The Central Bank of Ireland (the “Central Bank”) has declared its intention to strengthen the protection of client assets and has now published its “Review of the Regulatory Regime for the Safeguarding of Client Assets” (the “Review”).
The Review identifies three main objectives which should form the basis of a client asset protection regime:
- The maintenance of public confidence in the Client Asset Requirements regime (“CAR”)
- The mitigation of the risk of misuse of client assets whether as a result of maladministration or fraud
- The provision of a system which in the event of a firm’s insolvency will enable the expeditious return of available client assets to the owner at lowest cost
The Review also makes a number of key recommendations including:
- That the Central Bank be given the power to apply to the High Court for the appointment of an administrator to take charge of the affairs of a firm where the Central Bank has reasonable grounds to suspect that (a) there are serious problems of a financial nature; and/or (b) the interests of investors or clients of the firm are at risk
- The revision of the CAR and the adoption of a wider definition of client assets so as that all monies received and held on behalf of clients are subject to the CAR
- The introduction of a pre-approval control function (‘PCF’) for all firms holding/intending to hold client assets with accountability for client asset matters, to be exercised at director/senior management level
- That all authorisations to hold client assets should require sign-off from the Central Bank
- That all firms holding/intending to hold client assets adopt a Client Asset Management Plan
- The revision of the Central Bank’s supervisory and enforcement approach and the establishment of a Client Asset Specialist Team with cross-sectoral ownership of client asset risk, which will operate a risk-based approach with pre-determined triggers for intervention
Given the recent failure of companies where numerous client asset issues arose, including MF Global, Lehman Brothers and Custom House Capital Limited in Ireland, the publication of the Review and the Central Bank’s declared intention to strengthen the protection of client assets, by way of ‘tougher supervision, better rules, stronger audits, assumption of new powers and more accountability’, is an important step in preventing a repeat of such cases and towards increased protection for investors.