global insurance management

Client money and auditors responsibilities

Jan 15 2011

Client money and auditors responsibilities


Relevance: Only firms with permission to hold Client Money

Action required: Review FSA issues with your client money auditors to ensure they understand their obligations.

Client Money is under the spotlight once more and in the first of a series this article covers just one aspect that is currently receiving attention from the FSA – Client Money Audit Reports.

Rules covering client money and assets are contained in the CASS part of the FSA Handbook. The FSA relies upon auditor reports to give them the assurance that firms are looking after client money and assets as expected.

A Client Money Audit Report is required for all general insurance intermediaries (irrespective of whether they are a limited company, partnership or sole trader) who:

• hold client money in a non-statutory trust client bank account; or
• have held more than £30,000 in a statutory trust client bank account at any time (even if only for one day) in the client money audit reporting period. Please be clear, the requirement applies even if most of the money in the account is subject to risk transfer.

If your firm does not hold client money at all or only holds up to (but not exceeding) £30,000 in a statutory trust, then the audit requirement will not apply to you.

So why has the FSA decided to take action now?

One answer is that when they conducted a review of auditors’ reports, they found what they considered to be “material failings and weaknesses”, such as:

• auditors providing ‘clean’ reports, despite the firm having committed significant CASS failings;
• auditor’s reports covering the wrong chapters of CASS;
• failure to provide the report;
• auditors failing to provide adequate detail on the issues and exceptions identified in their report;
• auditors submitting their reports several months late; and
• some auditor’s reports had ‘simple errors’, such as the auditor not signing or dating the report, quoting the wrong FSA Firm Reference Number, or referring to another firm within the body of the report.

Clearly, the FSA’s main target is investment firms but insurance intermediaries will be affected. The key proposals in this consultation paper are:

• explicit requirements for the type of audit assurance reports;
• report to comply with applicable auditing standards;
• introduction of a report template;
• report signed off by holder of primary responsibility for the report;
• auditors to list any CASS breaches;
• firms to evidence action/mitigation regarding breaches;
• firms’ governing bodies to consider findings of audit report and action accordingly;
• Mandate rules back into auditor’s scope;
• guidance becomes a rule to deliver reports within 4 months of reporting period end.

Consultation closes 31 December 2010 and we can look forward to revised rules in early 2011. Spookily, this might coincide with the FSA’s planned overhaul of CASS 5 (Client Money – Insurance Intermediary activity) but we should not expect any easing of the regulatory obligations in this area!

It would be advisable to review your client money audit report arrangements now and commence early discussions with your auditor.

You should ensure that:

• your auditor is appropriately qualified to undertake this form of audit;
• your auditor understands the relevant FSA CASS rules;
• you have an audit report covering each of the last 6 years;
• you can demonstrate any action taken to rectify any failing identified.

There is likely to be an increase in the cost of providing the revised version of the audit report and you should be making additional provision in your budgeting for next year, especially if your accountant will not be undertaking the client money audit.

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