GIGI 2
Client Money (CASS 5)
GIGI 2.1
Introduction
- 01/12/2004
GIGI 2.1.1
See Notes
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
See Notes
If your firm handles customers' money you have the following options:
(1) it can hold the money as agent of the relevant insurance company (otherwise known as 'risk transfer'); or
(2) it can hold the money on trust in a segregated bank account that cannot be used to reimburse other creditors in the event of its insolvency.
- 01/12/2004
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
See Notes
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 that may arise from the failure of the firm to make a transfer of 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'. Money held as agent for an insurance company is not client money under our rules, so the firm must not hold it in a segregated client money bank account (but see paragraph 2.2.5 below).
- 01/12/2004
GIGI 2.2.2
See Notes
Rules and guidance dealing with holding money as agent of an insurance company are in Chapter 5.2 of CASS.
- 01/12/2004
What requirements are there for a firm who is holding money as agent of an insurance company?
GIGI 2.2.3
See Notes
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 (see paragraphs 2.2.7 to 2.2.9 for details on written agreements). Your firm must keep a copy of any such agreement for a minimum of six years following the date it is terminated.
- 01/12/2004
GIGI 2.2.4
See Notes
In addition, where your firm holds money as agent of an insurance company it must notify any clients through its terms of business if their money is to be held as agent.
- 01/12/2004
GIGI 2.2.5
See Notes
Your firm might hold some of its customers' funds as agent for an insurance company, while in its dealings with other customers it might not act as agent for an insurance company. In these circumstances it would have to hold money received from the second group of customers as client money in a segregated bank account. We are aware that this is changed practice for most firms who up to now will have held most of their receipts (from all sources) in an "IBA account". When your firm is holding money as agent of an insurance company, the insurance company may specify in the terms of the agency agreement the required banking arrangements. However, provided the insurance company does not specify banking arrangements to the contrary, until 14 January 2006, we will temporarily allow your firm to hold money received as agent of an insurance company in the segregated client money bank account.
- 01/12/2004
GIGI 2.2.6
See Notes
For further details on receiving and holding client money, see paragraph 2.3.1.
- 01/12/2004
Written agreements when holding money as agent
GIGI 2.2.7
See Notes
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
(3) premium refunds (if the firm has authority to make refunds of premiums on behalf of the insurance company).
- 01/12/2004
GIGI 2.2.8
See Notes
It is also possible that other kinds of agency agreements that do not give a firm authority to commit an insurance company to risk may nevertheless result in them 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 a transfer of risk in relation to the premium to the insurance company
- 01/12/2004
GIGI 2.2.9
See Notes
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 as to whether it is holding money as agent it should consult the terms of its written agreements or terms of business with insurance companies and, if necessary, seek clarification with the relevant insurance companies.
- 01/12/2004
Sub-delegation
GIGI 2.2.10
See Notes
A firm may extend or sub-delegate its authority to hold money as agent of an insurance company to another directly authorised firm or an Appointed Representative. This is provided it has the insurance company's written agreement to do so and that this written agreement names the firm acting as sub-agent.
- 01/12/2004
GIGI 2.3
Receiving and holding client money
- 01/12/2004
GIGI 2.3.1
See Notes
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. Money received and held as agent for an insurance company is not client money and must not be held in a client bank account other than in the circumstances outlined in paragraph 2.2.5. In addition, a firm's own money is not client money and must not be held in a client bank account (unless it does so in accordance with CASS 5.5.10 or CASS 5.5.16).
- 01/12/2004
What should your firm do if it holds client money?
GIGI 2.3.2
See Notes
- 01/12/2004
What are the main differences between the statutory and non-statutory trusts?
GIGI 2.3.3
See Notes
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
See Notes
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, to enable 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
- 01/12/2004
What are the conditions for operating a non-statutory trust?
GIGI 2.3.5
See Notes
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).
(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.
- 01/12/2004
GIGI 2.3.6
See Notes
In relation to point (4) above, this capital resources requirement only applies to your firm if it holds client money that relates 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).
- 01/12/2004
How does a firm set up either a statutory or non-statutory trust client bank account?
GIGI 2.3.7
See Notes
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 written notice to the bank, requesting the bank 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'.
- 01/12/2004
Legal formalities for setting up a statutory and a non-statutory trust
GIGI 2.3.8
See Notes
In the case of the statutory trust its status as a 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 and CASS 5.4.8. 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.
- 01/12/2004
GIGI 2.3.9
See Notes
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. We understand that trade associations are preparing some standard trust deeds for this purpose.
- 01/12/2004
A firm's selection of a bank
GIGI 2.3.10
See Notes
A firm must place client money with an approved bank (see CASS 5.5.38 R). In the case of small firms who hold 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.
- 01/12/2004
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
See Notes
When a 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 not later than the next business day following receipt.
- 01/12/2004
GIGI 2.4.2
See Notes
When a 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 and no later than one business day after it becomes due.
- 01/12/2004
Mixed remittances
GIGI 2.4.3
See Notes
From time to time a firm may pay its own money into the client account in error. It may also receive mixed remittances (comprising client money and its own money) into the client account. When this happens the firm must withdraw non-client money from the client bank account as soon as reasonably practical and in any event within 25 business days of it clearing.
- 01/12/2004
What are the rules governing the withdrawal of commission from the client bank account?
GIGI 2.4.4
See Notes
CASS 5.5.16 and CASS 5.5.17 contains our rules and guidance on withdrawal of commissions. CASS 5.5.16 prohibits a firm from removing commission from the client bank account until the client or a premium finance firm has paid the premium to it (such an account is said to be operated on a 'received' as opposed to an 'earned' basis). Further, commission may only be withdrawn from the client bank account at the point at which it is due to the firm for its own account. Until that point, commission will remain client money.
- 01/12/2004
GIGI 2.4.5
See Notes
The terms of business of the insurance company to whom the premium is to be paid may set out when the commission element of the premium will become due (e.g. it may state that commission will be due immediately on receipt of the premium from the customer or after, say, 25 days or 30 days). Where this is the case, commission may only be withdrawn from the client bank account if and when this is consistent with the terms of business of the insurance company to whom the premium is payable. Commission may be withdrawn before payment of the premium to the insurance company, provided the firm has received the premium from the client or a premium finance firm and provided the terms of business with the relevant insurance company permit this.
- 01/12/2004
GIGI 2.4.6
See Notes
In the event that commission becomes due immediately on receipt of the premium from the client then, for the purpose of our rules, the premium must be treated as a mixed remittance (i.e. part client money and part other money). The commission element of the premium must then be paid out of the client bank account as soon as reasonably practical and in any event within 25 business days of the payment clearing the client bank account.
- 01/12/2004
GIGI 2.4.7
See Notes
Often, the terms of business of the insurance company to whom the premium is to be paid may not specify when the commission element of the premium will become due. In these cases, for the purposes of our rules, a firm may assume that commission will become immediately due on receipt of the premium from the client.
- 01/12/2004
GIGI 2.4.8
See Notes
Where commission becomes due some time after receipt of the premium from the client or premium finance firm (e.g. 25 days or 30 days), it must be identified as no longer being client money at the point the regular client account calculation is undertaken (see paragraph 2.5 below), in line with CASS 5.5.63(1). The commission should be withdrawn from the client bank account by close of business on the day on which the calculation is performed, unless the firm determines on reasonable grounds in line with CASS 5.5.63(2)(b), that it is prudent to maintain a positive margin in the account.
- 01/12/2004
When a client pays a premium to a firm in instalments, how must commission be withdrawn from the client bank account?
GIGI 2.4.9
See Notes
CASS 5.5.17(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 to the firm.
- 01/12/2004
Transfer of client money from a firm to a third party (e.g. another intermediary firm)
GIGI 2.4.10
See Notes
A firm may pass a premium to a second firm provided, in accordance with CASS 5.5.34:
(1) 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 his money may be transferred in this manner.
CASS 5.5.7 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.- 01/12/2004
GIGI 2.4.11
See Notes
CASS 5.5.33 explains that when a firm transfers a premium to a third party, it will not automatically discharge its duties to its client as trustee, albeit that the premium will be shown in the firm's client ledgers as having been 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 who is authorised to hold that insurance company's money as agent, at which point that premium becomes the insurance company's money.
- 01/12/2004
GIGI 2.4.12
See Notes
Firms are reminded in CASS 5.5.81(3) that they should also exercise appropriate skill, care and judgment in their selection of third parties to whom they transfer client money.
- 01/12/2004
GIGI 2.4.13
See Notes
In the settlement of a claim or the return of 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).
- 01/12/2004
GIGI 2.5
The client money calculation
- 01/12/2004
What is the client money calculation?
GIGI 2.5.1
See Notes
CASS 5.5.62 G explains that the purpose of the client money calculation 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.
- 01/12/2004
GIGI 2.5.2
See Notes
In performing the client money calculation the firm must use its own internal records to determine the client money resource and the client money requirement and then compare them. Having done so:
(1) if the client money requirement is greater than the client money resource the firm 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 the firm must normally withdraw the excess from the client bank account.
- 01/12/2004
GIGI 2.5.3
See Notes
The calculation (client money requirement and client money resource) is to be undertaken as often as is necessary to ensure the accuracy of the firm's records and at least at intervals of not more than 25 business days. Any top ups to/withdrawals from the firm's client money bank account(s) need to be made by close of business on the day on which the calculations are performed.
- 01/12/2004
GIGI 2.5.4
See Notes
In order 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 en route to the insurance company was received by a firm authorised to hold that insurance company's money as its agent. Unless a firm receives confirmation that the transaction is complete through receipt of the money by the insurance company or one of its agents, they must assume that the relevant money is still with the third party firm to whom they passed it and an account of that money in the client money calculation.
- 01/12/2004
How do you calculate the client money resource?
GIGI 2.5.5
See Notes
There are two methods permitted for the client money calculation, a cash-based method and an accruals method.
Any designated investments must be valued on a prudent and consistent basis. Any designated investments must be valued on a prudent and consistent basis.
(1) For the cash-based method, the client money resource should be calculated 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
(c) designated investments to the extent they are permitted to be held under the terms of the non-statutory trust.
Any designated investments must be valued on a prudent and consistent basis. Any designated investments must be valued on a prudent and consistent basis.
(2) For the accruals based method, the client money resource must also include:
The client money resource should be calculated and then compared to the client money requirement.(a) to the extent that client money is held in the statutory trust, insurance debtors (which in this case cannot include pre-funded items); and
(b) 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).
- 01/12/2004
How do you calculate the client money requirement?
GIGI 2.5.7
See Notes
For the cash-based method the client money requirement can be found by calculating the individual client money balance for each client and then adding these together for a total client money requirement figure. CASS 5.5.66R makes clear that the individual client-balance for each client may not include any uncleared client funds. CASS 5.5.67R 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 (or third party firms) 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).
- 01/12/2004
How do you calculate the client money requirement?
GIGI 2.5.8
See Notes
For the accruals based method, CASS 5.5.68 makes clear that the client money requirement can be found by determining the sum of:
(1) the sum of all insurance creditors shown in the 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.
- 01/12/2004
Examples of the client money calculation
GIGI 2.5.9
See Notes
Example 1 - client pays £100 premium to a firm on day one, £10 of which will be earned by it as commission. The insurer's terms of business do not specify when the commission element of the premium will become due to the firm.
- 01/12/2004
Examples of the client money calculation
GIGI 2.5.10
See Notes
In these circumstances, it may be assumed the commission will become immediately due (see paragraph 2.4.7 for explanation). Paragraph 2.4.6 explains that the receipt of the premium must be treated as a mixed remittance (i.e. £90 client money and £10 the firm's own money earned as commission). CASS 5.5.16R(2) requires that money that is not client money (i.e. the commission in this case) 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.
- 01/12/2004
GIGI 2.5.11
See Notes
Example 1 on a cash basis (for formula see paragraph 2.5.7):
| 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 |
| 1* | £100 | ((£100) +(0) + (0)) - ((10) + (0)) = £90 | £100 inc £10 commission due | 0 |
| 25 | £0 | ((£100) +(0) + (0)) - ((£100) + (0)) = 0 | £0 | £10 transferred on day two |
- 01/12/2004
GIGI 2.5.12
See Notes
Example 1 on an accruals basis (for formula see paragraph 2.5.8):
* 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 account (see paragraph 2.4.6 above).
** As the commission is due immediately, it cannot be included in the client money requirement calculated on an accruals basis as unearned brokerage. Therefore, the unearned brokerage figure is 0.
| 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 |
| 1* | £100 | £90 + £0 = £90 ** | £100 inc £10 commission due | £0 |
| 25 | £0 | £0 + £0 = £0 ** | £0 | £10 transferred on day two |
** As the commission is due immediately, it cannot be included in the client money requirement calculated on an accruals basis as unearned brokerage. Therefore, the unearned brokerage figure is 0.
- 01/12/2004
GIGI 2.5.13
See Notes
Example two - the insurer's terms of business state that commission will become due 25 business days after receipt of 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). Paragraph 2.4.8 explains that the £10 surplus must be withdrawn from the client bank account and transferred to the firm's office account in line with CASS 5.5.63(2)(b).* 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.
** 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.
- 01/12/2004
GIGI 2.5.14
See Notes
Example 2 on a cash basis (for formula see paragraph 2.5.7):
* 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 can not 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 insurer. As such, the client money requirement is £0 whilst the client money resource shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business (see paragraph 2.4.8).
| 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 |
| 1* | £100 | ((£100) + (0) + (0)) - ((0) + (0)) = £100 | £100 inc £10 | £0 |
| - 12 - | commission not due | |||
| 25** | £10 | ((£100) +(0) + (0)) - ((£100) + (0)) = £0 | £10 to transfer to office account by cob | £0 |
- 01/12/2004
GIGI 2.5.15
See Notes
Example 2 on an accruals basis (for formula see paragraph 2.5.8):
* 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 figure is also £0 as the premium has been paid to the insurer. The client account therefore shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business (see paragraph 2.4.8).
** 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 figure is also £0 as the premium has been paid to the insurer. The client account therefore shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business (see paragraph 2.4.8).
- 01/12/2004
Verification of banking records
GIGI 2.5.16
See Notes
Having performed the client money calculation, a firm must also carry out a verification of its banking records. It must compare the balance on its internal client records with the balance on that account as set out on the statement issued by the bank(s) with which the client bank account is held.
- 01/12/2004