October 10, 2023
In this article we share the key messages from a recent webinar webinar held by the Institute of Chartered Accountants of England and Wales (ICAEW), and our own insights on the issues arising out of client money audits.
A number of ICS staff recently attended a client money webinar held by the Institute of Chartered Accountants of England and Wales (ICAEW). Here we share the key messages from the webinar and some insights on the issues arising out of client money audits.
Although the webinar was mainly aimed at auditors, there were some useful points and reminders from the FCA and from PKF Littlejohn, as well as from Deloitte on risk transfer and Terms of Business Agreement (TOBA) issues.
Whilst this is a specialist area, it is important that insurance intermediaries have a working knowledge of client money, given the potential risks to a firm of getting the administration of client money wrong (or even, for those firms that think client money is nothing to do with them, getting risk transfer wrong).
Ruby Bhavra, a Manager at the FCA, said that the FCA receives some three thousand client money audit reports a year (which is likely to be across the whole CASS population rather than just insurance intermediaries), which it reviews and triages. Given how many it sees, the FCA can assess the quality of the audit and auditor. Remember, though, that the FCA will typically not be sent a ‘clean’ audit report for an insurance intermediary – so the FCA may have little feel for the content – if any – of audits that are ‘clean’ (as opposed to ‘qualified’ or ‘adverse’).
The current CASS 5 landscape (the chapter of the Client Assets Sourcebook that relates to insurance distribution), for the FCA, includes the following:
PKF said that they would be very suspicious of a ‘clean’ client money audit report, and suspected that the auditors could not have carried out the audit properly. They highlighted that only 1 of 130 of client money audits undertaken by PKF was clean – so less than 1%.
What are the issues?
PKF’s ‘top-ten findings’ in client money audits are:
- Inappropriate ‘clean’ audit opinions
- Errors in the client money reconciliation
- Weak TOBA register
- Misunderstanding the importance of trust status, and the implications on moving money out of the trust (eg credit writebacks, closing trust accounts or variation of permissions)
- A lack of or a poor CASS 5 risk control matrix
- Mid-month transfers not supported by a client money calculation
- Fee only transactions not withdrawn
- Funding (so advancing credit / lending) from Statutory Trust and the use of client-by-client reconciliations
- Handling of monies by Appointed Representatives
- Bank accounts (confirmation letters and account naming)
Client Money problems are often identified when a firm is acquired, as a result of the enhanced due diligence typically undertaken. Even in these circumstances, issues can perhaps not be identified immediately (as seen in the recent AFL Insurance court case).
Although this case was not discussed during the webinar, the FCA did say that it expected auditors to test the underlying client records and not just rely on bank statements. PKF backed this up by saying those involved should understand where all the data is coming from in a client money calculation, and also check the accounting records to see if anything else should be included. (Sometimes, unearned commission is omitted, which then understates the client money requirement, so firms take too much money out of the client account).
The FCA also thought there was misuse, or at least a misunderstanding, of the CASS 5 audit exemption, meaning firms are not having audits carried out when they should be, because they wrongly assume that the ‘£30,000 or less in a Statutory Trust account’ amount is a transaction amount rather than a balance at any time in the year. A similar risk is that firms wrongly maintain that they don’t hold client money because of risk transfer, but then they are not compliant with the risk transfer provisions in their TOBAs. This was touched on by the Deloitte speaker and by PKF.
The FCA reminded auditors to be wary of firms in financial difficulty, as they are more likely to take from the client money account (as in the AFL Insurance case mentioned above).
What do we see?
In our experience, we see many ‘clean’ client money audits reported in section C of the RMAR (RMA-C). Often this is because of the inexperience of the auditor reviewing the accounting records of an insurance intermediary (this might be the only insurance intermediary it audits and therefore has little experience of auditing against the FCA CASS rules). The consequence is that the insurance intermediary continues to run the accounts in breach of the CASS 5 rules as they are never educated otherwise.
Unfortunately, after almost 20 years of the FCA CASS 5 rules, the general understanding of how firms are supposed to govern and administer their insurance premium accounts still leaves room for improvement.
We can help
If you require any support in relation to your client money or risk transfer operations, or with an understanding of the FCA’s client money regime or how risk transfer should operate properly, please get in touch with your usual ICS representative, or Head Office on 01892 539600 or and we will be happy to discuss further.