FCA Legislation Update

On 11 February 2014, the FCA published its policy development update for January 2014 (PDU 10) which details forthcoming FCA publications relating to a number of areas, as detailed below:

Business Standards

Initiative

Current Expected Publication Date

Previous Expected Publication Date (PDU 9) 

Client Assets Review – PS to 13/5

Q 1/2 2014

Q 1/2 2014

Review of the client money rules for insurance intermediaries and feedback to CP 12/20 – CP

TBC

TBC

 

CASS RP Changes on the Horizon?

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

FCA Hands Out More Fines for Client Money Breaches

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

FCA Fines Aberdeen £7.2m for Client Money Breaches

On 3 September 2013, the Financial Conduct Authority (FCA) published a press release announcing the final notice it has issued to Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited (“Aberdeen”), fining the firm £7,192,500 for breaches of the FCA’s client money rules.  This fine included a 30% discount for early settlement by Aberdeen.

Over a three year period from 31 August 2008 to 31 August 2011, Aberdeen breached Principle 3 (management and control) and Principle 10 (protection of client assets) of the FCA’s Principles for Businesses.  The firm failed to recognise that money held on behalf of clients in Money Market Deposits (MMDs) with third party banks were subject to the FCA’s client money requirements set out in Chapter 7 of the Client Assets Sourcebook (CASS).  As a result, Aberdeen breached rules 7.3.1R, 7.3.2R, 7.6.1R, 7.6.2R and 7.8.1R in CASS.

Under the client money requirements, firms are required to protect money held on behalf of its clients in the event of firm failure.  Aberdeen failed to:

  • Provide appropriate trust letter notifications to the banks and did not obtain acknowledgements confirming the client money trust status of the deposited monies from those banks;
  • Provide consistent account naming conventions when setting up accounts, creating uncertainty over ownership of those accounts.

The net result was that an average daily balance of approximately £685 million had been at risk but no actual loss of client money was suffered.  However had the firm become insolvent, severe delays and complications in the distribution of client money would have resulted.

Aberdeen’s failings highlight the importance of identifying and protecting client money.  In this regard, a CASS Resolution Pack (CASS RP) represents a useful and readily available compliance tool.  In providing a convenient snap shot of the state of a firm’s CASS compliance, not only does it assist an Insolvency Practitioner in locating and returning client money, but it also highlights immediate and ongoing deficiencies in a firm’s CASS procedures.  Implementing prompt remedial action with respect to CASS deficiencies highlighted during the creation and maintenance of a CASS RP will help avoid the high price, both in terms of monetary fines and reputational damage, that was experienced by Aberdeen in this case.

RRP for Non-Banks – Is Your Data Up to Scratch?

On 12 August 2013, the Financial Stability Board published a consultation document regarding the “Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions”, inviting comments by 15 October 2013.

The consultation document proposes draft guidance on how the Key Attributes should be implemented with respect to systemically important non-bank financial institutions.  It deals with three main areas:

  • The resolution of financial market infrastructure (FMI) and systemically important FMI participants;
  • Resolution of insurers; and
  • Client asset protection in resolution.

The proposed rules are, to a large extent, little more than the formalisation of existing thought and best practice regarding the resolution of non-bank financial institutions.  However, this does not detract from the value of the document.  Indeed, it highlights the practical challenge that institutions which are subject to the rules will face in providing the data necessary to facilitate the implementation of resolution measures by regulators.

Both FMIs and insurers will be required to maintain information systems and controls that can promptly produce, both in normal times and during resolution, all data needed for the purposes of timely resolution planning and resolution.  In the case of FMIs, this will include:

  • Information on direct and indirect stakeholders, such as owners, settlement agents, liquidity providers, linked FMIs and custodians;
  • Exposures to each FMI participant (both gross and net);
  • Information on the current status of obligations of FMI participants (e.g. whether they have fulfilled their obligations to make default fund contributions);
  • FMI participant collateral information, such as:
    • location;
    • holding arrangements; and
    • rehypothecation rights; and
    • netting arrangements.

Insurers will also be required to generate data regarding:

  • sources of funding;
  • asset quality and concentration levels; and
  • derivatives portfolios.

In addition, any entity holding client money, must have the ability to generate a wide variety of data that would facilitate its speedy return in a resolution scenario.  That data must be in a format understandable by an external party such as a resolution authority or an administrator and includes information on:

  • the amount, nature and ownership status of client assets held by the firm (directly or indirectly);
  • the identity of clients;
  • the location of client assets;
  • the identity of all relevant depositories;
  • the terms and conditions on which client assets are held;
  • the applicable type of segregation (e.g. “omnibus” or “individual”);
  • the effects of the segregation on client ownership rights;
  • applicable client asset protections (particularly where client assets are held in a foreign jurisdictions);
  • any waiver, modification or opting out by a client of the client asset protection regime;
  • the ownership rights of clients and any potential limitations to those rights;
  • the existence and exercise of rehypothecation rights; and
  • outstanding loans of client securities arranged by the firm as agent, including details of:
    • counterparties;
    • contract terms; and
    • collateral received.

If the experience of banks is anything to go by, the capture, analysis, delivery and updating of this type of data is a significant undertaking.  The FSB is clearly laying out its intentions and the direction of travel on this issue.  As such, non-bank financial institutions would do well to start analysing their capabilities in these areas, with a view to upgrading their data architectures where necessary.

CASS Resolution Pack Compliance: Don’t Expect Sympathy From the FSA

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.

CASS Resolution Pack Seminar

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 michael.beaton@drsllp.com if you would like to take advantage of this.

Hope to see you there.

Michael.