Within the GGC region, the regulation of insurance intermediaries, and particularly their handling of client money, has been relatively light. There have been some high profile cases in the media in recent times that demonstrate the risks involved with holding client money and how badly things can go wrong. There are new developments in legislation within the GCC as regulators begin to incorporate international practice into the local regulations.

Current international practice requires insurance intermediaries dealing with client money to hold such money in segregated accounts, which are clearly and specifically separate from any day-to-day operating accounts of the intermediary; one of the protective measures for the ultimate insured. In this article we provide a summary the proposed regulation for Bahrain and Saudi Arabia and the existing regulation in place in the United Arab Emirates. We also provide a high level review of what needs to be in place to ensure that an intermediary is in compliance with international practice and local law.

Bahrain

On 26 June 2011 the Central Bank of Bahrain (CBB) issued, for a consultation period of one month, draft new rules related to the handling of client money entitled "Client Money Module" (the Draft Module). The Draft Module is intended to be an addition to Volume 3 of the CBB Rulebook. The proposed Draft Module is intended to strengthen the already existing rules governing the segregation of client assets held by insurance brokers.

Scope of Draft Module

The Draft Module will apply to all insurance brokers licensed by the CBB and appointed representatives registered1with the CBB that undertake the broking of insurance contracts and holding client money. It will also apply to insurance firms to the degree that it sets out rules applicable to the payment of brokerage commission by the insurer.

Appointed representatives will be categorised as either (i) individual (ii) corporate or (iii) corporate licensed financial institutions. Although an appointed representative is not licensed as an insurance firm, insurance broker or insurance consultant by the CBB, it may be a CBB licensed financial institution. For example, in Bahrain, an appointed representative is often a retail bank. Therefore, the Draft Module may be applicable to some non insurance CBB licensed financial institutions in Bahrain.

The main purpose of the Draft Module, which is divided into two sections: 'Client Asset Protection' and 'Holding Client Money', is to ensure the proper protection of client money.

What is Client Money?

Client money is defined in the Draft Module as 'money of any currency that an insurance broker or appointed representative receives and holds for its client (or clients of appointed representatives) when carrying on insurance mediation. It can include premiums / contributions and premiums /contribution refunds."

Who may hold Client Money?

An intermediary such as an insurance broker or an appointed representative may choose either to hold client money and comply with the Draft Module or not to hold client money and instead transfer the risk to the insurance firm. However, for some intermediaries holding client money will no longer be a choice.

The Draft Module will prohibit individual appointed representatives and corporate appointed representatives that are not financial institutions from holding client money. They will be mandated to transfer the risk directly to the insurance firm. Therefore, the only appointed representatives that may hold client money will be appointed representatives that are financial institutions. And even this will be limited by the requirement that where the appointed representative is a bank, premiums received by them will have to be deposited directly into the insurance firm's account with the bank.

The Draft Module will prohibit any insurance broker or appointed representative from holding client money for life / family takaful participating with profit policies.

The Draft Module will require, where an insurance broker or appointed representative is required by an insurance firm to hold client money, a written agreement be put in place documenting the type of client money to be held by the intermediary.

Ring-fencing Client Money

The intention of the Draft Module is to ring-fence client money so that it can not be used for any purpose other than that for which it is directly intended. This is to be achieved by implementing a requirement that the insurance broker or authorised representative will be required to open a separate bank account to hold client money on trust, ensuring that the client money is not accessible to the creditors of the insurance broker or appointed representative. In Bahrain, the bank account will have to be opened with a locally licensed retail bank and written confirmation from the bank regarding the status of a client money account will have to be provided to the CBB. Client money will have be paid into the client money account within one day of it being received. Withdrawals from a client money account will have to comply with the rules and guidance set out in the Draft Module.

Premiums and Commissions

According to the Draft Module premiums received by insurance brokers or appointed representatives will be required to be paid to the insurance firm within 15 days of receipt of the money. The total amount of premium collected by the insurance broker will have to be remitted to the insurance firm. In other words, the insurance brokers or appointed representatives will not be permitted to deduct a brokerage commission from client money. However, the insurance firm will be required to pay outstanding brokerage commissions to the insurance broker or appointed representative within 10 days of receipt of the premium. Premiums from one client will not be permitted to be used to settle amounts outstanding for another client.

According to the CBB the tightening up of the remittance process is intended to establish good risk management practices facilitating the monitoring of receivables on the balances sheets of the insurance brokers and insurance companies.

The Draft Module also addresses the premium charge when an intermediary is involved and brokerage fees. It will not be permitted, for an insurance broker or appointed representative, to increase the premium charge above that quoted by the insurance company. In addition, the brokerage commission will be capped at 15% of the premiums quoted for direct general insurance business.

Record Keeping

Insurance brokers and appointed representatives will be required to comply with existing record keeping requirements[2]and ensure that they demonstrate compliance with the Draft Module. They will be required to carry out regular health checks of their record keeping and client money procedures and subject them to independent review. Specifically in relation to client money, records will be required to show money received and paid out for each client. In addition, all client money will be required to be recorded as off-balance sheet items.

Reporting Requirements

According to the CBB, a new insurance broker prudential return will be introduced to reflect the Draft Module requirements and the prudential requirements module. The prudential return will have to be submitted semi-annually, as opposed to the current annual requirement. In addition a special auditor's report 'the Agreed Upon Procedures' will have to be submitted to the CBB within 3 months of the financial year end to certify compliance with the Draft Module.

UAE

The UAE Insurance Authority (IA) Cabinet Resolution No. 543 of 2006 Concerning the Organising Insurance Brokers Profession (Cabinet Resolution) sets out rules governing the insurance broker profession. It does not set out specific requirements in relation to the segregation of client money. Although it does require that insurance brokers maintain a high standard of transparency in conducting business with clients and insurance companies. In addition, under Article 24(2) it is a violation to delay payments owed to an insurance company for a period longer than 3 months. Where such a violation is committed the insurance brokers licence may be cancelled.

The IA issued a circular on 12 April 2011 (the Circular) to all insurance brokers setting out specific requirements for segregating client money. The Circular requires all insurance brokers to:

Deposit all insurance premiums collected on behalf of a insurance company into a separate account in a UAE based bank. This separate account is to be used only for the deposit of insurance premiums.

A separate account should be opened for broker's funds, which are not insurance premiums, to be deposited.

UAE insurance brokers were required to produce evidence of their compliance with the segregation of insurance premiums as required by the Circular within one month of the date of the Circular (i.e. by mid-May2011).

There was a circular issued by the IA on 3 July 2011 instructing all insurance companies to stop dealing with a specific insurance broker which was in violation of Article 24(2) of the Cabinet Resolution.

KSA

The Saudi Arabian Monetary Authority (SAMA) has issued for public consultation draft insurance intermediaries regulation (Draft Regulation) dated 11 February 2011. According to the Draft Regulations the consultation period was for 60 days from 11 February 2011, therefore, the consultation period closed mid-April 2011. The Draft Regulations have a section entitled 'Premium Collection and Segregation of Accounts' that deals with the handling of client money.

The Draft Regulations will be applicable to insurance agents and insurance and reinsurance brokers (Intermediaries).

Intermediaries will not be permitted to collect premiums, commissions or proceeds in relation to an insurance contract before the insurance contract has been entered into.

Insurance companies will be deemed to have received the premium once the Intermediary collecting premium on their behalf has received the premium.

Premiums collected by Intermediaries will be required to be deposited into a separate premium account or transferred directly to the insurance company. Premiums will not be permitted to be treated as belonging to the Intermediary. It is specifically mentioned that it will be prohibited to use premium funds as security for a loan.

Premiums will be required to be remitted by the Intermediaries to insurance companies within a period of 7 days from the date of collection of the premium by the Intermediary from the client. The Intermediary will also be required to submit a detailed report for premiums collected and remit it to the insurance company.

Implementing Best Practice Arrangements

Many in the industry may be wondering exactly what needs to be in place to ensure that an intermediary is operating in accordance with international best practice and local requirements.

It is not as simple as just having the separate bank account, according to Lisa Kelaart Courtney, Head of Compliance Advisory Services at Clyde & Co. It is very clear that effective policies and procedures need to be in place. Such policies and procedures need to clearly define what is 'client money', and consider provisions for any claims related monies; who owns the day-to-day oversight and the controls in place, including signatories to client money accounts and the matrix for the delegation of, and limitations to authority.

Of utmost importance is the effective implementation and practice of the policies and procedures. The intermediary needs to consider the monitoring frequency; ensuring that the department or persons responsible do not have free access to the control of the client money; the compliance function must have active oversight of the correct segregation and treatment of client money; the role of internal and external audit in the monitoring compliance with the requirements for the treatment of client money and reporting on same; escalation points for any short fall and red flags.

Similar to any other internal control system, it will not be just one set of policies and procedures that need to be considered. The monitoring of the fitness and proprietary of the staff should be built in as a control measure and this should be on an ongoing basis. Internal and collision fraud controls need to be reviewed on a frequent basis. Capital adequacy forecasting needs to take into consideration that client money of any type is not included in any working capital and liquidity forecasts and the credit risk policy and limits may need to be reviewed and updated accordingly.

Of interests is the silence in some of the regulations on the expected treatment of any claims related monies however a sound written agreement between the insurer and the intermediary, in addition to the intermediaries' and insurer's internal controls should also cover that aspect as well.

Whilst many firms may already have good practices in place, these may not be clearly documented and others may need assistance with an overhaul of both the policies & procedures and systems and controls including training all relevant staff.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.