CP 71 includes draft Client Asset Regulations and Guidance and invited comment from the industry and interested parties. The Central Bank has not yet issued final Regulations and Guidance.
What are the key changes?
The purpose of the consultation was to enhance the Central Bank’s client asset regime by minimising the risk of loss or misuse of client assets while the firm is a going concern and in the event of the insolvency of a firm to return those assets to clients as efficiently and cost effectively as possible. Some of the key changes proposed in CP 71 include:
- Client Asset Core Principles: The Regulations are based on seven Client Asset Core Principles which reflect the fundamental obligations on all firms holding client assets.
- Collection accounts: The draft Regulations propose that Fund Service Providers as defined in the Regulations, will be for the first time subject to Client Asset Regulations in respect of client funds held Collection Accounts. This has been the subject of much debate and opposition from the industry, with some proposals focusing on structuring collection accounts as custody assets of the investment fund in line with the Alternative Investment Fund Managers Directive, with the effect that the CAR would no longer apply.
- Segregation: The Regulations do not permit a firm to maintain any asset other than client assets in a client asset account/Collection Account, eg firm’s own funds in the form of a ‘buffer’.
- Auditor obligations: The Regulations require firms’ auditors to report annually on the firm’s safeguarding of client assets, indicating the adequacy of processes and systems and the level of compliance with the proposed Regulations. The Regulations set out, at a minimum, the confirmations that the Central Bank expects auditors to obtain in this regard.
- Daily calculation: The daily calculation will be expanded to include margin transactions for investment firms writing margin transactions.
- Client Asset Oversight Officer: Firms will be required to appoint a Client Asset Oversight Officer (“COAR”) who will be responsible for overseeing compliance with the client assets rules. This role will be designated a pre-approval controlled function under the Central Bank’s Fitness and Probity regime and the individual in question will have to meet the requirements in that regard to be eligible to perform this role. A detailed knowledge of the CAR would be a key aspect of demonstrating competence to perform the role.
- Client Asset Management Plan: The COAR must develop a Client Asset Management Plan (“CAMP”), which must be approved by the board and reviewed at least annually. The key purpose of the CAMP is to demonstrate how the firm’s systems and controls meet the objectives of the client assets regime, document the firm’s business model and related risks in respect of the safeguarding of client assets and the controls in place to mitigate these, enable the board to document and monitor material changes to the firm’s business model, changes to controls and processes and therefore the changes in the associated risks to the safeguarding of client assets and make information readily available to assist in the prompt distribution of client assets in the event of the firm’s insolvency.