GIGI 2

Client Money (CASS 5)

GIGI 2.1

Introduction

GIGI 2.1.1

See Notes

handbook-guidance
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.

GIGI 2.1.2

See Notes

handbook-guidance
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.

GIGI 2.2

Holding money as agent of an insurance company

What does holding money as agent mean?

GIGI 2.2.1

See Notes

handbook-guidance
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'.

GIGI 2.2.2

See Notes

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

What does co-mingling mean?

GIGI 2.2.3

See Notes

handbook-guidance
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.

GIGI 2.2.4

See Notes

handbook-guidance
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.

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

GIGI 2.2.5

See Notes

handbook-guidance
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.

GIGI 2.2.6

See Notes

handbook-guidance
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.

GIGI 2.2.7

See Notes

handbook-guidance
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.

Written agreements under CASS 5.2.3R when holding money as agent

GIGI 2.2.8

See Notes

handbook-guidance
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).

GIGI 2.2.9

See Notes

handbook-guidance
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.

GIGI 2.2.10

See Notes

handbook-guidance
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.

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

GIGI 2.2.11

See Notes

handbook-guidance
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.

GIGI 2.3

Receiving and holding client money

GIGI 2.3.1

See Notes

handbook-guidance
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).

What should your firm do if it holds client money?

GIGI 2.3.2

See Notes

handbook-guidance
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.

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

GIGI 2.3.3

See Notes

handbook-guidance
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.

GIGI 2.3.4

See Notes

handbook-guidance
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.

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

GIGI 2.3.5

See Notes

handbook-guidance
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.

GIGI 2.3.6

See Notes

handbook-guidance
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).

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

GIGI 2.3.7

See Notes

handbook-guidance
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'.

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

GIGI 2.3.8

See Notes

handbook-guidance
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.

GIGI 2.3.9

See Notes

handbook-guidance
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.

A firm's selection of a bank

GIGI 2.3.10

See Notes

handbook-guidance
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.

GIGI 2.4

Payments into and withdrawals from the client money account

Payments into the statutory and non-statutory trusts

GIGI 2.4.1

See Notes

handbook-guidance
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.

GIGI 2.4.2

See Notes

handbook-guidance
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.

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

GIGI 2.4.3

See Notes

handbook-guidance
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.

GIGI 2.4.4

See Notes

handbook-guidance
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.

What is a mixed remittance?

GIGI 2.4.5

See Notes

handbook-guidance
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.

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

See Notes

handbook-guidance
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.

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

GIGI 2.4.7

See Notes

handbook-guidance
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.

GIGI 2.4.8

See Notes

handbook-guidance
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.

GIGI 2.4.9

See Notes

handbook-guidance
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.

GIGI 2.4.10

See Notes

handbook-guidance
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.

GIGI 2.4.11

See Notes

handbook-guidance
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).

GIGI 2.5

The client money calculation

What is the client money calculation?

GIGI 2.5.1

See Notes

handbook-guidance
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.

GIGI 2.5.2

See Notes

handbook-guidance
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.

GIGI 2.5.3

See Notes

handbook-guidance
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.

GIGI 2.5.4

See Notes

handbook-guidance
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.

How do you calculate the client money resource?

GIGI 2.5.5

See Notes

handbook-guidance
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
(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.

GIGI 2.5.6

See Notes

handbook-guidance
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).

GIGI 2.5.7

See Notes

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

How do you calculate the client money requirement?

GIGI 2.5.8

See Notes

handbook-guidance
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).

GIGI 2.5.9

See Notes

handbook-guidance
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).

Examples of the client money calculation

GIGI 2.5.10

See Notes

handbook-guidance
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.

GIGI 2.5.11

See Notes

handbook-guidance
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.

GIGI 2.5.12

See Notes

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

GIGI 2.5.13

See Notes

handbook-guidance
Example 1 on an accruals basis (for formula see paragraph 2.5.9):* 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.

GIGI 2.5.14

See Notes

handbook-guidance
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).

GIGI 2.5.15

See Notes

handbook-guidance
Example 2 on a cash 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 (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).

GIGI 2.5.16

See Notes

handbook-guidance
Example 2 on an accruals basis (for formula see paragraph 2.5.9): * 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).

Reconciliation of client money

GIGI 2.5.17

See Notes

handbook-guidance
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.