The regulatory rulebook for firms holding client money has been overhauled through a series of 39 separate updates, including demands for more extensive due diligence on accounts in which client money is held and new rules on disclosure of withheld interest earned on client funds.
A policy statement published this morning (10 June) finalises a raft of changes to the client money and custody assets rules and comes amid ongoing discussions between the regulator and the Treasury on the Special Administration Regime.
The rules affect the roughly 1,500 regulated firms that act as custodians or otherwise hold funds on behalf of clients, including investment advisers, fund managers, investment banks and others.
The document reveals that where a firm is not going to pay all the interest on clients’ monies, they should be notified of this in writing. Where interest is earned by a firm on client money, this money should be segregated in accordance with broader client money segregation requirements.
Firms also have to adhere to further due diligence requirements on banks with whom client money is placed.
The rules do not change the existing limit of a maximum of 20 per cent of funds being held with a single institution, but they do require firms to conduct periodic assessments on whether amounts held with any single group are appropriate.
The regulator says that when carrying out their periodic assessments, firms must consider:
• whether it would be appropriate to deposit client money in client bank accounts opened at a number of third parties;
• whether it would be appropriate limit the amounts of client money it holds with third parties who are in the same group as each other;
• whether risks arising from the firm’s business models create any need for diversification;
• its obligations to arrange adequate protection for clients’ assets;
• the outcome of the due diligence it is required to carry out on banks; and
• the market conditions at the time of the assessment.
The Treasury has published its final report of an independent review it commissioned of the Special Administration Regime. The report contained a large number of recommendations, which the FCA states it is working with the government to “explore”.
The FCA emphasises that it considers that some of the recommendations, if implemented, could achieve “better results for clients by accelerating the process for distributing client assets and reducing costs”.
These include introducing a bar date for the processing client money claims; facilitating transfers of client relationships and positions; allocating costs of distributing client assets; and exploring methods to speed-up reaching determinations of legal issues in an insolvency.
The paper adds, however, that “a number of the recommendations made by the independent reviewer are likely to be facilitated in part by the changes to the client asset regime made in this [policy statement]”.
It says: “This includes, in particular, the behavioural recommendations made around good recordkeeping, enhanced reporting to clients, improved understanding around our client assets regime (the protections it affords and its limitations) and increased clarity around certain intra-group relationships.”