Dear CEO letter – client money

The Financial Conduct Authority (FCA)  published a ‘Dear CEO’ letter addressed to general insurance intermediaries. It is a call to action for Boards to reassess the adequacy of their client money arrangements and their firm’s compliance with the rules in Chapter 5 of the Client Asset Sourcebook (CASS).

Following on from the FCA’s resilience surveys over the past year, the FCA identified firms deemed to have inadequate financial resources and reviewed their client money arrangements.

Whilst the previous letter issued in September 2020 reminded firms of their obligations, the FCA have now drawn attention to firms’ responsibilities to establish and maintain arrangements to ensure the funds are adequately protected. This reiterates the responsibilities under Principle 10[1] and Principle 3[2] of the FCA’s Principles for Business.

Obligations and what firms need to do

The FCA expects firms to review their client money arrangements, taking into consideration the issues that have been highlighted and then take robust action where needed. Firms are expected to discuss this letter with their Board and identify any action points they need to execute to ensure the firm has adequate client money arrangements in place. Firms subject to client money audits should also ensure their auditor is aware of this letter.

Key issues found

Some of the key issues identified and highlighted by the FCA, which may indicate more widespread non-compliance throughout the sector, are in relation to:

  1. The client money calculation
  2. Appropriate withdrawal of commission
  3. Client money bank accounts and acknowledgement letters
  4. Segregation of client money
  5. Co-mingling risk transfer money with client money
  6. Client money audit

The FCA has also reiterated the point of using client money only for the purpose that it is intended and any misuse would be deemed a significant failure.

Furthermore, the FCA highlighted the importance of firms to review their permissions and to consider removing the permission to hold client money where firms are no longer using it.

Next steps

The FCA will continue to assess firms’ client money arrangements and will take appropriate action, not limited to asset restriction and prohibition of regulated activities, where firms are not meeting their obligations under the rules.

Firms are also reminded that any material issues or concerns identified in relation to their client money arrangement need to be reported to the FCA.

Whilst the oversight of the firm’s client money arrangements is the responsibility of senior management, and the responsibility for compliance cannot be outsourced, the FCA has encouraged firms to seek external advice should they need additional support to fully understand the client money requirements applicable to their firm.

If you have questions or require assistance, please get in touch.

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[1] Principle 10 Clients’ assets – A firm must arrange adequate protection for clients’ assets when it is responsible for them.
[2] Principle 3 Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.