Review of the client assets regime for investment …

1 FCA consultation paper 13/5 Review of the client assets regime for investment business July 2013 Extended Assurance Assurance beyond financial statements1 Review of the client assets regime for investment business Overview and time lineThis paper advises on material changes to the rules to client money, custody assets and mandates. Individually, each proposal is intended to address a particular risk identified in firms or clarify an existing requirement, to enhance the client assets regime to achieve better results for consumers and increase confidence in financial received by 12 Aug 2013 for European Market Infrastructure Regulation (EMIR) proposalsFinal rules published on EMIR Regulatory Technical Standards(RTS)Comments received by 11 Oct 2013 for other proposalsFinal rules published in December 2013 on all other proposalsRules come in effect first half of 2014CP 13/5 published2013 JulAugSepOctNovDecJanFebMarAprMayJun2014 Consultation closes (EMIR)

2 Consultation closesFinal rules published (EMIR)Expected final rules publishedRules come into effect2 Review of the client assets regime for investment business 3 Review of the client assets regime for investment business client money distribution rules: prioritizing speedMultiple client money poolsThe key proposed changes to the rules are: Introduce a staged approach to distribution of client money following the failure of a firm by establishing: Stage 1: an initial client money pool requiring distribution of client money based on firm s books and records. This will require a repeat of the firm s reconciliation calculation in accordance with the firm s existing methodology, to effectively update the firm s records and distribute promptly on the basis of these recorded entitlements.

3 Stage 2: a residual client money pool distribution of client money constituting any client money not in the client bank accounts or client transaction accounts. The firm would be required to establish a claims process. The alternative (combined) approach in which the firm may not be able to follow the initial or residual approach. The insolvency practitioner will be required to perform a client money reconciliation ( , in this context, the reconciliation would not be a repeat of any calculation previously carried out by the firm but a new calculation on the basis that the insolvency practitioner thinks is correct. client s margined transactions that are open at primary pooling event are valued at the amount at which they are liquidated.)

4 Provisions to allow an insolvency practitioner to use unclaimed money to make good shortfall in client money pool if reasonable steps are taken to trace clients concerned. Interest earned on client money pool will be used to reduce shortfalls after a primary pooling proposed changes aim to improve the speed of return of client assets and reduce market impact of an implemented, the rules would come into effect six months after the policy statement publication in first half of , subject to consultation responses and extent that the changes are dependent on client money and custody rules, rules may come in effect immediately following publication of policy proposed changes will lead to.

5 Emphasis on firms to maintain accurate and timely books and records as there will be likely an increased Financial Conduct Authority (FCA) supervisory focus in this area. Pressure on firms to update current processes, systems, documentation and controls surrounding the firm s methodology to calculate and reconcile client assets . Increased investment around reconciliation engines functionality and documentation of rules proposed changes are likely to impact firms in many ways including: Increased operational demands and costs relating to reconciliation requirement and disclosures. Additional training and education to firm s employees and clients on operating multiple pools.

6 Increased reporting requirement and documentation. Related investment required to upgrade current CASS reporting tools and reconciliation engines to cope with data FCA has reflected on industry feedback and firms concerns to the operational complexity of the proposals in CP12/22 and has proposed changes to the client money pool rules with anticipated effective date being first half of proposed changes are: Only those firms that are clearing member firms to offer net omnibus client transaction accounts that can be used for porting. Each client pool to have its own client money bank accounts, and client money belonging to one pool cannot be placed in client money bank account belong to another client money pool.

7 Firms will be required to perform separate internal and external reconciliations on each subpool. Firms will be required to keep records in client asset Sourcebook (CASS) Resolution Packs relating to client money bank accounts and transactions used for each subpool. Firms required to create subpool terms and maintain a subpool disclosure document that identifies omnibus client account beneficiaries and explains distribution. Notification requirement to the FCA of their intention to establish a client money subpool, and client consent is required before operating a client money of the client assets regime for investment business 5 Review of the client assets regime for investment business client money rulesThe proposed changes to client money rules aim to clarify and enhance the regime to ensure the best protection of client money held.

8 If these proposals are implemented, they will come into effect six months after the policy statement is published (in the first half of 2014).Key proposed changes are:CA SS 7 Alternative approach method Firms would be required to justify using the alternative approach and consider maintaining buffers, having appropriate systems as well as notifying the FCA no less than three months before adopting this method. Document the use of the alternative approach in writing as well as providing an auditor report to the FCA covering the adequacy of the firm s systems and controls to effectively operate the alternative approach and the appropriateness of the firm s calculation of its buffer before commencing use of the alternative money reconciliations Internal client money reconciliation to be performed on a daily basis.

9 External client reconciliation to be performed as regularly as necessary Evaluate on a regular basis the frequency of external reconciliations with the likelihood of carrying out external reconciliations on a daily basis. Converting many of the provisions set out currently in CASS7 Annex 1 into requirements, including additional guidance in this exemption Where firms are able to use the Banking exemption, that the default is that money relating to investment business is held by the firm under Banking exemption. Comply with the requirements in COBS relating to making available to the clients details of the relevant compensation regime and requirement to the proposed client asset Disclosure Document.

10 Title transfer collateral arrangements (TTCA) Introduce rules to document TTCA and a mechanism that must be followed should client request client money protection (switching out of TTCA and back into CASS protection). On agreeing to a request for protection, firms must notify the client of its agreement including, notification of when the protection would come into effect. This would be on the business day following the term deposits Introduce rules to prohibit placing client money in unbreakable term deposits or notice accounts Time deposits subject to penalty clauses will be allowed provided money can be withdrawn within one business day of giving letters The proposed changes require firms to use a standard template in relation to acknowledgement letters and re-paper existing ones using the standard template.