global insurance management

Client Money and Credit Write-backs


Nov 28 2011

Client Money and Credit Write-backs

Relevance:             All firms

Action required:     Review current approach to client credit balances and amend if necessary.

The FSA has recently revisited the issue of credit write-backs, which they understand to mean “an accounting transaction (the reduction or elimination of a creditor balance) which may or may not be followed by a cash transfer out of client money accounts”. 

Client credit balances can build up over time and it is often perceived to be too much trouble to tidy them up properly by refunding sometimes small amounts of money to clients or ex clients. However, if tempted to sweep up these balances and transfer them into the office account, you have to remember that the FSA’s view is that:

A firm will be liable for a breach of trust… if it takes client account monies to its own account when it considers they are properly due, but it transpires they are not.

In a recent report, the FSA stated that:

All firms should ensure that they have adequate procedures to ensure that legacy balance issues do not develop. Firms are only allowed to transfer legal ownership of client money to themselves under very limited conditions and firms must ensure that they discharge their obligations fully under any credit write-back.

Simply put, the FSA expect you to take the time to manage client balances and ensure that you do not take money which does not belong to you.

Helpfully, the FSA has also published a list of questions relating to this topic that firms should consider and which we make no apology for reproducing:

1.   Are all balances fully reconciled to the general ledger?

2.   Are there detailed breakdowns of aged debtors, creditors and unallocated cash, which show the validity and valuation of all balances contained within these populations?

3.   Are there appropriate bad-debt provisions in place against aged debtors, and are these kept up-to-date for inclusion within the client money calculation?

4.   Have all of the reports extracted from the ledgers to perform the client money calculation been interrogated and validated? Are these reports accurate, complete and fit for purpose?

5.   Where there are significant aged client balances, are sufficient resources dedicated to the investigation and resolution of these balances?

6.   When considering taking credit ‘write-backs’ for aged credit balances, have any related debit balances been considered and is the approach being taken consistent with ours on this topic?

7.   Do the Board have adequate management information and a clear line of sight in relation to these questions? Are they able to show the control and governance that they exercise in this area?

Breaches of Client Money rules are taken very, very seriously by the FSA.  You only have to look at the number of cases resulting in fines imposed over the last few years to realise this.  A recent example is that of a firm that failed to obtain a letter from their bank that confirmed client money was identifiable and ring-fenced from the firm’s own assets and as a result was fined £15,000.

So, if you have any unallocated credit balances you must make every effort to find the rightful place, which is not simply to transfer to your own account.  It is worth bearing in mind that the Limitation Act 1980 does not apply to trust accounts so any credit write-back taken from a client money account can still be sued for irrespective of the time since the original transaction.

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