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GIGI 2.3 Receiving and holding client money

GIGI 2.3.1G

Client money is money of any currency that, in the course of carrying on insurance mediation, a firm receives and holds on behalf of a client. It can include premiums, claims money and premium refunds - as well as professional fees due from clients, for example, for onward payment to a loss adjuster. A firm's own money is not client money and must not be held in a client bank account (unless it receives a mixed remittance in line with CASS 5.5.16 R (2) or its own money becomes client money in the circumstances described in CASS 5.5.10 R).

What should your firm do if it holds client money?

GIGI 2.3.2G

Any client money it receives should be held in a client bank account in the form of a statutory trust account as set out in CASS 5.3, or non-statutory trust account as set out in CASS 5.4.

What are the main differences between the statutory and non-statutory trusts?

GIGI 2.3.3G

Both the statutory and non-statutory trust bank accounts are for:

  1. (1)

    holding premiums received from clients until they are paid directly - or via a third party firm - to an insurance company; and

  2. (2)

    holding claims monies and premium refunds received from insurance companies or third party firms until they are paid to clients.

GIGI 2.3.4G

The main difference between the two types of trust is that, unlike the statutory trust, the firm acting as trustee may use the non-statutory trust to make advances of credit from the pool of client money held for all of the firm's clients. This enables a client's premium obligation to be met before the firm receives the premium from the client. Similarly, firms can pay claims and premium refunds to a client from a non-statutory trust before they receive those monies from the insurance company. Neither is permitted under the statutory trust, although a firm may provide credit for clients from its own funds.

What are the conditions for operating a non-statutory trust?

GIGI 2.3.5G

Your firm may only operate a non-statutory trust if it can meet these conditions (see CASS 5.4.4 R (1) to CASS 5.4.4 R (5):

  1. (1)

    Your firm must have and maintain systems and controls that are adequate to ensure it is able to monitor and manage any credit risk resulting from having made credit advances from the trust account.

  2. (2)

    Your firm must obtain, and keep current, written confirmation from its auditor that it has in place systems and controls that are adequate to meet the requirements in (1). The first such confirmation must cover a period ending no later than 53 weeks after the date of your firm's authorisation.

  3. (3)

    Your firm must designate a manager with responsibility for overseeing day-to-day compliance with the systems and controls requirements in (1).

  4. (4)

    Your firm will be subject to a minimum capital resources requirement of £50,000 where it wishes to pay client money relating to transactions with retail customers into the non-statutory trust account.

  5. (5)

    Your firm must take reasonable steps to:

    1. (a)

      ensure that its terms of business adequately explain to the client that his money will be held in a non-statutory trust; and

    2. (b)

      obtain the client's informed consent to the holding of his money in a non-statutory trust account.

GIGI 2.3.6G

In relation to point (4) above, this capital resources requirement only applies to your firm if it holds client money relating to transactions with retail customers in the non-statutory trust bank account. The capital resources requirement for all other intermediaries who hold client money (be it in the statutory or the non-statutory trust) is the higher of £10,000 or 5% of annual income from regulated activity (see Part I, paragraph 7.2.5).

How does a firm set up either a statutory or non-statutory trust client bank account?

GIGI 2.3.7G

With both trust types, no special bank account is required, and a conventional deposit or current account is suitable. When your firm opens a client bank account you must give the bank written notice, requesting it to acknowledge in writing that:

  1. (1)

    all money standing to the credit of the account is held by the intermediary as trustee (or if relevant in Scotland, as agent) and that the bank is not entitled to combine the account with any other or to exercise any right of set-off or counterclaim against that money for any sum owed to it on any other account of your firm; and

  2. (2)

    the title of the account sufficiently distinguishes it from any account containing money belonging to your firm and is in the form you have requested e.g. it could be titled 'XYZ insurance brokers statutory trust client account' or 'XYZ insurance brokers non-statutory trust client account'.

Legal formalities for setting up a statutory and a non-statutory trust

GIGI 2.3.8G

The trust status of a statutory trust arises automatically under our rules. A non-statutory trust, on the other hand, has to be created by the firm executing a formal trust deed in line with CASS 5.4.7 R and CASS 5.4.8 R. This is a legal document which must declare that client money will be held for the purpose of, and in line with, the rules in the CASS 5.4 to CASS 5.6. The trust deed must be kept safely by the firm.

GIGI 2.3.9G

Where a firm wishes to make advances of credit on the basis set out in paragraph 2.3.4, the deed must also state that it may do so. The general insurance trade associations have prepared some standard trust deeds for this purpose.

A firm's selection of a bank

GIGI 2.3.10G

A firm must place client money with an approved bank (see CASS 5.5.38 R). In the case of small firms holding relatively modest amounts of client money, this requirement will most likely be satisfied if the firm places client money with an authorised UK clearing bank, for example.