At our bi-annual meeting with the FCA, we asked for clarification on various CASS issues where we commonly receive push-back from clients when we raise breaches on these matters.
We wanted certainty from the Regulator on whether it considered these areas to be breaches of the CASS rules, and so enhance consistency in our approach.
TOBA issues
Many TOBAs are silent on the required method of commission extraction and on the correct bank account for holding client money.
Our clients usually assume the ‘receipt of premium’ is the default method. So, if a TOBA doesn’t mention commission extraction, and they are withdrawing commission once the insurance premium has been received, there’s no breach of the CASS rules.
But the FCA said that is an incorrect assumption. All TOBAs should be clear as to when the intermediary can withdraw its commission. What’s more, where silent on this, the TOBA is defective. So, this in itself constitutes a breach of the rules, as there’s no way of confirming whether the intermediary is complying with the terms of the TOBA.
Similarly, our clients often take the view that if a TOBA refers to a ‘client’ or a ‘segregated’ or ‘trust’ account, this is sufficient evidence of the type of bank account needed for holding client money. But the FCA clarified that a TOBA was in breach of the rules unless it specifically stated whether a statutory or non-statutory trust account was required.
Fee/commission-only receipts
Where a firm receives a fee/commission-only receipt which is not part of a mixed remittance, there is a requirement to transfer the funds to the office account on the date of receipt in order to avoid pollution of the trust.
Many of our clients still believe that fee/commission-only receipts can be withdrawn as part of the CMC withdrawal without breaching the CASS rules.
The Regulator has clarified that fee/commission-only transactions must be transferred out of the client account within a 24-hour window of receipt. This is a practical approach. Clearly they can arrive out of hours and, if not transferred on the actual date, this allows for it to be done when the system opens the next day.
The FCA explained further, where it is not clear if the receipt is part of a mixed remittance or not, it allows extra time for the firm to obtain further details. It can then leave the funds in the client account as protected, in case it turns out to be a mixed remittance and, therefore, client money.
Third-party commissions
There continues to be uncertainty in the market about third-party payments, such as introducer or other agent commission. Can they be paid out of the client account or do they need to be transferred to the office account, as part of the usual drawdown procedure, and then paid out to the third-party from corporate funds?
The FCA said the key points to consider are the underlying terms of the insurance contract. For example:
- If the third party is included as a party to the insurance contract – perhaps by being a named party on the broking slip, this is clear evidence of its role in the chain. In these circumstances the firm can make payment out of the client account.
- If the third party has no part in the insurance contract and is perhaps only acting as an introducer, then the firm must withdraw its commission in full as part of the CMC drawdown – and then pay out of the office account.
How we can help
We hope this clarifies some areas of confusion over CASS 5. But please contact Paul Goldwin or another member of the PKF Insurance Intermediaries team if you would like to discuss these issues in more detail.
