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Tips & Traps: Commissions, Mixed Money and Trust Accounts
We were recently asked whether commissions paid by an insurer in one lump sum to divide between Authorised Representatives, can be paid into a broker’s trust account.
The answer lies in the rules dealing with Mixed Money.
You receive Mixed Money when you receive money that you must pay into your trust account mixed with money that is not permitted to be paid into your trust account (e.g. a cheque from a client in payment of an invoice that includes both premium and your broker fee).
Money received in cash can never be Mixed Money because it is a simple matter to divide the payment and bank it into separate accounts.
However, cheques have to be banked to one location. If a cheque contains premium, you would be in breach to bank it to somewhere other than the trust account. But if it also contains a broker fee, you would be in breach to bank it into the trust account – so, there is an exemption for Mixed Money, to avoid this situation of being unable to bank the cheque anywhere without committing a breach!
A broker admin fee paid together with premium will always be Mixed Money. However, commission mixed with premium may not in fact be Mixed Money. It depends who the commission belongs to. If you remit premium to the insurer ‘net of commission,’ then premium and commission is Mixed Money because the premium belongs to the insurer and the commission belongs to you. If you remit premium gross to the insurer, then it is not Mixed Money – in fact, there is no commission component to the payment because the entire sum is premium.
Commission received by you from an insurer can never be paid into the trust account (unless it is received as part of a cheque that also included say premium refunds, but this would be unusual). Any such commission belongs to you, and therefore need not be held on trust for anyone.
This also applies to commission paid to Authorised Representatives. This is because money is only held on trust when one person pays it to you on the understanding that it belongs to a third party. In this situation, the insurer agrees to pay you commission, and then you agree to pay your Authorised Representatives commission. When the insurer pays you, it is paying the money it has agreed to pay you. You then pay your Authorised Representatives in accordance with your agreement with them. The insurer is not paying your Authorised Representatives via you (the way it pays claims or premium refunds to clients via you), because the insurer has no agreement with your Authorised Representatives.
Therefore, commission you receive from insurers should be banked into the general account, because this money belongs to you. It does not belong to your Authorised Representatives until you pay them - the same way that money you owe to other suppliers does not belong to them (and is not held on trust for them) until you pay them. Because it belongs to you, and not your Authorised Representative, when you bank it, there is no need to maintain separate accounts for each Authorised Representatives.
Remember that where Mixed Money is banked to the trust account, the part that is not premium, claims money or premium refunds must be removed from the trust account every 30 days.
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