In June 2014 the Financial Conduct Authority (FCA) published its proposed changes to the bulk of the Client Assets module of the FCA Handbook of Rules and Guidance (CASS) in Policy Statement PS 14/9.
The first wave of rules came into force on 1 July 2014. From 1 June 2015, FCA authorised firms will need to comply fully with all of the changes published in June 2014.
In the meantime, firms will need to prepare to comply with certain provisions of CASS to be introduced on 1 December 2014. On this date, the FCA will make the relevant changes to the custody rules in CASS 6, the client money rules in CASS 7 and client reporting requirements in CASS 9.
We have set out below:
- an outline of the changes which are relevant for FCA authorised firms, to whom CASS applies
- an indication of the next steps firms will need, or may want, to take to comply with the changes from 1 December 2014.
In many cases, compliance will be necessary only with respect to new clients. Firms will have until 1 June 2015 to apply the relevant rules to existing clients. However, firms may wish to implement changes to existing client documentation before then.
Where firms intend making changes to agreements with existing clients, they must check whether the clauses in those client agreements permit this taking into consideration Unfair Contact Terms Act and Treating Customers Fairly issues.
1. Unclaimed custody assets and client money
Where there has been no activity on a client’s account for six years with respect to client money and twelve years with respect to client assets, CASS 6 and 7 will now permit a firm to pay the proceeds from the liquidation of these client assets and/or client money to a registered charity.
Subject to a de minimis threshold of £25 for retail clients and £100 for other clients, a firm will have to (a) take into account the arrangements under which the client assets and/or money are held and (b) take the “reasonable steps” specified in CASS to return the unclaimed client assets and/or money to the relevant client.
The firm will have to undertake to make good any valid claim by the client for the unclaimed client assets and/or money paid away to the charity and ensure the undertaking is legally enforceable by any person with a valid claim on the unclaimed client assets and/or money. The firm will have to bear the costs of paying away the proceeds.
- Review and amend terms of business to be given to new clients.
- Consider notifying existing clients of changes to terms of business.
2. Delivery versus payment commercial settlement systems
CASS 6 will be revised to set out the circumstances in which a firm may cease to treat money as client money or apply the custody rules to custody assets while carrying out a delivery versus payment (DvP) transaction through a commercial settlement system (CSS, the DvP CSS Exemption).
The DvP CSS Exemption will only apply where (a) the firm is a direct or sponsored member or participant in a CSS and (b) the relevant transaction is not settled by a third party on behalf of the firm through that third party’s account held with the CSS.
In essence, the revisions will specify that the DvP window will apply from (a) the date of the client’s fulfilment of its payment/delivery obligation (T) (provided that the firm intends for the asset in question to be due to the client/firm, as the case may be, within one business day following the date on which the client fulfils its payment/delivery obligation, as the case may be) until (b) the date on which the transaction settles or, if it has not settled, on the third business day following T.
A firm will have to obtain a client’s written consent to use the DvP CSS Exemption.
- Send out notices to existing clients to be signed and returned to the firm.
- Review and amend terms of business to be given to new clients for signing.
- Review and confirm that systems and controls and arrangements with CSS are consistent with and can give effect to requirements under DvP CSS Exemption.
3. Depositing assets with depositaries and custodians
CASS 6 will require firms to have written agreements whenever they place custody assets or arrange for custody assets to be placed with third party custodians even where that third party custodian is an associate of the firm. CASS will specify the types of provision which the FCA will expect the written agreements to contain.
- Ensure that written custody agreements are in place for new clients.
- Consider putting in place written custody agreements for existing clients. (These will need to be in place, in any event, by 1 June 2015 unless the existing arrangements are materially altered before then, in which case a written custody agreement will be required even if the relationship was entered into before 1 December 2014.)
4. Title transfer collateral arrangements
CASS 6 and 7 will require firms to have written agreements in place for all title transfer collateral arrangements. CASS will specify the types of provision which the FCA will expect the written agreements to contain.
- Ensure that written custody agreements are in place for new clients.
- Consider putting in place written custody agreements for existing clients. (These will need to be in place, in any event, by 1 June 2015.)
5. Transfer of business – handling client money
CASS 7 will give firms three options for transferring client money to a third party in the context of a business transfer: (a) consent at the time of transfer; or (b) inclusion of a clause in its terms of business with a client, which complies with the relevant CASS provisions; or (c) if the amount of money held is less than £25 in the case of a retail client or £100 for any other client, transfer without consent.
In cases (b) and (c), the firm will be required to notify the FCA seven days before and the relevant client seven days after the transfer.
- Consider amending terms of business to be given to new clients to include an assignment clause.
- Consider notifying existing clients of changes to terms of business to include an assignment clause.
6. Acknowledgement letters
CASS 7 will require firms to have in place an acknowledgement letter before the firm places client money with a third party. CASS will also provide guidance on the formalities for drafting and executing the acknowledgment letters in different circumstances and require firms to review periodically (at least annually) their acknowledgment letters.
CASS introduces a template which firms will have to use when drafting and exchanging acknowledgment letters with a third party with whom the firm deposits or places client money, irrespective of where the third party is located.
- Ensure that template acknowledgment letters are in place for new bank accounts.
- Consider putting in place template acknowledgment letters for existing bank accounts. (These will need to be in place, in any event, by 1 June 2015.)
- Ensure that terms of business with clients are reviewed and amended to prevent any conflicts with template acknowledgment letter by containing, for example, a general set-off provision or security interest.
- Review and confirm that systems and controls are sufficient to ensure that acknowledgment letters are (a) signed by third party banks and (b) reviewed periodically.
7. Banking exemption
CASS 7 will clarify the circumstances in which the exemption from compliance with the Rules for banks (Banking Exemption) will apply.
The Banking Exemption will be relevant to investment firms that are also credit institutions. These firms will need to notify clients whether the Banking Exemption will apply.
They will also have to allocate money promptly to the client and, in any event, within ten business days of receipt.
- Modify terms of business to reflect the circumstances (if any) in which money will cease to be treated within the Banking Exemption and be treated as client money.
8. Alternative approach to client money segregation
CASS 7 will set out: (a) procedures that a firm must follow to establish whether it has considered that the use of the alternative approach to client money segregation is appropriate for a particular business line; and (b) requirements for firms to use prudent segregation to address the risk to client money that may arise using the alternative approach.
Firms will be required to notify the FCA three months before adopting the alternative approach for a particular business line and obtain and send to the FCA an independent auditor’s report prepared on the basis of a reasonable assurance engagement. The auditor will need to give an opinion on whether the approach will achieve the desired regulatory outcome.
Next steps to enable alternative approach to be used from 1 December 2014:
- Ensure that procedures are reviewed and amended for new clients.
- Consider reviewing and amending procedures for existing clients. (These will need to be in place, in any event, by 1 June 2015 if the firm wishes to use the alternative approach.)
- Ensure that notices have been sent to the FCA at least three months before firm adopts alternative approach.
- Ensure that auditor’s report is sent to the FCA before firm adopts alternative approach.
9. Information to professional clients and eligible counterparties
CASS 9 will require firms to provide the same information to all client types and for all types of custody assets. Currently, firms are only required to provide this information to retail clients and for specific assets types under the Conduct of Business Sourcebook 6.1.7.
- Ensure that terms of business are in place for use with new clients who are professional clients and eligible counterparties.
- Consider putting in place terms of business for use with existing clients who are professional clients and eligible counterparties. (These will need to be in place, in any event, by 1 June 2015.)
10. CASS requirements due to come into force on 1 June 2015
As set out above, the remainder of the CASS requirements set out in PS 14/9 are due to come into force on 1 June 2015. Some requirements will require firms to change documentation and obtain consents from clients. (This will be required where, for example, a firm wishes to rely on the DvP exemption for the operators of regulated collective investment schemes.)
- Consider amending documentation for new clients to address changes that only need to be made by 1 June 2015 to remove need to seek further consent or further revise new client documentation.