Key takeaways
- CASS 5 sets the client money rules for firms that receive or hold money in connection with insurance distribution: premiums, claims money and premium refunds.
- Money a broker holds as the insurer's agent under a written agreement is generally not client money, unless the insurer agrees it should be treated as client money.
- Client money is held on a statutory trust, or on a non-statutory trust that allows credit to clients and insurers but requires capital of at least £50,000 for retail business, auditor confirmation and a trust deed.
- A client money calculation is required at intervals of not more than 25 business days, with any shortfall paid in by close of business on the day the calculation is performed.
- Each client bank account must be reconciled to the bank's statement within ten business days of the calculation, and the FCA must be told immediately if a calculation cannot be performed or a shortfall cannot be covered.
What CASS 5 covers
CASS 5 is the chapter of the FCA's Client Assets Sourcebook for firms that receive or hold money in connection with insurance distribution activity. For most firms that means insurance brokers and other intermediaries handling three kinds of money: premiums on their way from a client to an insurer, claims money on its way from an insurer to a client, and premium refunds. It sits alongside CASS 7, which covers client money held by investment firms, and CASS 15, which covers safeguarding for payment and e-money firms.
Some firms are outside the chapter. Insurance undertakings acting as such and managing agents acting as such are excluded, and so is a firm to the extent it is already acting under the client money chapter. An insurer is not treated as the broker's client unless the two have agreed otherwise. For a plain-English overview of what counts as client money across the Handbook, see What is client money?.
Money held as the insurer's agent
A broker that holds a written agreement with an insurer, often called a binding authority or risk transfer agreement, may receive premiums, settle claims or handle refunds as the insurer's agent. Under that kind of agreement a premium is treated as received by the insurer as soon as the broker receives it, and claims money and refunds are treated as received by the client only when they are actually paid over.
Money held under such an agreement is generally not client money. The insurer can agree in writing that it should be treated as client money and held in a client bank account. Because the treatment depends on the wording of each agreement, a firm needs a current register of which insurers it acts for as agent, for which kinds of money, and whether each insurer has agreed to client money treatment. Without that register the client money calculation cannot be done accurately.
Statutory trust or non-statutory trust
Client money is held on trust. A firm chooses between the statutory trust that the rules create, and a non-statutory trust set up by the firm's own trust deed. The non-statutory trust is more flexible: where the deed expressly allows it, the firm may make advances or give credit to clients or insurers from client money, for example paying a premium to an insurer before the client has paid it. It never allows a firm to give credit to itself, and it does not allow commission to be withdrawn before the premium has been received from the client.
The flexibility comes with conditions. The firm needs adequate systems and controls for the credit risk it takes, written confirmation from its auditor that those systems are adequate, a named manager responsible for day-to-day compliance, client terms that explain the arrangement, and, where it deals with retail customers, capital resources of at least £50,000 at all times.
| Statutory trust | Non-statutory trust | |
|---|---|---|
| Credit to clients or insurers from client money | Not permitted | Permitted where the trust deed allows it |
| Credit to the firm itself | Not permitted | Not permitted |
| Capital resources | No CASS 5 minimum | At least £50,000 at all times for retail business |
| Auditor involvement | Annual client money audit | Written auditor confirmation of systems and controls, kept current, plus the annual audit |
| Trust document | Created by the rules | Properly executed trust deed |
Client bank accounts and acknowledgement letters
Client money is paid into client bank accounts held in the firm's name as trustee. When a firm opens a client bank account it must ask the bank to confirm in writing that the money is held on trust for clients, that the bank has no right to set it off against any debt the firm owes, and that the account title distinguishes it from the firm's own money.
If a UK bank has not returned that acknowledgement within 20 business days of the request, the firm must move the money to another bank as soon as possible. Acknowledgement letters are one of the first things an auditor checks, so each one should be filed against the account it covers and checked whenever account details change.
The client money calculation and reconciliation
The core check under CASS 5.5.63 is a comparison between what the firm holds and what it owes. At intervals of not more than 25 business days, and more often if needed to keep its records accurate, the firm checks whether its client money resource at the close of the previous business day was at least equal to its client money requirement at that point. Many brokers run the check far more often than the minimum, because a shortfall found three weeks late is much harder to explain to clients, insurers and the FCA.
Separately, within ten business days of the calculation, the firm reconciles the balance on each client bank account as shown in its own records with the balance on the bank's statement. Any difference that is not simply a timing difference between two accounting systems must be investigated and corrected as soon as possible. Until it is resolved, the firm must assume the record showing the larger requirement is right and pay in its own money to cover it.
| Requirement | Rule | Timing |
|---|---|---|
| Client money calculation | CASS 5.5.63R(1) | At intervals of not more than 25 business days |
| Pay in a shortfall | CASS 5.5.63R(1)(b)(i) | By close of business on the day the calculation is performed |
| Withdraw an excess | CASS 5.5.63R(1)(b)(ii) | Within the same period, subject to a prudent margin |
| Reconcile each client bank account to the bank statement | CASS 5.5.63R(2) | Within ten business days of the calculation |
| Investigate and correct discrepancies | CASS 5.5.63R(3) | As soon as possible |
| Unresolved difference | CASS 5.5.63R(4) | Assume the larger requirement is correct and fund it |
Worked example
A commercial lines broker runs its client money calculation on Thursday, as at close of business on Wednesday. Its records show premiums received from clients but not yet paid to insurers, claims money received from insurers but not yet paid to clients, and refunds awaiting payment. Together these make a client money requirement of £8,412,650.00. Its two client bank accounts hold £8,388,150.00.
The £24,500.00 gap is traced to a claim paid to a client on Wednesday from the client bank account, before the insurer's settlement had arrived. Under a statutory trust that payment is an advance the rules do not allow, so the firm pays £24,500.00 of its own money into the client bank account before close of business on Thursday and records the cause. Under a non-statutory trust whose trust deed allows credit to clients, the advance itself would be permitted, provided the firm meets the conditions described above.
| Line | Amount (GBP) |
|---|---|
| Client money requirement at close of business Wednesday | 8,412,650.00 |
| Client money resource: client bank accounts | 8,388,150.00 |
| Shortfall | (24,500.00) |
| Cause: claim paid before the insurer's settlement arrived | 24,500.00 |
| Firm money paid in by close of business Thursday | 24,500.00 |
| Position after funding | 0.00 |
When to notify the FCA
The FCA must be told immediately if a firm is unable to perform the client money calculation, or fails to perform it, and immediately if the firm may be unable to cover a shortfall by close of business on the day of the calculation. If a bank or other third party holding client money fails, the firm must tell the FCA as soon as it becomes aware, and as soon as reasonably practicable say whether it will make good any shortfall and how much is involved.
Firms that hold client money also need an annual client money audit report from their auditor. The audit tests the same records the calculation relies on, so a firm whose calculation, reconciliations and acknowledgement letters are kept current has far less to prepare.
CASS 5, CASS 7 and CASS 15 compared
The three regimes share a structure: hold the money apart, know what is owed, check the two agree, fix any gap and keep the evidence. They differ most in how often the check must happen.
| CASS 5 | CASS 7 | CASS 15 | |
|---|---|---|---|
| Who it applies to | Insurance brokers and intermediaries | Investment firms | Payment and e-money firms |
| Money covered | Premiums, claims money, refunds | Client money in investment business | Relevant funds received for payments and e-money |
| Internal check | At intervals of not more than 25 business days | Each business day | Each reconciliation day |
| Bank reconciliation | Within ten business days of the calculation | No more than one month apart | Each reconciliation day |
| Shortfall | Paid in by close of business on the calculation day | Paid in by close of business on the reconciliation day | Paid in by the end of the reconciliation day |
Where brokers most often go wrong
Most CASS 5 problems start in the records rather than the bank account: premiums allocated to the wrong client, claims paid before the insurer has settled, commission taken before the client has paid, unallocated cash left in suspense, and agency agreements that no longer match how money actually flows. Each of these makes the calculation harder and the result less reliable.
The controls that help are simple to state. Keep the insurer agency register current. Allocate every receipt on the day it arrives. Run the calculation more often than the minimum. Investigate each difference to its cause and record it, as described in our guide to reconciliation break management. Keep acknowledgement letters filed against each account.
Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to CASS 5. If your firm holds client money under CASS 5, talk to us about CASS 5.
Frequently asked questions
What is CASS 5?
The FCA's client money rules for firms that receive or hold money in connection with insurance distribution, such as insurance brokers handling premiums, claims money and refunds.
How often must an insurance broker perform a client money calculation?
At intervals of not more than 25 business days under CASS 5.5.63R, and more often where needed to keep records accurate.
When must a CASS 5 shortfall be paid in?
By close of business on the day the client money calculation is performed.
Is money held under a risk transfer agreement client money?
Generally not. Money a broker holds as the insurer's agent under a written agreement is treated as the insurer's money, unless the insurer agrees in writing that it should be treated as client money.
What does a non-statutory trust allow?
Where the trust deed allows it, credit to clients or insurers from client money, such as paying a premium before the client has paid. It never allows credit to the firm itself, and needs capital of at least £50,000 for retail business, auditor confirmation and a named manager.
When must the FCA be notified?
Immediately if the firm cannot or does not perform the calculation, immediately if it may be unable to cover a shortfall by close of business on the calculation day, and as soon as it becomes aware that a bank or other third party holding client money has failed.
References
- FCA Handbook, CASS 5.1 Application and general provisions
- FCA Handbook, CASS 5.2 Holding money as agent of an insurance undertaking
- FCA Handbook, CASS 5.4 Non-statutory trust
- FCA Handbook, CASS 5.5 Segregation of client money
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.