The collapse of Lehmans Brothers and MF Global outlined commercial challenges in respect of client assets and client money, including the role of regulated investment firms, the regulator, administrators and external auditors and focused attention on the management and protection of client money and assets, to avoid the impact of an insolvency.
Following a detailed review by the Financial Conduct Authority (the FCA) of its legislative framework, the FCA introduced significant changes to the rules that govern investment firm's conduct when handling client money and custody assets, aimed at improving firm's systems and controls around segregation, record keeping and reconciliations. Amongst other things, investment firms will need to provide the FCA with clear reporting of how their funds are being handled and where the assets are located.
These regulatory changes are being implemented in three phases by way of amendments to the Client Assets Sourcebook (CASS). The first phase was implemented in 1 July 2014, with the second and third phases to be effective from 1 December 2014 and 1 June 2015 respectively. In many cases, the 1 December deadline applies the changes to the rules to new clients and the 1 June 2015 applies to changes to the rules to existing clients.
The phased approach is designed to allow investment firms more time to implement the changes. But even with the phased in approach, the timescales remain challenging and some investment firms may decide to implement the changes for both new and existing clients at the same time.
Implementation of the changes will be a costly affair for investment firms and must be implemented effectively and within the time limits specified. Fines for non-compliance with the rules are likely to be tough and there is likely to be little sympathy for misinterpretations of the rules or for non compliance within the deadlines.
This client alert highlights some of the key forthcoming provisions that will, for most affected investment firms, necessitate changes to their internal policies and client facing documentation.
Changes applicable to both client money and custody assets
Whilst the rules in many instances will provide for more stringent conditions to be observed by investment firms, certain sections of the CASS rules are being liberalised.
Investment firms will be permitted to transfer unclaimed client money or custody assets to a registered charity if there has been no activity on the client's...