The Financial Conduct Authority ("FCA") has published its policy statement reviewing the rules in the Client Assets Sourcebook (CASS). The Review of the client assets regime for investment business (PS14/9), published on 10 June 2014, details the rule changes being introduced and the relevant deadlines for the rules to come into force.
PS14/9 summarises the results of the FCA's consultation on CASS, which had focused on the protection of client assets, including ensuring that firms are capable of enacting the swift return of assets to clients in the event of insolvency, and therefore guaranteeing greater market stability in the event of firm failure. The aim was to amend the existing rules in order to promote confidence in the UK market and consumer protection.
The FCA decided not to proceed with a number of the proposals outlined in its consultation paper, including changes to client money distribution rules as the regulator is currently awaiting the Treasury's response to the review of the special administration regime (SAR) which was published in January, before conducting a further review of CASS later in the year where it will likely consider further changes.
However, the published rules amount to a significant change to the current CASS regime. A particular focus of the amendments has been improving how firms comply with the fundamental requirement that: (a) firms segregate the client assets they hold from their own and (b) they regularly and accurately record the details of assets held. We outline two of the key changes introduced by PS14/9 below.
The rules aim to ensure that most client assets cannot be held in an institution's own accounts, even for a short time pending a reconciliation to a client account the following day. It is hoped that this immediate segregation of assets will prevent the confusion upon insolvency which was exemplified by the litigation following the collapse of Lehman Brothers. The aim is to ensure that client assets are safe and can be easily identified upon insolvency. For firms with complex arrangements, such as larger international firms, there is an ''alternative approach'' by which client funds may be mixed with the firm's own cash, but this approach will need to be approved by the FCA before implementation.
Another key aim of the new regime is to improve the records firms keep of client assets, so that firms ensure that records contain all relevant details, are reviewed regularly and kept accurate. Monthly custody record checks must also be conducted to ensure the correct location of assets, and non-written mandates must also be recorded. There are also stricter requirements to make it easier for the FCA to take enforcement action if client money goes missing, such as the need for a written contract between custodian and client if a custodian consigns assets in its keeping to another institution. The new rules also require additional information to be provided to customers regarding firm policies on client money, as well as information in relation to how money is held and protected.
These changes are being introduced in three stages: 1 July 2014 (changes that are expected to be non-material), 1 December 2014 and 1 June 2015. Firms may face a number of challenges regarding the practicalities of becoming CASS compliant before the rules come fully into effect. The new rules will require firms subject to CASS to review and amend where necessary their operational processes around the identification, segregation, handling and reporting of client money and assets. In addition, the rules are likely to necessitate changes to client-facing documentation to ensure that they reflect the way that cash and assets will be held and require consent or disclosure as required. Given the scope of the changes announced in PS14/9, firms, particularly those with complex or large-scale client asset arrangements, should start to assess their compliance with the rules in good time before they come into force.