The Financial Conduct Authority’s Client Money changes may be problematic for the investment and wealth management industry, according to consultancy Walbrook Partners.
As firms start to digest to potential implications of the changes to the CASS rules proposed by the FCA in CP 13/5, regulatory experts at Walbrook Partners have identified seven challenges raised by these proposals:
1. Removal of the fund manager’s DvP exemption
Requiring all money to be processed through client money accounts will add significant costs to firms. Some will question whether this is justified by the perceived risk of an asset manager failure.
2. Interest on Client Money accounts – all or nothing?
The proposals would allow firms to either keep the funds in their entirety (with the client’s agreement) or not at all. There is, surprisingly, no option to share. Some firms could lose significant income, if cutting off interest from their clients altogether is unacceptable to them.
3. Prohibiting unbreakable term deposits
While it seems logical to ensure the speedy return of money, it is not clear who would bear the cost associated with breaking a term deposit. Potentially it could reduce the clients’ money, post-insolvency.
4. Restricting the alternative approach
Only the largest investment banks will be permitted to receive money into their own accounts and segregate it later – the alternative approach. However, in our experience many firms are unaware of parts of their business which are using an alternative approach that hasn’t been either recognised or signed off. This could lead to unpleasant surprises on implementation.
5. Acknowledgement letters for overseas accounts
Standardised acknowledgements letters for client money accounts will, we fear, be impossible to obtain from many overseas banks for a variety of reasons, ranging from local market practice to differences in insolvency laws. If implemented, this proposal could leave firms scratching around for an effective way of processing overseas business; which sidesteps the client money rules altogether.
6. Allocation of all receipts within 5 business days
In practice, it is often not feasible to receive reliable details about corporate actions and distributions from all markets in time for allocation within five days of receipt, particularly for smaller firms. For overseas receipts, greater flexibility may be required.
7. Releasing unclaimed monies
There is clarification that unclaimed cash cannot be released into firms’ balance sheets, even after undertaking to make good any claims. However, registered charities could be particularly pleased as substantial amounts of small balances could be flowing their way– and firms will benefit from the reduced administrative costs from releasing these leftover sums.
Karen Bond, director at Walbrook Partners says: “The proposed CASS changes need careful analysis to get under the skin of the practical implications for each firm as well as for clients. The changes will be lucky for some – but painful for others. There are some useful clarifications and some enshrining of best practice into the new normal in this paper. However, there is plenty of discussion still to take place to ensure that the results of these proposals have the desired effects, pre- and post-insolvency, on client outcomes, which to some extent will depend on the costs and feasibility associated with their implementation.”
