The UK Financial Services Authority (FSA) has published a consultation paper on enhancing its Client Assets rules—the CASS sourcebook. Issues arising from the administration of Lehman Brothers’ London affiliates and other issues which have arisen since mid-2008 have highlighted a number of areas where the FSA considers that investor protection aspects of CASS need to be strengthened. The FSA has engaged in pre-consultation with regulated firms over a period of nearly 18 months, and it has also included proposals based on the UK Treasury’s 2009 consultation relating to effective resolution arrangements for investment banks.
The proposals in the consultation paper include the following:
- Increasing rehypothecation transparency and disclosure to prime brokerage clients, requiring prime brokerage agreements to contain a disclosure annex highlighting contractual rehypothecation provisions. The FSA also proposes to require daily reporting on client money and assets holdings to all prime brokerage clients so that they will know which of their assets, if any, have been rehypothecated.
- Restricting the use of group company banks for client money bank accounts to 20% of the firm’s total client money so as to reduce the exposure to group credit risk.
- Prohibiting the use of general liens in custodian agreements. The FSA objects to client assets held with a custodian being subject to a lien due to the debt to the custodian arising from unrelated business of a group entity of the customer to the relevant custodian.
- Creating a new significant influence controlled function within regulated firms holding responsibility for oversight and protection of client assets and money.
- Requiring a client money and asset return, which will be reviewed and authorized on a monthly basis for medium and large regulated firms and twice annually for small regulated firms.
Some of these proposals are subject to discussions with the European Commission. The deadline for receiving comments on the proposals has been set at June 30. The FSA has identified the work on strengthening its client assets regime as a priority and expects to finalize the revised CASS rules during the third quarter of this year.
To read the consultation paper in full, click here