IFA firms, Sipp providers and platforms that are subject to client money rules, could face exorbitant costs or regulatory action if they do not implement the new intra-day funding requirements in FCA Client Money rules.
In a 28-page white paper, Intra-day Client Money Management, published jointly by financial services management consultant Walbrook Partners and software provider AutoRek, the authors claimed that too many firms were not up to speed with the FCA’s changes to the Client Assets Sourcebook rules.
On 1 September, the FCA’s updated information on Cass set out revised rules for firms of all sizes on how they are to notify the regulator about how much money and assets they are holding, ensuring that there is enough money to enable firms to cover the costs of intra-day scenarios, and processes are in place to mitigate any risks to client capital.
According to the white paper, the sum of money required is “significant” when it comes to managing the unknowns – various costs that may be incurred as firms ensure they hold sufficient cash at all times, including intra-day, to meet all clients’ entitlements.
The white paper said costs could include £22m of cover for intra-day timing differences and £20m in Bacs pre-funding. But if the firms reassessed their processes and explored different ways to ensure the correct sequence of cash movements, such as using timed payments, the costs could be reduced.
The paper said that, without unlimited cash and capital to hand, many firms have had to consider changes to processes to the extent that these are not prohibited by other regulations.
Cass firm type
| Cass firm type | Highest total amount of client money that was held in the firm's last calendar year, or is projected to be held during the current calendar year | Highest total value of safe custody assets that was held in the firm's last calendar year, or is projected to be held during the current calendar year |
| Cass large firm | More than £1bn | More than £100bn |
| Cass medium firm | An amount equal to or greater than £1m and less than or equal to £1bn | An amount equal to or greater than £10m and less than or equal to £100bn |
| Cass small firm | Less than £1m | Less than £10m |
Source: FCA
Karen Bond, director at Walbrook Partners, said: “The significant impact of intra-day funding requirements in the FCA Client Money rules has taken everyone by surprise.
“Managing the costs of compliance, as well as the added administrative burden of implementing changes to various processes, has taken its toll on a large number of firms, especially smaller market participants.”
| Hurdles to overcome |
| Lack of understanding of firm and bank processes |
| Costs forcing firms to change processes |
| Huge cost of regulations difficult for smaller firms |
| Intra-day reconciliations helps identify intra-day shortfalls, release funding and remedy breaches |
Source: AutoRek
The FCA started to tighten up the client money rules in June 2014. Carl Lamb, managing director of Norwich-based Almary Green, said: “While IFAs mostly don’t have permissions to hold client money themselves, they will be advising clients on the use of fund groups and providers that do so.
“The rules force those who do hold client money to be more transparent and accountable. They will also go some way to protect all of us in the industry against future mis-selling claims. For once we are shutting the stable door before all the horses have bolted.”
