AMI is pleased that the FSA consider it disproportionately onerous to apply the full rigour of the client money rules, to those situations where the fee agreement is constructed in such a way that the monies are treated as owned by the firm and then refunded to the customer.
Mortgage intermediaries should be aware however that the arrangements proposed in the Markets in Financial Instruments Directive (MiFID) will mean that any firm indebted to its clients will be subject to the client money rules. The directive, which is expected to come into force in 2007, may affect the guidance outlined above.
Chris Cummings, director general of AMI, said,“It is pleasing that the FSA has taken this stance on client money. As written, the rules did not account for arrangements in the mortgage industry and it is right that brokers can now benefit from this concession”.
Background
This new arrangement will affect all mortgage intermediaries who offer a purely fee based remuneration option and, as such, it captures all firms which offer independent mortgage advice. Those firms which offer clients the opportunity to pay by way of a combination of client fees and procuration fees may also need to make use of this concession.
There are a number of examples where firms are technically viewed as holding client money, and therefore are required, amongst other rules, to meet increased capital adequacy standards:
1) An upfront fee is charged and it is agreed that any procuration fees are to be rebated to the client;
2) The procuration fee will be used to offset a fee paid upfront, and therefore part of the procuration fee will be rebated to the client;
3) It is agreed that all or part of the procuration fee is to be retained on behalf of a client, to offset future fees charged by the firm.
In each of these situations, the FSA could determine that firms are holding client money, once the procuration fee had been received.
