The consequence of consolidation is often deauthorisation. We look at the process, with a particular emphasis on client money.
The M&A market for insurance brokers and MGAs strengthened in 2024 and has continued to do so into 2025 as a result of attractive valuations. This ongoing consolidation is driving an increase in the number of legal entities, and therefore FCA authorised firms, in larger insurance broking groups.
Groups are restructuring to streamline and rationalise, so that they can stay lean. This avoids the unnecessary cost and effort of operating too many regulated firms. So deauthorising regulated entities that are no longer needed meets this aim.
What is the deauthorisation process?
Firms are hiving up businesses and running off legacy balances before they submit a deauthorisation request to the regulator. This request must confirm that regulated activities have ceased, that clients have been made aware, and that any outstanding returns or regulatory fees have been settled. Once accepted, the regulator will approve the revocation of Part IV permissions for the firm.
But there are other considerations that are often overlooked. These can lead to a lengthy deauthorisation process or difficulties in clearly demonstrating regulated activities have ceased.
In particular, firms with client money permissions must produce an accountant’s letter to confirm that client money is no longer being held. Delays in the process of clearing legacy balances often lead to issues with obtaining this assurance.
How to prepare for deauthorisation
In preparation for obtaining this letter, firms must be able to demonstrate that:
- insurance balances have been properly reconciled
- all client monies have been paid to the appropriate parties
- client money bank accounts have been fully reconciled and hold no client money
- client money bank accounts have been closed.
The primary concern during deauthorisation is that firms may fail to safeguard client money through a run-off exercise.
The FCA is particularly uneasy about how firms might clear legacy balances from their insurance ledgers, and has a renewed focus on credit writebacks.
Firms must make sure that any ledger clearance process documents the implications for the fiduciary duty of their directors under trust law. We recommend firms obtain external legal advice when carrying out any credit writeback or balance transfers.
It’s critical that firms are aware of, and prepared for, these requirements for a simplified and efficient deauthorisation process.
Conversations with the FCA
The FCA has recently challenged the wording of accountants’ letters. At PKF we have been discussing with the regulator the best way to produce a form of negative assurance report that it finds acceptable, and have now agreed on a suitable form of words.
For more information on deauthorising regulated entities please contact Paul Goldwin or Charles Drew.
