UK watchdog revamps rules protecting client money and custody assets

The Financial Conduct Authority (FCA) has today finalised changes to the client money and custody assets (client assets) rules. These changes affect approximately 1,500 FCA regulated firms that carry out investment business, from the largest investment banks to the smallest investment adviser, who collectively hold over £100bn of client money and £10tn of custody assets.

Following the insolvency of Lehman Brothers International (Europe) the government introduced the special administration regime (SAR) which was first used in the failure of MF Global (UK) Ltd and has since been used in a number of other administrations including Pritchard Stockbrokers, the custodian of defunct structured products provider Merchant Capital.

The final rules address lessons learnt from recent insolvencies, feedback from firms themselves and observations from the FCA’s specialist client assets unit.

“The protection of client assets is central to confidence in the UK markets and fundamental to consumers’ rights and the trust they place with firms,” said David Lawton, Director of Markets. “These changes will improve the protection offered to client assets and should speed up the recovery of client assets on a failure of a firm.”

The UK regulator has introduced extensive and detailed changes including a rewrite of the client money rules for investment firms and substantial amendments to the custody rules in the client assets sourcebook (CASS).

The changes, said the FCA, will improve firms’ systems and controls around segregation, record-keeping and reconciliations and set out how investment firms must address client assets risks within their business.

HM Treasury
The FCA also said it will not proceeding with most of the proposals it consulted on around the client money distribution rules until a HM Treasury-commissioned independent review (the SAR review) of the special administration regime (SAR) has been finalised.

The FCA will conduct a further review of the client money distribution rules in line with HMT’s implementation of the SAR review recommendations and intends to publish a further consultation on the client money distribution rules later this year.

This policy statement affects all firms that are subject to CASS because they conduct investment business and hold client money, custody assets, collateral and/or mandates in relation to that investment business.

Financial firms required to meet the new guidelines include auditors in relation to providing annual auditors’ client assets reports and other reports related to the alternative approach to client money segregation and non-standard methods of internal client money reconciliation; third-party providers who provide back office functions that firms use for their client assets operations; market infrastructure firms, including central counterparties, exchanges and other intermediaries with which firms may place client assets; banks with which firms deposit client money; custodians and other third parties who may hold client assets in a client transaction account for a firm subject to CASS; and insolvency practitioners and their advisers that would be responsible for distributing client assets if a firm that holds client assets enters into insolvency proceedings.

Click the link to read the FCA policy statement.

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UK watchdog revamps rules protecting client money and custody assets