On 31 March 2015, the Central Bank published revised client asset Regulations for investment firms (CAR) together with detailed Guidance. The publication of the Regulations and Guidance is the culmination of a lengthy review of the regulatory regime for the safe-guarding of assets which commenced in 2011 when the Central Bank commissioned a task force to carry out the review, followed by a public consultation in 2013.
The revised CAR contains the following seven core principles for investment firms:
- Segregation – the firm must physically hold or arrange the physical holding of client assets separate from the firm’s own assets
- Designation and Registration – client assets must be clearly identified in the firm’s internal records and in the records of third parties and separate from the firm’s own assets
- Reconciliation – the firm must keep accurate books and records to enable it at any time and without delay to provide an accurate record of the client assets held by the firm for each client and the total in the client asset account. The firm must conduct daily and monthly reconciliations between its internal records and the external records of any third party holding client assets
- Daily Calculation – a daily calculation must be carried out by the firm to ensure that the balance in the firm’s client bank accounts is equal to the amount it should be holding on behalf of clients. If there is a shortfall, this must be met out of the firm’s own account
- Client Disclosure and Consent – the firm must provide information to its clients on how and where client assets are held and the resulting risks. Retail clients must be provided with certain information in a Client Assets Key Information Document including the circumstances in which their assets will and will not be subject to the CAR regime
- Risk Management – the firm must have an appropriate risk management system in place. This includes the appointment of a Head of Client Asset Oversight which will be a Central Bank “pre-approval controlled function”. The firm must also have a Client Asset Management Plan containing certain minimum provisions
- Client Asset Examination – an external audit must be conducted annually on the firm’s safeguarding of client assets and an annual assurance report from the auditor submitted to the Central Bank
The Central Bank also published a separate set of investor money Regulations (IMR) for fund service providers (FSPs) together with detailed Guidance. The IMR relate to collection accounts operated by FSPs for monies transferred from an investor for onward transmission to the fund and likewise where money flows back from the fund to the collection account for onward transmission to the underlying investor. Collection accounts are not subject to the existing client asset requirements. Under the revised regime, the IMR will apply to money received by the FSP from an investor where it is held in a collection account in the name of the FSP or its nominee. FSPs include UCITS and alternative investment fund management companies, alternative investment fund managers, fund administrators and depositaries.
Once the money from the collection account is transferred to the fund it ceases to be covered by the IMR but becomes a fund asset, which is then subject to the relevant fund safekeeping regime.
It is anticipated that many FSPs (typically fund administrators) will put in place solutions which are outside the ambit of IMR but are nonetheless consistent with ensuring a satisfactory safekeeping solution for the fund’s assets and those of its underlying investors.
The IMR contains six of the seven core principles referred to above, apart from ‘Client Disclosure and Consent’ (principally because there is typically no contractual relationship between a FSP and the underlying investor of a fund).
CAR and IMR will come into effect on 1 October 2015 and 1 April 2016 respectively, providing investment firms and FSPs some time to engage with clients and put in place the necessary systems, operational and contractual changes required for compliance with the new regime. Contraventions of the regime will attract various penalties, including sanctions under the Central Bank’s administrative sanctions procedures. It should be noted that in February the Central Bank announced that CAR compliance would be one of its enforcement priorities for 2015.