RegulationJun 11 2014

FCA revises Isa client money rules in wake of Budget

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The Financial Conduct Authority has proposed that all monies investment firms hold within stocks and shares Isas should be held as client money, following the changes to the savings vehicle announced at the Budget.

In a consultation paper published today (11 June), the FCA said the changes been brought on by the Budget announcement to merge cash Isas and stocks and shares Isas.

The changes permit individuals to use stocks and shares Isas for both deposit and investment purposes, with a new higher limit of £15,000 applying to the new ‘Nisa’, however the regulator warned this has implications on its client money rules.

The regulator said the changes may cause “ambiguity to the status of the money investment firms managing stocks and shares Isas hold within the Isa wrapper”.

This means money held for the purposes of investment would be client money, and subject to the client money rules, whereas money held for non- investment purposes would not be client money.

If the current rules remain unchanged, the changes announced in the Budget would require firms to separate client money from non-client money within the Isa wrapper, the regulator said.

The regulator said, in addition, after observing varying practices within the industry in relation to how investment firms are holding cash Isa monies, it is proposing an option to allow these firms to hold cash Isa money as client money.

The consultation also warned there may be implications of the proposed Isa changes for Financial Services Compensation Scheme protection available to consumers.

Those consumers who have a cash Isa managed by a ‘deposit taker’ for their cash savings will have a £85,000 limit if their deposit taker fails, whereas those who choose to use a stocks and shares Isa for their cash savings will have a £50,000 limit where the investment manager fails.

The FCA added that in the latter case, if the cash is on deposit and the deposit taker fails, then the compensation limit will be £85,000.

Consumers, or their agents, will decide the balance between cash and investments held in a stocks and shares Isa, the regulator added.

Where a firm which does not have deposit-taking permissions (such as an asset management firm) and manages a cash Isa, then there is no FSCS protection if the firm fails and this results in losses for consumers.

The FCA said that firms that do not have deposit taking permissions and which manage cash Isas must explain this to their customers, and take measures to ensure that such money is segregated in the event that the firm fails - either by opting into the client money regime, or otherwise by employing a trust or nominee structure.

The Isa changes come into force on 1 July 2014, therefore, the FCA said following a two-week consultation, it intends to publish a policy statement “as soon as possible”.