On 28 August, the FSA published Consultation Paper CP12/10, “Review of the client money rules for insurance intermediaries”.
The Consultation Paper is aimed at all insurance intermediaries to which CASS 5 applies. It attempts to address a number of concerns which arose during the FSA’s review of CASS 5, including:
- inappropriate controls around the use of non-statutory trusts;
- ineffective risk transfer documentation;
- infrequent client money calculations; and
- the segregation of client money.
As part of its Consultation Paper, the FSA proposes to introduce the “CASS 5 Resolution Pack”. The FSA estimates that there are approximately 3,000 firms in the UK which operate with permission to hold client money. These will be the firms most affected by the CASS 5 Resolution Pack proposals. The proposal itself largely mirrors the CASS Resolution Pack requirements for firms which are subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) as detailed in Policy Statement PS 12/6 published by the FSA in March 2012 (see blogpost “FSA Policy Statement on CASS Resolution Packs” dated 28 March 2012). However, there are a few notable differences, such as the absence of:
- an express right to exhibit documentation in the CASS RP of an affiliate;
- an express right to exhibit documentation in electronic form;
- a requirement to ensure that any systems for the provision of component documents within the CASS RP remain operational and accessible after the insolvency of the firm; and
- a requirement for the firm to provide information with respect to the affiliates and third parties on which it is dependent for the performance of its CASS obligations.
The purpose of the CASS 5 Resolution Pack is to assist an insolvency practitioner access information required to deal with client money in a timely manner. It is proposed that insurance intermediaries must, at all times, be able to provide the documentation specified in the schedule below to an insolvency practitioner within 48 hours of the firm’s failure.
CASS 5 Resolution Packs must be reviewed on an ongoing basis to ensure that they remain accurate, and any material inaccuracies must be corrected within 5 business days of the inaccuracy occurring. The firm must notify the FSA immediately if it is not able to comply with these requirements.
In practice, updating of a CASS 5 Resolution Pack is likely to represent less of a burden than is the case with respect to a ‘normal’ CASS Resolution Pack. This is due to the fact that the documentation to be incorporated within the CASS 5 Resolution Pack is more static in nature. Nonetheless, the FSA proposes to change the frequency with which client money calculations must be performed, from the current once every 25 business day period to:
- where the firm holds client money under a non-statutory trust:
- at least every 7 business days if the firm held more than GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; or
- at least every 14 business days if the firm held less than or equal to GBP 250,000 of client money at any time during the calendar year prior to the year the calculation is made; and
- at least every 25 business days where the firm holds client money under a statutory trust.
As each firm to which the CASS 5 Resolution Pack rules apply is obliged to include the latest client money calculation and reconciliation within its pack, a degree of effort to maintain the CASS 5 Resolution Pack remains.
The Consultation Paper is open for comments until 30 November 2012. The FSA expects to publish its feedback to the consultation, together with final rules, in the second quarter of 2013. It seems likely that the rules themselves will not come into force until 12 months from the publication of the final rules for all provisions (except for separate proposals regarding unclaimed client money).
DOCUMENTS FORMING PART OF THE CASS 5 RESOLUTION PACK
- a master document containing information sufficient to retrieve each document in the firm’s CASS resolution pack;
- a document identifying all the institutions with which client money may be held, including approved banks, money market funds or other third parties to whom client money may be passed;
- a document identifying each appointed representative, field representative or other agent of the firm which may receive client money in its capacity as the firm’s agent;
- a document identifying each senior manager and director and any other individual and the nature of their responsibility within the firm who is critical or important to the performance of operational functions related to any of the obligations imposed on the firm under CASS 5;
- for the institutions identified in (2) all trust letters;
- the latest client money calculation;
- the latest bank reconciliation;
- a copy of the firm’s annual reconciliation down to individual client balances; and
- any Non-Statutory Trust deeds.