Media Briefing Note: New Client Money Rules Will be Costly, Says Hogan Lovells
29 November 2012
London, 29 November 2012 – The Financial Services Authority (FSA) is nearing the end of its consultation on the proposed changes to the rules in Chapter 5 of the Client Assets Sourcebook (CASS), regarding the manner in which client money is handled.
Victor Fornasier, partner at Hogan Lovells, commented: "The FSA has found various instances of non-compliance with the rules, for example in relation to ineffective risk transfer documentation. The current rules are unnecessarily complex and many insurance intermediaries will have had difficulty in applying them so any changes from the FSA will be welcomed".
"However, these changes will come at a significant financial cost to insurance intermediaries. Many organisations will have put some of these new controls in place already but it is not yet clear how much more work will be required and, therefore, what the cost of compliance might eventually be. Money will need to be spent on improving systems and controls and training staff."
The new rules will clarify the CASS rules, which are intended to protect client money. Some specific proposals include:
- Increasing controls over the advance of funds from a non-statutory trust, and requiring firms to conduct client money calculations and reconciliations more frequently;
- Prohibiting risk transfer arrangements that are conditional upon the occurrence of an event (i.e. payment of premium);
- Upon failure of the firm, (a "pooling event"), requiring insolvency practitioners to use reasonable endeavours to complete open transactions rather than immediately returning client money to the clients, and allowing them to consider transferring the broker's business;
- Clarifying the rules on "secondary pooling events" (i.e. where an institution holding a firm's client money fails);
- Allowing firms to obtain a "pre-consent" from clients in respect of a future transfer of the business and client money to another intermediary;
- Improving diversification of client money by limiting the amount that can be held in a group bank to 20%;
- Requiring firms to reconcile down to individual client balances at least annually;
- Providing a mechanism for dealing with unclaimed client money and unallocated client money;
- Requiring brokers who accept client money from another broker to send monthly statements to the originating broker, detailing the money held;
- Removing the ability of firms to hold money as designated investments and requiring money to be held in either client bank accounts or money market funds;
- Clarifying the rules in relation to commission;
- Requiring periodic segregation in respect of money held by a firm's appointed representatives, field agents and other agents to take place at least every three months;
- Requiring firms to allocate responsibility for CASS oversight to one individual within the firm; and
- Clarifying the rules in relation to client money audit reports.
The consultation closes tomorrow (30 November). The feedback and final rules are expected in Q2 2013 (with the final rules coming into force 12 months after publication).
The FSA's Consultation Paper can be found at:
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