There have been various regulatory developments in the treatment of client money and assets which will be of interest to FSA authorised firms as well as their clients.
The Lehman client money judgment was handed down in December 2009. Although subject to an appeal, the judgment represents the current state of the law in relation to Chapter 7 of the Client Assets Sourcebook (CASS 7) (http://fsahandbook.info/FSA/handbook/CASS/7.pdf). The main effect of the judgment is that any client whose money has not been segregated by an FSA regulated firm in accordance with CASS 7 will, in the event of the firm’s insolvency, be unable to assert a proprietary claim against the pool of segregated client money and will instead be faced with the challenge of tracing that money through the firm’s own accounts under established principles.
In January 2010, the FSA sent a “Dear CEO” letter (http:// www.fsa.gov.uk/pubs/ceo/ceo_letter0119.pdf) and a Money & Asset Report (Report) (http://www.fsa.gov.uk/ pubs/other/cass_risk.pdf) to CEOs of major insurance brokers and investment firms which are able to hold money or assets on behalf of clients. The Report includes examples of good and poor practices in relation to the treatment of client assets and money found during firm visits.
The FSA has said that client money and asset remains a priority for the coming year. Visits to firms will continue and the FSA is in the process of putting together a consultation paper, to be published in Q1 2010, on the reform of CASS, parts of which have been shown to be totally inadequate in light of the Lehman client money judgment.
Our publications can be found at http://www.herbertsmith.com/NR/rdonlyres/7F32DA5E-0E25-4FD3-BDBC-8AF913F33A0F/14423/ClientMoneyandAssetReport1.htm and http://www.herbertsmith.com/NR/rdonlyres/3E93A6EA-60C7-4E03-91E1-12B7C39E8ECF/14150/Lehmanclientmoneyjudgment.html.