Financial Institution Bond | a valuable risk management & compliance tool
By: Moe Dahnous
Recent Ipsos-Reid surveys indicate that approximately one in five employees stole or witnessed other employees stealing from their employer. A recent KPMG study indicated that 59% of frauds discovered by companies were perpetrated by employees.
No organization is immune from the risks of employee fraud and theft. Over the past three years, there have been a number of high-profile claims involving long-time trusted employees stealing millions of dollars from their employers. In one well-publicized case, an Edmonton banker defrauded his branch of $16.3 million over five years. In the US, it has been estimated that employees steal approximately $400 million a week from their employers.
It is unfortunate that even with a reasonable employee fraud prevention program in effect, many employers still will suffer significant losses due to worker-related embezzlement and theft. In order to protect against these potential losses, many clients in the financial institutions sector purchase financial institution bonds (clients in other sectors purchase crime insurance), which provides coverage for losses caused by the dishonest and fraudulent acts of employees that are under supervision and on the companies’ payroll.
Apart from risk management considerations, Exempt Market Dealers (EMDs) are required under National Instrument 31-103 to carry Financial Institution Bonds.
National Instrument 31-103 came into force on September 28, 2009. Much of the Instrument is related to the new regulatory framework that replaced a myriad of requirements that had been developed under various Canadian regulatory and self-regulatory regimes. Under the Instrument, there are three revised registration categories: Advisors, Dealers (including Exempt Market Dealers - EMDs) and Investment Fund Managers (IFM).
Financial Institution Bond (FIB) Insurance requirements for EMDs under the Instrument are summarized as follows:
1) The FIB that is purchased must include insuring agreements for:
- On premises
- In transit
- Forgery or alteration
2) In respect of the minimum limits required by the Instrument, a registered dealer must maintain bonding or insurance as set out in Appendix A. Please refer to the categories as listed in item 1 above.
A) $50,000 per employee, agent and dealing representative or $200,000, whichever is less;
B) one per cent of the total client assets that the dealer holds or has access to, as calculated using the dealer’s most recent financial records, or $25,000,000, whichever is less;
C) one per cent of the dealer’s total assets, as calculated using the dealer’s most recent financial records, or $25,000,000, whichever is less;
d) the amount determined to be appropriate by a resolution of the dealer’s board of directors, or individuals acting in a similar capacity for the firm. For more details, please refer to section 12.3 of the Instrument.
3) The FIB must provide for a double aggregate limit or full reinstatement of coverage. In other words, the amount of coverage available during the policy period is twice the individual occurrence limit. For example, if there is a $1 million per occurrence limit, the policy will pay a maximum of $1 million per any one occurrence, and a maximum of $2 million during the policy period. There can be any combination of claims less than $1 million each, as long as they are less than $2 million in the aggregate.
4) The Instrument does not stipulate how much the FIB’s deductible need be. However, it is important to note that despite the fact a higher deductible may result in a lower premium, it will impact on the amount recoverable, should there be a claim, and could negatively influence the registrant’s available working capital.
For EMDs, Financial Institution Bonds are a valuable loss control mechanism to transfer the employee fraud risk exposure to the Insurance companies, as well as to comply with the requirements of the regulators.
In partnership with the Western Exempt Market Association (WEMA) and the Guarantee Company of North America, Aon designed a robust and competitive FIB program for the WEMA members.