide what competence is necessary for their employees to perform their role effectively and comply with the relevant regulatory requirements.

01/12/2004

GIGI App

Appendix A: brief description of key terms in Part III

GIGI App 1

Appendix A: brief description of key terms in Part III

01/12/2004

GIGI App 1.1

Defined term

Meaning

Client money

Money that a firm holds on behalf of a client in the course of carrying on insurance mediation activities. This includes money that a firm treats as client money in line with the FSA client money rules in CASS.

Contracts of large risks

A contract covering certain types of risks. These include ships or aircraft (and related liability), railway rolling stock and goods in transit, and credit and suretyship if the policyholder meets certain criteria. Property and liability risks are included as 'large risks' if the policyholder exceeds certain size thresholds.

Customer

In ICOB, a 'customer' is a policyholder or potential policyholder. This can include a member of a group policy who has direct rights under the contract of insurance, e.g. to claim.
In CASS, a 'customer' is the same as a 'client' who is any person with or for whom a firm conducts or intends to conduct designated investment business, insurance mediation or any other regulated activity.

Distance contract

A contract concluded without any face-to-face contact with the customer (e.g. by telephone, internet, e-mail or post).

Durable medium

In a form that a customer can keep and refer to as needed. It can include paper, disk, and e-mail.

Insurance intermediary

A firm carrying on insurance mediation activities. So as well as a broker it may be a bank, IFA or a retailer or an insurance company selling directly to the customer. For the purposes of this Guide we use it to mean a small insurance broker.

Insurance mediation activities

Any of the following regulated activities:
(1) dealing as agent in contracts of insurance;
(2) arranging (bringing about) deals in contracts of insurance;
(3) making arrangements with a view to transactions in contracts of insurance;
(4) assisting in the administration and performance of contracts of insurance;
(5) advising on contracts of insurance;
(6) agreeing to carry on any of the above activities.

Non-investment financial promotion

A financial promotion relating to a non-investment insurance contract that is not made in the course of a personal visit, telephone call or other interactive manner.

Non-investment insurance contract

A contract of insurance that is a general insurance contract or a pure protection contract but which is not a long-term care insurance contract.

Personal recommendation

A recommendation to a specific person (or group of people) on a non-investment insurance contract.

Retail and commercial customer

(1) A 'retail customer' is a customer who is an individual acting outside his trade business or profession.
(2) A 'commercial customer' is a customer who is not a 'retail customer'.

31/05/2005