The Central Bank wants to streamline the regulatory regime governing client assets to make it more robust and easier to understand. Sarah Lyons outlines the main points contained in its recent consultation paper
- Safeguarding client assets
- Central Bank consultation paper
- Highlights of proposed regime
The Central Bank’s original Client Money Rules were issued in 1996 with the aim of protecting client monies held by regulated firms. A series of high profile cases involving the loss of client assets by regulated investment and stockbroking firms led to the first upgrade of the requirements in 2007. Now, six years on and in the wake of further high profile examples of client asset misuse and loss which have come to light such as Custom House Capital, the Central Bank is engaging with industry with a view to further strengthening the regulatory protections that exist to safeguard client assets. This time round, the Central Bank has published a consultation paper on the proposed enhancements to the client asset regime, which when finalised will comprise the Central Bank (Supervision and Enforcement) Act 2013 Section 48 Regulations (the "Regulations") and the Central Bank’s Guidance on the Client Asset Regulations. Both the Regulations and the Guidance have been issued in draft as part of the consultation process.
Regulated investment firms and fund service providers (such as custodians and administrators) holding ‘Collection Accounts' are all caught within the scope of the Regulations and therefore subject to the client asset requirements. Client assets consist of client funds (cash) and client financial instruments/investment instruments.
The Central Bank’s revised regime provides for a framework based on seven Client Asset “Core Principles”, which reflect the fundamental obligations on all firms holding client assets, being Segregation, Designation and Registration, Reconciliation, Daily Calculation, Client Disclosure and Client Consent, Risk Management and Client Asset Examination. The Regulations set out the obligations imposed on firms holding clients assets while the Guidance has been produced to help firms comply with these obligations.
Highlights of the proposed new regime include the following:-
- Firms will be required to create, document and maintain a client asset management plan in order to safeguard client assets.
- For the first time, the Central Bank will apply its client asset rules to client funds when these funds are housed in a "Collection Account" with a regulated fund service provider, i.e. an account opened by a fund manager, administrator or custodian/depositary which holds subscription or redemption monies or dividend payments. However, where the funds are transferred to the investment fund, or whether the Collection Account is an asset of the fund, the Regulations will not apply.
- Firms are required to carry out a daily calculation to ensure that the aggregate balance on their client asset bank accounts (their client money resource) as at the close of business on the previous day is equal to the amount they should be holding on behalf of their clients( their client money requirement). The daily calculation will be expanded to include margin transactions for investment firms writing margin transactions.
- The Regulations do not permit a firm to maintain any assets other than client assets in a client asset account/Collection Account, e.g. firm’s own funds in the form of a ‘Buffer’.
- Firms will be required to appoint an individual to a Client Asset Oversight Role which will be a pre-approved controlled function, and therefore within the scope of the Central Bank's Fitness and Probity regime.
Ultimately the protection of client assets remains a top priority for the Central Bank and the revised rules aim to streamline the regime and make it easier to understand and implement. Comments on Consultation Paper 71 were invited up to 31 October 2013. It is expected that the final Regulations and Guidance will be published by the Central Bank in early 2014.