UK: FCA finalises rules to improve the protection of client money and custody assets

On 10 June, the FCA published PS14/9: Review of the client assets regime for investment business, providing feedback and made text on changes to the rules in CASS, proposed in CP13/5, to address specific risks, to clarify the requirements firms must comply with and to enhance the client assets regime to achieve better results for consumers and increase confidence in financial markets.

All investment firms to which the CASS sourcebook applies will need to review the instrument set out in Appendix 1 to the Policy statement and map out how the changes being made will affect their business.  There are a large number of changes which cover the entire operation of the client money and custody rules.  The below is a summary of the key changes, which are being introduced in stages:

• 1 July 2014 –rules and guidance come into force including:

o   Clarifying the general application provisions of CASS (CASS 1) and the application of the collateral rules (CASS 3), custody rules (CASS 6) and the client money rules (CASS 7);

o   Removing the requirement for an auditor’s confirmation in respect of alternative reconciliation methods for custody assets;

o   Changes to right to use arrangements for custody assets;

o   Changes to money ceasing to be client money;

o   Amending rules applying to trustee firms;

o   Prohibiting placement of client money in unbreakable term deposits with terms longer than 30 days;

o   Clarifications on payment of interest on client money;

o   Changes to client money held by third parties;

o   A revised definition of the ‘standard method of internal client money reconciliation’;

o   Clarification of the obligations placed on firms in relation to FCA-regulated business conducted under the CFTC Part 30 Exemption Order;

o   Certain clarifications to our client money distribution rules; and

o   Introducing multiple client money pools

• 1 December 2014 – further rules and guidance come into force, applying initially to new arrangements and/or existing arrangements including that have been materially altered after this date (full compliance will be required for both existing and new counterparties and/or clients from 1 June 2015), and include:

o   Written custody agreements (impact on new or materially altered counterparty arrangements);

o   Acknowledgment letters (impact on new client bank accounts and new client transaction accounts);

o   Banking exemption (impact on new client relationships);

o   Title Transfer Collateral Agreements - written agreements (impact on new client relationships);

o   Delivery versus Payment commercial settlement systems (impact on new client relationships); and

o   Information to be provided to clients before the provisions of investment services about client asset arrangements (impact on new client relationships). force relating to the provision of information to or obtaining the agreement of new clients and the documenting of agreements and arrangements with any new counterparties with whom firms deposit or otherwise place custody assets or client money, these include requirements to notify the client of certain matters if operating the banking exemption and mandating the use of template acknowledgment letters with new client bank accounts and client transaction accounts;

There will also be specific rules which firms will need to follow when operating the alternative approach to segregating client money and/or a non-standard method of internal client money reconciliation.

• 1 June 2015 – all of the remaining rules and guidance come into force.