Why assessing TOBAs appropriately is so important

Financial resilience is a key concern for the FCA. It’s something the regulator has continually been monitoring since February 2020, through repeated mandatory surveys. Based on the findings from these, the FCA issued a Dear CEO letter on client money arrangements in October 2020. It has followed this up by looking at what actions firms have taken in response – and by asking some firms to provide verification evidence.

Whether your firm has client money permissions or you rely on risk transfer arrangements, it’s vital you ensure the Terms of Business Agreements (TOBAs) you hold with your markets reflect the way you work. Failure to comply, albeit non intentionally, can result in a significant breach. 

About TOBAs

TOBAs record the general terms and conditions on which business will be transacted. Once an authorised signatory within your firm signs and returns a TOBA, you’re legally bound by its terms. This includes those relating to changes to the TOBA, termination clauses, or any other terms within the agreement – even if you later find them to be inappropriate. So it’s vital you understand what you’re agreeing to when signing a TOBA.

Not having appropriate systems and controls in place for reviewing and approving TOBAs could impact your ability to handle premium collection appropriately. This, in turn, could have serious consequences for your ability to operate your client money account in compliance with the FCA’s Client Asset Sourcebook (CASS) – or, if you use an insurer trust account, your ability to operate in accordance with the requirements of individual markets you enter into agreements with.

Be prepared

By the time you receive a TOBA for review, you should already have assessed the provider you’re intending to do business with. This enables you to evidence having carried out due diligence and put in place appropriate and effective controls for monitoring that provider’s suitability on an ongoing basis. 

The review

UKGI’s subject matter experts can provide you with TOBA review and client money support services, but if you prefer to handle the task yourselves, here are some key points to look out for when reviewing and approving TOBAs.

Key considerations

Before assessing any TOBA you need to understand fully how TOBAs work, what types of trust account(s) your firm holds, and which aspects of your operations could have an important bearing on your assessment, e.g. whether you have Appointed Representative relationships in place. 

It’s vital you maintain a consistent approach and adhere to the same standards across all agreements you assess and sign. It’s also important to remember that agreements can sometimes comprise multiple – potentially contradictory – terms.

CASS compliance

To be sure of meeting CASS requirements, you will need to check:

  • that the risk transfer status is clearly defined, whether risk transfer applies to your firm, and whether there are any exceptions to this cascade (without this knowledge, you will not be in a position to know when your fiduciary duty has been discharged)
  • that the type of trust account your firm operates is acceptable to the market you’re looking to transact with – some markets will request a segregated account for their exclusive benefit
  • that, where monies are held under full risk transfer, there is clear permission for them to be held in the same account as client monies (co-mingling approval) – or, if an Insurer Trust Account is permitted, that monies can be held in the same account as monies held on trust for other insurance undertakings
  • that sub-ordination has been granted, i.e. where risk transfer monies are co-mingled with client monies, the market has clearly confirmed that the interests of the insurer will be subordinated to those of the client
  • that the agreement is clear on the question of commission transfer and the point at which commission can be removed from the trust account (this should consistent across all agreements and should be a true reflection of the systems and controls you have in place – whether you remove commission on a received or a settled basis).

Commercial considerations

It’s also important to consider the legal and contractual risks a TOBA could bring to your business. Ask yourself whether any of its terms impose requirements your firm cannot satisfy.

Examples could include:

  • your firm being asked to maintain a PI insurance policy in excess of the regulatory minimum limit and higher than your firm currently holds
  • unusual or unreasonable terms, e.g. anything that could create a financial exposure or that goes beyond legal or regulatory requirements
  • termination clauses that could impact your business if not considered alongside other clauses e.g. around client protection and non-solicitation. 

Record keeping

Once you have signed a TOBA, it’s essential you retain a copy signed by both parties. It’s also best practice to maintain a register of all the TOBAs you’ve entered into, including clearly recorded details on the key CASS considerations. This will give you the information you need to ensure your trust account operates compliantly and provide clarity around the ownership of funds in the trust.

We can help

For all of the reasons touched on above, and many others besides, it’s vital you understand exactly what you’ll be getting into whenever you’re looking at signing a TOBA. At UKGI we can provide expert practical support on any and all of these issues. For more information, or to discuss your specific requirements, please contact us at info@ukgigroup.com

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