On 14 January 2014, HM Treasury published the “Final review of the Investment Bank Special Administration Regulations 2011” conducted by Peter Bloxham. The report meets Parliament’s requirement that the Treasury hold an independent review of the special administration regime (SAR) for investment banks within two years of it coming into force. Continue reading
On 26 November 2013, the FCA published a final notice and accompanying press release levying a fine of GBP 900,200 on the asset manager SEI Investments (Europe) Limited (SEI) for failing to arrange adequate protection of client money in the period from 1 November 2007 to 4 October 2012. Continue reading
The Financial Conduct Authority has levied its first penalty under the new penalty regime for inadequate compliance with the Client Money rules.
On 11 June 2013, the FCA published details of the £120,900 fine (including a 20% discount for early settlement) levied on Xcap Securities (a retail stockbroking and asset management firm) for failure to protect client money and assets. The fine amounts to 2% of Xcap’s average client money balance plus 0.2 % of its client asset balance during the relevant period. This equates to a low-medium level fine according to the FCA 5 step process. Among Xcap’s specific breaches were failures to:
- ensure that client money was properly segregated;
- ensure that all safe custody assets were clearly identified as belonging to the client;
- maintain accurate records and accounts in respect of client money and safe custody assets;
- have in place adequate organisational arrangements, policies and procedures to detect and manage client money and safe custody asset risks;
- put in place adequate trust documentation;
- carry out timely and accurate client money reconciliations; and
- report without delay failures to comply with CASS requirements.
In the press release accompanying the final notice, the FCA noted that the new levels of penalty “are expected to result in larger fines, demonstrating the seriousness with which we view these failures and serving as a stronger deterrent to firms”. Firms should take note and not expect sympathy. Today, many of the gaps in client money processes which led to Xcap’s breaches would be highlighted to firms which establish robust procedures around the population and maintenance of a CASS Resolution Pack. Whilst providing a smoking gun to the FCA in any client money investigation, if implemented correctly, a CASS Resolution Pack is also a powerful regulatory compliance tool, and even a competitive advantage instrument. This case reinforces the need for firms to commit sufficient resource to improving standards in this area.
On 26 April 2013, the FCA published Policy Development Update No 157. This summarises the anticipated publications dates for various pieces of regulatory guidance. Of note are the following:
- a policy statement (PS12/5) to CP11/16 on recovery and resolution plans, due for publication in Q2 2013;
- a policy statement to part 2 of CP12/22 on the client assets regime (multiple client money pools), due for publication in Q2 2013 (had previously been noted as “TBD”); and
- a policy statement to CP12/20 on client money rules for insurance intermediaries, due for publication in Q3/Q4 2013.
Just a reminder that I am giving a webinar on CASS Resolution Packs for Insurance Intermediaries tomorrow at 3:30 pm. The event is free and you can register here.
On 16 April 2013 I am a guest speaker in a webinar being given by the Forum for Regulatory Change. The presentation will focus on the future requirements for insurance intermediaries to prepare and maintain CASS Resolution Packs. It will summarise the law in this area as it applies to insurance intermediaries and will leverage off the practical experience we have derived from implementing CASS Resolution Packs for banks and investment firms.
The event is free and you can register here.
On 25 February 2013, the FSA published Policy Development Update Number 156 detailing forthcoming publications from the FSA on a wide range of issues, including:
- RRP: Policy Statement to CP11/16 and PS12/5 on recovery and resolution planning. This is expected to be published in Q2 2013; and
- CASS RP: Policy Statement to CP 12/20, “Review of the client money rules for insurance intermediaries”. This will include finalised rules regarding CASS Resolution Packs for firms subject to CASS 5 and is expected to be published in Q3/Q4 2013.
On 20 November 2012, the FSA published a speech given by Richard Sutcliffe, Head of the Client Assets Unit at the FSA on the background and purpose of the unit he leads and its future policy initiatives.
The speech underlined the priority given by the FSA to improving the client assets regime. Mr Sutcliffe noted that there are over £9.7 trillion of custody assets within the UK, the protection of which is crucial if the FSA is to meet its objectives of protecting consumers and enhancing the integrity of UK markets. In his words, CASS compliance is “not a regulatory fad, it is a fundamental duty” owed to customers.
The Client Assets Unit was created in the wake of the Lehman collapse and since that time has initiated a number of policy reforms, including:
- the stratification of firms into “small”, “medium” or “large” based on the value of their holdings;
- the requirement for all medium and large firms to submit a monthly Client Money & Assets Return; and
- the introduction of the CF10a role – the dedicated control function with responsibility for client money compliance in all medium and large firms.
Mr Sutcliffe made clear that the FSA actively uses all of the material generated by firms and takes the issues of quality and accuracy of data very seriously. Whilst acknowledging that progress has been made, he noted that concerns regarding CASS compliance remain – particularly the continuing failure of firms to properly document trust arrangements. In light of these concerns the FSA will intensify its supervisory approach in the future, visiting more firms and returning to other firms to cover different issues or check on progress.
On the subject of CASS Resolution Packs, the FSA is aware of the costs involved in creating and maintaining a CASS Resolution Pack and the tight compliance deadlines. However, it is not particularly sympathetic to the concerns of firms in this area on account of the fact that it is only asking for documentation which, in the main, should have been available to firms before the introduction of the CASS Resolution Pack requirements.
A CASS Resolution Pack provides a convenient snap shot of the state of a firm’s CASS compliance, which can be requested by the FSA at any time. Given this, the particular concerns that that the FSA has regarding trust notifications and acknowledgments (which are required to be an immediately available component of every CASS Resolution Pack) and the stated intention to increase the intensity of future supervision, firms would be well advised to ensure that their approach to CASS Resolution Pack compliance is on a firm footing before the FSA next come knocking.
Today marks the deadline for completion of a CASS Resolution Pack with respect to every investment firm to which CASS Chapter 6 (custody rules) or Chapter 7 (client money rules) applies.
The CASS Resolution Pack regulations are documented in PS12/6, published by the FSA in March 2012. They require a firm to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure. The purpose of the rules is to facilitate the return of client money and safe custody assets to clients more quickly than is currently the case.
The Burden of Maintenance
At least in theory, the creation of a CASS Resolution Pack is a reasonably simple exercise. However, in practice, the CASS Resolution Pack requirements imply a significant ongoing maintenance burden on firms due to the nature of the documentation forming part of the pack and the requirements regarding retrieval and updating of the pack’s contents.
The ’48 Hour Rule’
The documentation forming part of a CASS Resolution Pack must be capable of being retrieved within 48 hours of (a) the appointment of an insolvency practitioner or (b) the request of the FSA, irrespective of whether the firm in question is a going concern or has entered into insolvency/resolution. It is worth noting that the 48 hour period continues to run whether the days in question are business days or non-business days. Moreover, where documents are held by a member of the firm’s group, the firm must have adequate arrangements in place to ensure that documents are still delivered within the 48 hour timescale.
The ‘Immediately Retrievable’ Rule
Certain documentation must be capable of being retrieved immediately so as to assist an insolvency practitioner in identifying and freezing client assets. Additionally, firms should note that the FSA may rely on the inability of a firm to provide ‘immediately retrievable’ documentation as tending to establish that the firm is in contravention of the general requirement that documents be retrievable within 48 hours.
Inaccuracies and Corrections
Firms must ensure that the contents of a CASS Resolution Pack are reviewed on an ongoing basis to ensure that the pack remains accurate. In addition, material inaccuracies in the content of any new documentation required to be produced as a result of the CASS Resolution Pack rules must be corrected within 5 business days of the inaccuracy arising.
To date, many firms have put in place a tactical, rather than strategic, solution to the issue of CASS Resolution Packs. These first generation CASS Resolution Packs are generally created in MS Word or MS Excel. Whilst easy to create and being fully compliant with the regulations, these products suffer from multiple user and data integrity issues. Moreover, they are likely to come under further strain as recently proposed changes to the CASS regime, in particular the ability to create multiple legally and operationally separate client money pools and sub-pools, increase yet further the burden associated with maintaining a CASS Resolution Pack. As a result, they are not well suited to being the foundation stone upon which an efficient and robust CASS Resolution Pack maintenance policy can be built.
However, the future is almost upon us. We are already starting to see the emergence of second generation CASS Resolution Packs in the form of bespoke CASS RP databases. In terms of speed and efficiency of updating, multiple-user access and data integrity, the longer-term advantages of these products is clear. However, the main driver behind this development is not primarily the question of maintenance, but rather the appreciation of the value of a robust CASS Resolution Pack as a risk management tool, used to identify weakness in existing client money processes. Indeed, discussions are already turning to the creation of third generation CASS Resolution Packs – being CASS Resolution Packs the contents of which are drawn automatically from existing systems and update, at least in part, on a semi-automatic basis. It is at this point that the true value of the CASS Resolution Pack, as a competitive advantage tool demonstrating the robustness of client money systems and used in the marketing of a firm to new and existing clients, will be fully realised.
I will be presenting a half-day workshop on CASS Resolution Packs on 29 November 2012 as part of the Infoline Client Assets & Client Money Protection Conference. The workshop will address a number of topics, including:
- The background to CASS RP;
- The CASS RP regulations;
- Implementing a CASS RP;
- The form of a CASS RP;
- Future FSA initiatives and their effect on CASS RP planning; and
- The extension of CASS RP regulations to insurance intermediaries.
Finally, we will also be demonstrating a CASS RP database, and discussing the advantages of this solution over more manual forms of CASS RP.
As a speaker, I am entitled to offer a 20% discount to contacts, colleagues and clients. Please just drop me a line at firstname.lastname@example.org if you would like to take advantage of this.
Hope to see you there.