Companies around the world have blossomed being the “middle man”, connecting sellers and buyers while collecting monies FBO style. FBO – For the Benefit of Others, references a company that holds one party’s money on behalf of another (think of the convenient 3rd party app delivery companies that have been transporting food and other goodies to your door throughout the pandemic, or a website where you buy antiques, or handmade trinkets). Regulators in Europe and parts of Asia require that those companies protect monies they are holding for the benefit of others in the event of bankruptcy. This is referred to as safeguarding, and that’s where surety bonds come in.
While FBO companies have several options at their disposal when it comes to safeguarding funds, surety bonds give the biggest bang for their buck. The first option is to set the monies aside in a regular bank account; this, however, does not allow the money to work for them in anyway. It is tied up, unable grow or be put to good use. The next option is a Letter of Credit; this has traditionally been the go-to, but it also ties up liquidity, and has a cost associated. So the best option are surety bonds - they often cost less than the traditional LCs, do not appear on a company’s balance sheet, and do not tie up bank lines of credit, thus freeing up liquidity
If surety bonds are the best option for safeguarding funds, what do you need to know before entering the surety marketplace to shop for them? Given that Rosenberg & Parker was one of the first brokers to place this type of bond in continental Europe and the UK, and instrumental in helping to write the bond form language so that it was acceptable to a European regulator, you’ve come to right place to get answers!
First, it’s worth noting that the United States does not currently have regulations that mirror those found in Europe and Asia, so these types of bonds are seen just in those parts of the world (for now). Next, it’s important to engage a law firm to assist with bond form language and negotiations with the regulator. We can also help you with that. Each regulator has slightly different requirements, not to mention languages, which have to be considered, so bond language can literally vary from country to country.
The bond will be required in the country in which the company is domiciled. In addition, the surety company needs to be licensed in that country. Pricing is going to be determined by the financial rating of the company that requires the bond and should be in line with typical surety rates. Be aware that presently, there are a relatively small number of sureties in the marketplace that are willing to consider writing these types of bonds. Nonetheless, it is worth conversing with your broker to see if surety bonds are the right fit for your safeguarding requirements.