Broking Business Summer 2019: Get your CASS 5 ducks in a row early
Read time: 4 mins
Service: Audit & assurance Sector: Financial services
We are still seeing a strong appetite for insurance intermediary acquisitions involving firms of all sizes across the market. In our experience, certainly in smaller firms, CASS 5 sometimes gets overlooked as part of the due diligence process. But beware; overlooking it can cause some real headaches down the line once the acquisition is complete and the integration process starts.
Why CASS 5 mattersAs an acquirer or a vendor, it really is worth understanding any CASS 5 issues that may apply – for a number of reasons. We’ve seen poor CASS 5 compliance lead to vendors receiving less than they expected. This might be because there is a deficit that requires funding. Or because the firm is deemed to be of lower quality with sub-standard systems and processes that have been highlighted by inadequate CASS compliance.
We’ve also seen buyers struggle post-acquisition, where issues have emerged that need significant time, cost and energy to resolve. In some cases the FCA has had to get involved.
So whether you’re a seller or a buyer it makes sense to get your CASS 5 ducks in a row. In the last two years we’ve acted on a number of CASS 5 assignments and have compiled the following quick wins to establish whether a firm is meeting the requirements.
Latest audit reportIn any broker due diligence, it’s standard practice to obtain the latest client money audit report. But too often this is as far as it goes. Once you have the report, it’s important to assess the extent to which you can rely on the report – and therefore how much additional work you need to do.
CASS 5 is a complex area. It is easy to have minor breaches that result in a ‘qualified’ audit opinion. Over 95% of the opinions we issue are qualified. A clean audit report with no breaches may, not be as clean as it appears – there are often breaches that have just not been picked up.
Establishing the trustCASS 5 focuses on protecting client money in the event of broker insolvency. So it is vital to establish that the client money trust has been correctly set up and is properly maintained. By not having a correctly executed trust deed, a broker may give insolvency practitioners the opportunity to break the trust, enabling them to use the client money to pay off the firm’s other creditors.
What’s more, unless a non-statutory trust deed is in place, the trust effectively reverts to a statutory trust. This means there are different, potentially more onerous, rules at play – the funding of premium or claims, for example, is not allowed. So getting back to basics for the establishment of the trust is critical.
Client money calculationsA recent client money calculation is the key to identifying any deficits or any potential system issues. We suggest you carry out the following basic checks for reassurance:
- Are the balances used tied to supporting system reports?
- Do you really understand what the reports from the system are telling you?
- Is the calculation complete and in line with the FCA template? Are all the components of the calculation shown?
- Can the commission surplus calculated be referenced to an underlying list of commission transactions?
- Is the surplus calculated actually the amount that is transferred – no more and no less?
Relevant permissionsWhen an intermediary claims to be operating outside the CASS 5 regime on the basis that it has ‘risk transfer’ – in other words, every insurer has granted risk transfer via their terms of business agreement (TOBA) – it is worth challenging this claim.
If there is a single non-risk transfer TOBA, it is likely the intermediary should be complying with the client money rules. Handling client money without the correct permissions is a serious breach of the FCA rules and will therefore involve communications with, and disclosures to, the FCA as soon as possible. In our experience, firms that have a number of TOBAs will have one that is ‘non-risk transfer’.
Integration considerationsIn order to maximise operational efficiencies after acquisition, you may have integration plans for the client money processes and procedures. But trust law dictates that you cannot move client money from one business to another in the same way as you can with other business assets. For this reason it is worth seeking advice before taking any action.
Moving client money from one trust to another always requires informed consent from the client – and that isn’t necessarily easy. Thinking about your post-acquisition plans at the time of the due diligence can speed up integration when the time comes.
Act before acquisitionOn the face of it, there are several quite straightforward ways to assess a firm’s CASS 5 compliance. But dealing with the results and taking action before acquisition can be a bit more challenging.
Our team at PKF Littlejohn carries out over 70 CASS 5 audits every year, as well as CASS 5 due diligence, compliance and internal audit work. If you would like to discuss how we can support your overall approach to CASS 5, we would be happy to chat.
Written by Bethanie Crayston in our London office.