When CASS 5 Applies

CASS 5 applies to firms that receive or hold money for clients in connection with insurance distribution. Typical examples are premiums collected from customers before they are paid to insurers, and claims or refund money received from insurers before it is paid to customers. Payment and e-money firms have their own safeguarding rules in CASS 15, and investment firms use CASS 7; see CASS oversight explained.

Risk Transfer: Money That Isn’t Client Money

Where a broker has a risk transfer agreement with an insurer, money it receives as the insurer’s agent is treated as received by the insurer. A customer who pays a premium to the broker has, in effect, paid the insurer, and the risk of the broker failing sits with the insurer, not the customer. Money held under risk transfer is not client money under CASS 5, though it still needs careful handling. Many brokers hold a mix of risk transfer money and client money, and must identify which is which.

Statutory and Non-Statutory Trusts

A non-statutory trust gives brokers more flexibility with cash flow, but it brings higher capital and more demanding controls. Brokers should take advice before choosing one.

Bank Accounts and Acknowledgement Letters

Client money must be held in designated client bank accounts, separate from the firm’s own money, with the bank’s written acknowledgement that the money is held on trust and can’t be used to offset the firm’s debts. Brokers need equivalent acknowledgements where client money is passed to other parties, such as another intermediary. Missing or out-of-date acknowledgement letters are a common audit finding.

The Client Money Calculation

Firms must regularly check that the money they hold for clients (the client money resource) covers what they owe clients (the client money requirement):

• Perform the calculation at least every 25 business days.
• Use either the client balance method, which works customer by customer, or the accruals method, which uses insurance creditors and unearned commission.
• Correct any shortfall on the same day, using the firm’s own money if necessary, and remove any excess.
• Reconcile the client money resource to the bank statements, and investigate and correct any difference promptly.
• Include money held by any appointed representatives.
• Tell the FCA immediately if the firm can’t perform the calculation or can’t correct a shortfall.

Records should be kept with supporting evidence, reviewed and signed off by the person responsible, and made available to the auditor.

Reporting and the Annual Audit

Brokers holding client money report on it in the RMAR return, and must obtain an annual client assets report from their auditor, sent to the FCA. Auditors test the calculations, reconciliations, bank arrangements, acknowledgement letters and the firm’s controls. A qualified report, or one listing significant breaches, will draw supervisory questions. Our guide to FCA regulatory reporting covers the returns.

Who Is Accountable

Under the SMCR, responsibility for the firm’s compliance with CASS is a Prescribed Responsibility, allocated to a Senior Manager. At a small broker that is often the managing director or the compliance officer; at a larger broker, the finance director. Whoever holds it needs management information good enough to show they are in control, and must be able to show reasonable steps if something goes wrong. See Prescribed Responsibilities explained and reasonable steps.

The People CASS 5 Needs

• A finance person who runs the calculation: someone who understands insurance accounting, insurer and customer ledgers and the chosen method, not only general bookkeeping. See why client money experience has to be specific.
• A compliance officer who oversees it: an SMF16 who knows CASS 5 well enough to challenge the calculation and spot weak controls. See compliance officer for insurance brokers.
• A Senior Manager who owns it: the person holding the CASS Prescribed Responsibility, with board-level reporting.

Experience doesn’t transfer automatically between regimes. Someone who knows CASS 7 at an investment firm will still need to learn risk transfer, insurer ledgers and the CASS 5 trust options.

Setting Up Client Money at a New Broker

New brokers that do this before authorisation find the application easier, because the FCA can see how client money will be protected. See becoming a directly authorised insurance broker.

Appointed Representatives and Client Money

Where a broker’s appointed representatives handle premiums, the principal remains responsible for that money. It must be included in the principal’s calculations, and the AR’s handling of it must be overseen like any other part of the business. Weak AR controls are a frequent source of shortfalls. See appointed representatives explained.

Common Weaknesses

• Not knowing which money is held under risk transfer and which is client money
• Late or missed calculations, especially in busy renewal periods
• Shortfalls identified but not corrected the same day
• Out-of-date or missing bank acknowledgement letters
• Using client money to fund the business, even briefly, under a statutory trust
• Calculations prepared by one person and never reviewed

Frequently Asked Questions

What is CASS 5?

The FCA’s client money rules for firms that hold money for clients in connection with insurance distribution.

Is money held under risk transfer client money?

No. Money received as the insurer’s agent under a risk transfer agreement is treated as held by the insurer.

How often must a broker do the client money calculation?

At least every 25 business days, correcting any shortfall the same day.

What is a non-statutory trust?

A trust that lets the broker advance credit, for example paying insurers before customers pay. It requires higher capital, with a £50,000 minimum, and stronger controls.

Do brokers need a CASS audit?

Yes. Brokers holding client money need an annual client assets report from their auditor, sent to the FCA.