12 July 2013

FCA: Review of the client assets regime for investment business

This paper consults on material changes to the rules in relation to client money, custody assets and mandates. Comments are requested by 12 August, 2013 (Chapter 8) and 11 October, 2013 (all other proposals).

The client assets regime applies to around 1,500 regulated firms that safeguard and administer assets and/or hold client money. They collectively hold more than £10 trillion of custody assets and more than £100 billion of client money.

Protecting client assets is fundamental to consumers’ rights and the trust they place with firms that are often acting as their agents, fiduciaries and/or counterparties. It is at the heart of ensuring a well-functioning and robust market place.

Client money distribution regime

The FCA asks whether it should make a change to the client money distribution regime that will enable the insolvency practitioner (IP) of a firm that has begun insolvency proceedings to distribute client money based on the firm’s records (rather than agreed claims of clients). This will allow the distribution of client money to be undertaken within weeks of insolvency rather than the years and months it currently takes.

If this change is implemented it could increase the speed of recovery and affect the amount returned to clients in most cases. Some clients will enjoy increased recoveries, but there may be less or no recovery for others. At the heart of the proposals is the balance between what constitutes an ‘accurate’ recovery for clients and the speed at which a distribution should be made following a firm’s insolvency.

The FCA is conscious that other national regimes may be able to achieve a speedy distribution of client assets without the negative consequences to some clients identified in its proposals. However, the proposals recognise the limits of what the FCA can do within its powers.

If the government introduces changes that could speed up the distribution of client money following the review of the Special Administration Regime, then some of the proposals that concern the speed of distribution of client money may not be necessary while others would be enhanced. However, if no changes are made in the legislation, then the proposals in Chapter 2 reflect what the FCA considers the limit of what can be achieved in its rules to speed up the distribution of client money.

Client money rules, custody rules, mandate rules and new disclosure requirements

The FCA consults on proposals to changes to the client money rules and custody rules. The changes relate to a wide variety of aspects, including reconciliations, delivery versus payment exclusions, buffers, unclaimed client money and assets and acknowledgment letters. In addition to these specific proposals the FCA is taking the opportunity to clarify other client money and custody rules, adding guidance where appropriate and restructuring sections to make the sourcebook easier to understand and navigate.

The FCA proposes introducing new disclosure requirements that would see firms report to their clients at least annually on the client assets protections they provide them. The regulator is also proposing to increase the scope of the mandate rules by requiring firms to establish and maintain adequate records and internal controls for all mandates, including those not obtained in written form.

European Market Infrastructure Regulation (EMIR)

The FCA is proposing changes to client money rules and client money distribution rules to comply with the EMIR Regulatory Technical Standards (RTS) regarding indirect client clearing.

Comments are requested by:

• 12 August, 2013 – in relation to Chapter 8
• 11 October, 2013 – in relation to all other proposals

Press release

Full Consultation paper

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