Insurance Intermediary Insolvency: A CASS Act

Author:Miss Geraldine Quirk and Julie Tripp
Profession:Clyde & Co

In addition to the general insolvency measures found in the Insolvency Act 1986, insurance intermediaries are subject to specific client money rules, which have a particular effect if they become insolvent. Though in the context of investment firms rather than the insurance sector, the recent UK Supreme Court case of Lehman Brothers International (Europe) (in administration) v CRC Credit Fund and ors [2012] UKSC 6 (LBIE) is a useful decision against which to consider the application of many of these client money rules. The decision has highlighted how these rules could, absent reform, result in some confusion in the event of an insurance intermediary insolvency.

Holding client money

Article 4(4) of EU Directive 2002/12 required governments in member states to: "... take all necessary steps to protect customers against the inability of the insurance intermediary to transfer premium to the insurance undertaking or to transfer the amount of claim or return the premium to the insured."

The UK government complied with that requirement by producing Ch 5 of the (then) Financial Services Authority's (FSA's) Client Assets Sourcebook (CASS 5) (now under the remit of the FCA). The rules in CASS 5 have the force of law and a person who suffers loss in consequence of a breach of one of the rules may bring court proceedings under s 138D of the Financial Services and Markets Act 2000.

Under the CASS 5 regime, an insurance intermediary is permitted to hold a client's money in three ways:

on a "risk transfer" basis; in a statutory trust; or in a non-statutory trust. Risk transfer (CASS 5.2)

Money is held on a "risk transfer" basis when an intermediary holds money as the insurer's agent pursuant to a written agreement. Premium held as agent for an insurer is treated as having been received by the insurer, so there is no requirement on the part of the insured to pay the premium twice should the intermediary become insolvent. Conversely, where the intermediary holds claims money or premium refunds as agent for the insurer, on insolvency the money is not treated as having been received by the insured. The insurer therefore bears the credit risk in relation to all funds held by the intermediary on a risk transfer basis.

Such funds are not treated as client monies, and cannot be paid into a client bank account without the insurer's written agreement; it must consent to its interests in the trusts (whether statutory or non-statutory) governing the client...

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