Regulation  

Advisers to face client asset due diligence burden

Financial advisers could be forced to undertake due diligence on client asset rules compliance at investment firms holding client funds and will be forced to account for all money held by third parties, under new rules proposed by the Financial Conduct Authority.

In a 240-page consultation paper published today, the FCA unveils plans to increase the speed of return of client money on firm failure and new rules for how companies must keep tabs of investors cash.

In particular, the FCA says it plans to clarify rules to force firms to “reconcile” client assets internally where they are held by third parties - even if the firm at no point touches the funds - in cases where the client relationship is held with the firm rather than with the third party.

The FCA also reveals it wants businesses to keep a closer eye on whether firms they recommend are meeting client asset rules if they have a “mandate” to influence such funds. This means any firm able to make an instruction over client funds would have to “assess” the compliance with client asset rules of the party that holds the funds.

A spokesperson told FTAdviser that it was yet determined what ‘assessment’ would mean in this context, encouraging firms to provide feedback on the proposals.

Firms are, however, told they should conduct specific enhanced due diligence over the banks with which they deposit client money.

Factors that must be considered include those set out in FCA’s Client Assets Sourcebook (Cass) but also, for example, the financial soundness of the bank, the percentage of the firm’s overall client money held by that institution, and the protection provided by the relevant deposit protection scheme.

The paper states: “We propose to clarify the existing rules by adding guidance to the application provisions to remind firms that when their activities are caught by the client money rules they should ensure that the money is held in accordance with the client money rules.

“If money relating to investment business is not held by the firm (as client money) the firm must assess whether it is providing appropriate protection for clients’ money, for example by complying with the mandate rules.

“Firms should at all times be aware of any client money obligations they owe to their clients.”

The rules will further require firms that receive physical payments of client money such as cash, cheques and payment orders to record their receipt immediately and deposit the client money in a client bank account promptly but no later than one business day following receipt.

The deadline for feedback on the consultation is 11 October 2013.

Click here to read FTAdviser’s Regulation Tracker summary of the new client asset rules.