Analysis: Does the One Call fine signal wider issues with client money?

Radford’s fines came alongside a £684,000 fine to One Call Insurance, the business he was responsible for at the time, as well as a block on charging renewal fees for 121 days, which would likely cost the firm £4.6m.

The Financial Conduct Authority, which levied the fine, published a total of 56 pages in its decision note to explain the reasons for the fine. However, Radford’s defence – quoted in those pages – struck a chord for many brokers already struggling with the weight of regulation.

“I wouldn’t have got any work done if I’d have sat and read FCA documents all the time,” he told FCA officials.

More than 13 years after they were first published, Post looks again at client money rules and whether mishandling remains common in the industry.

One Call fine

The FCA’s rules on client money, known as Cass 5, have been a source of confusion for many brokers since they were first implemented in 2005.

They are set out in the 42-page chapter 5 of the Client Assets Sourcebook, which was so widely misunderstood it was clarified in a 43-page guide the following year.

In the years since then, there have been numerous training seminars organised by compliance firms and trade bodies like the British Insurance Brokers Association.

According to the FCA decision note, Radford himself attended one of those seminars, and yet still failed to fully grasp the requirements of the law.

The FCA wrote: “Mr Radford considered that guidance issued by the authority regarding a firm’s client money obligations was more aimed at individuals who, unlike him, were new to the industry.”

In essence, the rules require that funds from clients are kept in a trust account. At any time, the broker has to have enough funds in that account to reimburse clients should the business become insolvent and must carry out calculations to that effect every 25 days.

The exception is when the risk is transferred to an insurer, in the Terms of Business Agreement. In which case, the insurer bears the risk for any client money shortfalls if the broker fails, rather than the customer. The handling of insurer money has fewer restrictions than client money.

The FCA mandates that if client money and insurer money becomes mixed in the same pot, then the broker must abide by Cass 5 rules for the entire account.

In the case of One Call, this was not the case. The FCA found the firm had inadvertently placed non-risk transfer premium with insurer money, and had dipped into the account to fund its own working capital requirements, make payments to directors and, indirectly, to capitalise a connected company, One Insurance Limited.

When visited by FCA officials in 2013, the firm was found to have had a deficit of £17.3m in its accounts which it couldn’t pay back the same day.

“These deficiencies meant that, in the event of insolvency, it would not have been clear whether money held under these Tobas should be treated as belonging to the insurer or to One Call’s customers, litigation may have been required in order to determine ownership,” said the FCA.

The problem, according to the briefing note, was that Radford didn’t appear to have checked the Tobas carefully enough to ensure that there was risk transfer.

“When conducting business with a new insurer, Mr Radford sought verbal assurances as to whether risk transfer would form part of a Toba but did not take reasonable steps to ensure the risk transfer was effective,” the FCA said.

One Call introduced motor policies with a three year guarantee, known internally as T36. The deal involved One Call being advanced by a premium finance company with three years’ worth of premium upfront, before receiving the premium from the customer.

Warnings unheeded

The FCA said it should have held all the money from the premium finance it received for years two and three in accordance with client money rules. It was not money received under a contract for insurance.

The issue was picked up in company’s first ever statutory audit, in March 2012. The company’s auditor told Radford he could not “see anything to suggest that the monies received on the three-year price fix are not client monies per the FSA rules”, the FCA note said. However, the concerns were dismissed at the time.

One Call said it accepted the FCA’s findings. A spokesperson added: “In early 2014, One Call Insurance Services and John Radford realised that they had made an error in the client money calculation and immediately reported it to the FCA.

“The client money deficit was then rectified. Both One Call Insurance and John Radford express regret for this miscalculation. Their intention, as always, was to help consumers achieve the best possible price in an increasingly competitive motor insurance market.”

The FCA note said One Call had commenced a wind-down of all its Cass balances in order to move to a “pure risk transfer model”, which was scheduled to have been concluded in March 2016.

One Call isn’t the first to have fallen foul of FCA penalties in respect to client money mishandling. Even as recently as 2016, Towergate was fined £2.6m for failing to ring-fence client funds, leaving accounts with shortfalls of £12.6m.

Part of the issue is a lack of standard wording in Tobas, said Branko Bjelobaba, managing director of insurance at compliance consultancy firm Branko.

“I will be the first to admit that Cass 5 has always caused problems with brokers because insurers from day one, have never agreed a standard wording for risk transfer,” he said.

“Most are meant to enshrine that in wording that’s two or three or lines long but they can never seem to get it spot on. Someone will say we will give you a risk transfer in line with the FCA’s client money rules or if you keep it in a statutory trust.”

He added: “You then need to read what every single insurer requests you to do in their Toba with you over the handling of their money and draw up a matrix.”

David Sparkes, head of compliance and training at Biba, said it was clear, by the level of detail outlined in the FCA’s decision note that the authority intended to use One Call as an example to other players.

“The FCA expects firms to read those reports and use them as educational pieces to measure how they’re doing themselves,” he said.

James Sharp, business development director at Ten Insurance Services – which manages client money on behalf of appointment representative members – said the network was forced to conduct its own review recently.

“We’ve just gone through a huge exercise double checking our assumptions, probably over the past year we’ve done three man months checking all the damn things and making sure we were right,” he said.

“How a little broker does it, I don’t know. They certainly don’t have the manpower. Do they get client money wrong? Yes they do. Do they do it deliberately? No they don’t.”

That was a sentiment echoed by Bjelobaba: “The very small broker, one man in a shed, I really do fear for.

“There’s a huge amount of regulation to get your head around. Once you get to 15 or 20 staff, someone should have compliance as their job, or you need to have a consultant. Once you get even bigger you need a team of specialists.”

However, Melanie Hampton, managing director at small broker Alexander Miller, said the small size of the operation meant she was able to personally ensure the business was fully compliant.

“As a small business owner I know exactly what is going on because the business is small enough to allow me to do that,” she said.

“I have always been directly aware and responsible for all the compliance issues. I read all the papers and change things as appropriate.

“When we started off with our FCA regulation, we had lots of training courses. The people there were paying lip service. A lot of senior leaders were leaving it to someone else. If you are a big broker and everything is a box ticking exercise, you need to have oversight from those on high. Some of the behaviour in big brokers is shocking.”

‘Who will stop me?’

Part of the problem lies in the practice of dipping into insurer money, said Bjelobaba. “I remember going to a meeting with the person at the FCA who headed this up.

“They said whenever we’ve gone to a broker and they’ve misappropriated client money, it’s been spent in three ways: private school fees; very flash cars; or women who like to be paid for their time.

“I had a client who knew he needed £200,000 a month to run his business. I asked him what he would do if the commissions in that month don’t reach £200,000. He said he’ll just take it out of the client money. I told him it wasn’t his, and he said ‘who is going to stop me’.

“There’s no excuse. It’s just laziness and to be honest, a lack of intelligence for some.

“I’ve met firms where the owner has bragged to me about his number plates and his helicopters. He makes about £2m brokerage but he doesn’t spend any money on or hire anyone who helps him with compliance. They say they’ll just manage. One day they’ll get caught with their trousers down.”

However, Sparkes claimed that in the majority of cases, the rules were only breached by accident. “I don’t think it’s a case of people not being bothered, it’s just they’re struggling to understand the rules,” he said. “Even big firms can inadvertently get it wrong.”

This was even more true when premium was passed to wholesale brokers. “If the retail broker only operates risk transfer and he uses a wholesale broker that doesn’t have cascaded risk transfer he could be inadvertently holding client money,” said Sparkes. “That’s another case where things could go wrong through inadvertent mistakes.”

However, Carl Shuker, CEO of retail broker A Plan, said if firms were diligent in reading contracts and acting within the rules, there were unlikely to be major mistakes.

“You’ve just got to make to sure you have the right Tobas in place with the insurers and then you act on what you’ve agreed with them,” he said. “It’s fairly straightforward.”