In the first of our Expert Opinion series, Laura Chappell and Judith Cromwell from financial services regulatory consultancy, Bovill, review the FCA’s recent consultation on client assets.
This week sees the launch of our new series, Expert Opinion. Each month we’ll be featuring insights into hot topics in the financial services industry from our clients’ point of view.
This month, Laura Chappell and Judith Cromwell from financial services regulatory consultancy, Bovill, review the FCA’s recent consultation on client assets.
Review of the client assets regime for investment business
In July 2013 the FCA published a “blockbuster” summer read for us to enjoy on our sun loungers: CP13/5 “Review of the client assets regime for investment business”.
This consultation follows on from the FSA’s Client Asset Review, which was launched after client money and client assets issues arose in connection with the insolvencies of Lehman Brothers International (Europe) and other firms during the financial crisis of 2008-2009.
The consultation proposes some sensible changes and brings clarity over a number of issues that firms have been struggling with. Overall, the proposals are aimed at improving outcomes in the event of insolvency by facilitating:
- Faster return of money and assets to clients;
- Lower shortfalls in the overall amount of money and assets returned to clients; and
- A reduction of the market impact in the event of the failure of a large, complex firm.
The “speed” proposals would permit an initial client money distribution solely on the basis of the insolvent firm’s own records, if the insolvency officials determine that the firm’s records are sufficiently reliable. We expect this will mean an increased focus by the FCA on the accuracy of client money recordkeeping.
There are also some proposals intended to increase the reliability of client money records and reduce client money shortfalls, including:
- Clarity on the treatment of unclaimed money (best endeavours to contact the client and advice on giving unclaimed money to charity, not the balance sheet of the firm!);
- Abolition of the “delivery versus payment” exclusion for regulated collective investment schemes;
- Banning the use of unbreakable term deposits;
- All or nothing interest payments on client money for retail customers;
- Immediate segregation of client money;
- Allocation of all receipts within 5 days;
- Restricting the use of the “alternative approach” – only the largest and most complex institutions may now use the alternative approach and the FCA has re-introduced the concept of a buffer (although it is now termed an “over segregation”);
- Requiring frequent internal and external reconciliations; and
- Provision of template client money bank acknowledgement letters.
The FCA is proceeding cautiously with regard to its proposals on separate client money pools (following an earlier consultation). The final proposals in this summer’s consultation are much narrower and now permit only clearing member firms offering net omnibus client transaction accounts at authorised or recognised central counterparties to operate multiple client money pools, in relation to those accounts.
Overall, the paper confirms that “compliance with the client assets regime remains a regulatory priority” for the regulator and they have approached this review with good intentions to clarify some of the harder questions and protect clients. We note that the regulator has also issued some significant fines in the wealth sector recently for CASS non-compliance so we can all rest assured there will be no let up from the FCA CASS team this year. But we expect firms to respond strongly by questioning the risk versus return and the cost of compliance for some of the proposed changes.
– Laura Chappell and Judith Cromwell, Bovill