FCA CONSULTS ON MINOR AMENDMENTS TO THE CLIENT ASSETS SOURCEBOOOK

The FCA has recently issued a consultation paper (“CP 17/29”) on minor amendments to the Client Assets sourcebook (“CASS”). These amendments are as a result of feedback received by the FCA from the industry regarding the difficulties that investment firms are experiencing when depositing client money at banks in accordance with CASS requirements. This feedback strongly suggests that the difficulties are partly due to the unintended combined effects of the rule in CASS 7.13.13 and the prudential liquidity rules applicable to banks. CASS 7.13.13(3) states that firms may use client bank accounts which are held on terms under which withdrawals are prohibited until the expiry of a fixed term or a notice period of a maximum of 30 days (known as the ‘30-Day Rule’). Banks have cited that the cost of liquidity requirements associated with such 30-day money is the main reason for their reduced appetite for client money.

In July 2014, the FCA introduced the 30-Day Rule in response to behaviour they had seen in the market, where some firms were depositing client money in three to four year unbreakable deposits (“UDs”). In general, the nature of client money is that it is held by a firm on a transitory basis en route to being invested. The policy rationale behind introducing the 30-Day Rule was:

  • firms are required to carry out risk assessment on the banks with which they deposit client money and should ensure they are able to react to that risk assessment by withdrawing and re-locating client money if necessary; and
  • client money must be readily available for distribution to clients in the event of the failure of a firm.

The FCA has previously set out their view that the use of UDs with lengthy terms to hold client money is incompatible with the purpose of the client money regime. The client assets regime aims to ensure client money held by a firm is well protected and, in the case of a firm insolvency, as much of the client money as possible can be returned to clients as quickly as possible.

THE PROPOSALS

The proposals in CP 17/29 are intended to address the potential harm to consumers resulting from the unintended effects. The FCA are seeking feedback on the following proposed changes to CASS:

  • firms should be permitted to deposit an appropriate proportion of client money in a UD of a maximum of 90 days;
  • where a firm deposits client money in a UD of 31 to 90 days, it must comply with certain conditions (see below); and
  • require CASS medium and large firms to report client money in an unbreakable deposit of 31 to 90 days in their client money and asset return (CMAR).

In relation to the second requirement above, the conditions are:

  • produce a written policy statement that sets out the maximum proportion of client money held by the firm, on a per business line basis, that the firm considers would be appropriate to hold in such accounts having regard to the need to manage the risk of the firm being unable to access client money when required, for example, to meet client instructions. The statement should also set out the firm’s rationale for reaching this conclusion and the measures the firm will put in to place to manage the risk of the firm being unable to access client money when required, taking in to consideration a number of factors including historic and expected client money receipts and payments and stress scenarios; and
  • provide each client with a written explanation of the risks that arise as a result of the longer notice periods for withdrawals.

The FCA have said that in proposing an amendment to the 30-Day Rule, they are taking into account the timelines of CASS firm insolvencies, the need for a firm to react promptly to its due diligence and the current market for client money deposits, whilst also considering the PRA’s proposed regime applicable to banks that hold client money.

The FCA’s proposals are intended to enhance the client assets regime and improve consumer outcomes by ensuring client money continues to be appropriately protected when it is held by firms.

WHO CP 17/29 APPLIES TO

CP 17/29 principally affects or is of interest to:

  • regulated firms that hold client money in relation to investment business;
  • banks that deposit client money; and
  • auditors in relation to the provision of client assets audit reports.

CP 17/29 will not apply to:

  • general insurance intermediaries that only hold client money under CASS 5;
  • or debt management forms that only hold client money under CASS; and
  • client money received by a firm in its capacity as a trustee firm.

NEXT STEPS

The FCA have stipulated that any comments should be received on CP 17/29 by 1 November 2017. After considering all feedback, the FCA aim to publish a policy statement setting out the final rules. The FCA’s current expectation is for the rules to come into force concurrent to the Handbook changes required by the implementation of the Markets in Financial Instruments Directive II (MiFID II).

To access the FCA’s CP 17/29, please click here.

For more information, and any guidance or advice on CASS, Cleveland & Co, your External in-house counsel, are here to help.

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