What are the changes made to the client assets sourcebook (CASS) and what should clients do now to make sure they are in line with the rules? Michael Wainwright, partner at Dentons, considers the FCA policy statement on client asset regimes.
Investment firms conducting investment business and holding client money, custody assets, collateral and/or mandates in relation to their business are required to check the changes introduced to the CASS, as set out in a new Financial Conduct Authority (FCA) policy statement. All such firms will be affected by the changes and are required to comply with them by one of three key dates in July or December 2014 and June 2015.
What is the background to this policy statement?
The original client money rules worked well for many years, but they were amended extensively in the implementation of the Markets in Financial Instruments Directive 2004/39/EC (MifiD) and a lot of the guidance was taken out. Partly as a result of that, and partly because firms’ systems and operations became more and more complex, people began to lose sight of how the rules were supposed to work.
Then in 2008, we had the financial crisis and the collapse of Lehman Brothers—client money locked up in the Lehman companies was not available for distribution for a long time and much litigation followed. It became clear that a lot of people, including the regulator itself, no longer understood how the client money rules were supposed to operate in detail. The consultation leading to this policy statement is meant to fix all that. It has taken some time because the Financial Services Authority (FSA) (as it then was) had to wait for the litigation to be resolved, and in the meantime took the opportunity to create a specialist unit to properly understand the rules and get the message out to the industry as to how and why firms should be complying with them.
We are now at the point where we get to see what the client money rules are going to look like for the future.
What are the main changes being made to the FCA’s CASS requirements?
The most significant changes that affect the day-to-day administration of the rules for everyday users are:
- a new form of acknowledgment required from each bank that holds client money—there is now even less room to depart from the template than there was in the past
- new provisions that clarify how the client money reconciliations that firms have to carry out work— it is very important to ensure that these are properly implemented
- new requirements to report to clients and to obtain their consent to arrangements that affect client money and assets
- changes and clarifications to the rules which mean firms will have to update their client agreements and their periodic reports to clients
- changes in the way the rules apply to managers of authorised funds—more specifically, a technical change in the delivery versus payment (DvP) rule for funds. Fund managers will have less flexibility under this rule than they have enjoyed in the past
Has the FCA dealt fully with industry concerns in the final policy statement?
There were some very worrying proposals in the original consultation, but it seems that the FCA has gone some way to address concerns raised by the industry. The centrepiece of the consultation was an attempt to speed up the distribution of client money following the insolvency of a firm. Some people, myself included, felt that the proposed approach would have created considerable confusion and was most unlikely to work well in practice. The FCA has put these plans on hold for the time being.
Similarly, the FCA’s proposal to permanently remove the DvP facility for managers of authorised funds has been dropped, following protests that such a move would be impossible in practice to accept for many fund managers.
In other areas—for example, with the difficulties surrounding transfers of business and handling unclaimed client money or unclaimed assets—the FCA has introduced some changes to make things easier, although in my view it has not gone far enough.
In practice, what changes will firms have to make to their business processes?
Firms will need to have a new form of acknowledgement in place from every bank with which they hold client money, and that acknowledgment must be in place before money is transferred to the bank. The existing grace period will cease to apply—firms will need to be much better at getting this right.
Firms must also look comprehensively at the consents they get from clients, and the notifications they give to clients in client agreements and periodic reports, and ensure they have taken account of all the occasions to seek consent or to provide information as now set out in the rules.
How should lawyers advise their clients?
Clients should look at their reconciliation procedures under their client money systems and make sure they comply with what’s now been set out, and that they have the approvals that they need from auditors if they are running a non-standard system. Many aspects of the existing rules on reconciliations are not as clear as they should be. The FCA has put a lot of effort into clarifying what it expects. Now would be a good time for clients to make sure they are in line with that.
For lawyers who have any responsibility for the terms of client agreements, as I have said, there are new client-facing requirements which have to be taken into account. The provisions that we have been given to make transfers of business and dealing with unclaimed assets easier can only work if your firm has got the right consents from clients from the outset.
The FCA has said that the changes that come into force on 1 July are mainly to clarify existing requirements and introduce the new option for clearing house members to operate multiple client money pools. Whoever is responsible for client money will need to understand these clarifications to ensure that their firm’s systems are already compliant. The major changes are mainly deferred for the second implementation date of 1 December 2014.
For the benefit of lawyers, if they want to understand the policy statement in a hurry, they should refer to the table that starts on page 11 of the document—that, plus the implementation timetable that immediately follows it, is the best guide to what’s going on.
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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