Amy GallimoreEC3 Brokers Ltd, a Lloyds insurance broker, went into administration in late 2022 holding client monies subject to CASS 5. Its clients were corporate entities which were either end-insureds/reinsureds or were producing brokers in a chain. The client would pay EC3 premiums, which EC3 would transfer to the relevant insurer. When clients made a claim, the settlement monies would often be passed from the insurer to EC3 and then onto the client, and the insurer would use the same method if needing to refund premiums.
At the date of administration, EC3 held around £13m client money. The administration has been extended twice and is due to expire in November 2026. The joint administrators, Tony Wright and David Hudson of FRP, sought the Court’s directions for a proposed scheme of distribution.
The joint administrators had tried to determine the client money entitlement using many factors, looking at each of the three scenarios outline above in which the firm had held the money. Where the beneficiary can be identified, the money can be returned to it. But where it is not possible to identify a beneficiary, the monies stay subject to a trust, and the Court may then give a direction to enable distribution based on the practical probabilities. In this case, the joint administrators had not been able to determine whether EC3 had complied in full with its CASS obligations. Ultimately it was not possible to determine how much of the monies held were attributable to the client and what had been held on a risk transfer basis for the insurer. It was likely that some clients would not make a claim, and the issue was what would happen to that money, how small sums should be handled where it could cost more to distribute them than the actual amount due, and where a balance just could not be matched (because of errors in the records).
The joint administrators had proposed a scheme to the FCA. The FCA used its powers to modify the terms of CASS so that the scheme would be able to be implemented once approved. The scheme would effectively give each client a sum rateable to its entitlement calculated in accordance with CASS – but distribution would be subject to 10 conditions, primarily that it could not start without a Court order approving it. The scheme also included a number of presumptions and a provision that clients with small balances need not be notified of their entitlement. And ultimately, any funds associated with unallocated sums should be treated as part of the client money pool to make up any shortfalls, which the Court agreed was a practical solution.
It said:
- the directions were consistent with the functions and duties of the joint administrators, did not put them in a position of conflict and that the court should provide effective assistance;
- the scheme was compliant with FCA rules and struck a proper balance between the rights of established clients and the prompt return of their money, the position of those with substantial claims and the need for finality; and
- the joint administrators could act on the basis that there were no risk transfer arrangements in cases where they could not determine whether one existed or not, and where the insurer could not show there was one.
The Court approved the scheme.