Every sole proprietor, partnership or corporation is required to maintain a Trust Account.
When arranging the banking, it is important that the bank you will be or are dealing with is aware that it is a “statutory trust account” accorded protection from general creditors of the brokerage under the Bank Act that is required. It is highly recommended that a receipted copy of Ontario Regulation 991, Section 16 be given to the bank so that they are aware of the transactions that should be processed through this account.
Cheques must have the words “Trust Account” and the name of the member in whose name the Trust Account is kept printed on their face. The bank statements must also clearly designate the account as being a “Trust” account.
Members are required to deposit all Trust monies received (cash, cheque or otherwise) into the Trust Account without delay and in no case, any later than three (3) banking days after it is received. Deposits must be made in kind, i.e. if cash is received from the insured, the cash must be deposited into the trust account. A broker should never issue a personal cheque for the same amount to be deposited into the trust account while taking the cash received from the trust account.
Any direct bill and/or monthly payment plan payments or installments received from clients on behalf of the insurer are also considered to be trust funds and must be deposited into the trust account. Payments to the insurer must be processed through the trust account and paid with a trust account cheque. These transactions cannot be processed through the general account. These payments should have a neutral effect on the trust position of the brokerage since money deposited into the trust account results in a corresponding liability which is used to offset the increase in the bank account.
Once funds are deposited into a Trust Account, they can only be properly taken out under the following circumstances/situations:
- Payments to Insurers by Trust cheque.
- Refunds to clients by Trust cheque.
- Transfers, by Trust cheque, for deposit into the member’s general account, in respect of commissions.
- Payments to the Ministry of Finance for purposes of retail sales tax by Trust cheque.
- Purchase of trust investments by Trust cheque.
- Payment of claims on behalf of insurers if authorized by insurer.
Disbursements made for any other reason would likely constitute an act of misconduct.
The brokerage must be in a trust positive position at all times and it is extremely important that procedures are established to ensure this.
Establishing a bank line of credit against the trust bank account to ensure a trust positive position would NOT be an option as disbursements from the trust account to the line of credit would not comply with the Regulations. Also, arrangements made with the bank manager may be such that the bank manager and not the principal broker, is the one who is controlling the injection of funds into the trust account to meet the payables and the removal of the funds from the trust account to pay down the line of credit. The brokerage may also be reporting the trust bank account amount including the availability of the line of credit without the funds actually being injected into the bank on the Form 1.
Caution should also be taken if commissions owed by regulation to the general account are being transferred from the trust account at the beginning of the month as it could result in a trust deficit.
Accounts receivables from the clients (trust funds) should never be hypothecated by the brokerage to financial institutions. Should business assets be assigned as collateral, trust assets must be specifically declared to be excluded from the provisions of the assignment agreement, pledge or security agreement.