The respected Financial Markets Law Committee sponsored by the Bank of England has published a paper, dated October 2011, containing an analysis of legal uncertainty in the FSA’s Client Assets Sourcebook (CASS) and arising from judicial decisions relating to the administration of Lehman Brothers International (Europe).

The FMLC explains that the High Court’s decision in Lehman Brothers International (Europe) v CRC Credit Fund Ltd and others [2009] EWHC 3228 (Ch) and the Court of Appeal’s decision in CRC Credit Fund Ltd v GLG Investments Sub-Fund [2010] EWCA Civ 917 (“the Lehman case”) have highlighted issues surrounding the nature and effect of the statutory trust created under CASS when a FSA authorised firm fails to segregate properly the monies that it receives from its clients. The FMLC considers that these issues give rise to material legal uncertainty in the financial markets.

In response to the financial crisis, it will be recalled that the FSA amended CASS. During the consultation period, it participated in the Court of Appeal hearing in the Lehman case and tried to ensure that the hearing would not adversely affect the policies it had proposed. However, the FSA will only undertake a comprehensive review of the CASS regime once the appeal to the Supreme Court in the Lehman case has been decided later in 2011 or early in 2012.

The FMLC has therefore prepared this paper for the FSA in its consideration of CASS. In particular, the paper seeks to deal with:

  • the uncertainties highlighted in the High Court’s decision in Lehman Brothers International (Europe) v CRC Credit Fund Ltd and Others and the Court of Appeal’s decision in the Lehman case surrounding the point at which the statutory trust created under CASS arises; 
  • the uncertainties in relation to the nature of the assets and claims forming part of the statutory trust and the remedies available to the holders of the beneficial interests under the statutory trust where a firm has failed to segregate monies in the client account; and 
  • some policy solutions for addressing the above uncertainties, including the power to transfer unsegregated monies from the “house” account to the “client” account and the power to treat a claim for client monies as an expense of a firm’s administration in cases where the statutory trust and/or proprietary remedies fail.