By Michael Beaton

On 10 June 2014, the FCA published its long-awaitedpolicy statement  and accompanying guidance notedetailing changes to the client assets regime in the UK following the proposals made in Consultation Paper CP 13/5, published in July 2013.

The policy statement represents a material rewrite of the CASS regime in the UK.  The most significant amendments, many of which will have an impact on firms’ documentation processes, are detailed below.  However, of note is the fact that the FCA does not intend to proceed with its main proposal – regarding changes to the client money distribution rules (i.e. the rule that ‘speed’ should take priority over absolute accuracy), although it will keep these rules under review and further consult on the topic later in the year.[Footnote 1]  In addition, it believes that a number of the recommendations made by Peter Bloxham regarding the operation of the Special Administration Regime (see here for more information) are likely to be addressed by the changes detailed within the policy statement[2].
Footnotes for this section:
[1] Paragraph 1.13
[2] Paragraph 1.15

Client money distribution review on hold, awaiting government decisions

New rules governing client money and custody of client assets have been announced by the Financial Conduct Authority (FCA). However, the regulator has stepped back from most of the client money distribution proposals it made previously pending further deliberations by HM Treasury.

“These changes will improve the protection offered to client assets and should speed up the recovery of client assets on a failure of a firm,” FCA director of markets David Lawton said in a statement.

The “extensive and detailed changes” include 

• a rewrite of the client money rules for investment firms 
• substantial amendments to the custody rules in the client assets sourcebook (CASS). 

The changes to CASS have compliance deadlines of 1 July 2014, 1 December 2014 and 1 June 2015.

“The changes will improve firms’ systems and controls around segregation, record keeping and reconciliations and set out how investment firms must address client assets risks within their business,” the FCA said.

The FCA is holding back on most of the changes it proposed to the client money distribution rules. Work on those proposals had been carried out in parallel with an independent review commissioned by the government into the special administrative regime (SAR), a structure introduced after the collapse of Lehman Brothers. The independent review published its report and many recommendations in January and the Treasury is now considering how to proceed. The FCA said it will conduct a further review of the client money distribution rules once it is known how the government wishes to proceed with the SAR review.

The FCA’s 400-page policy statement, including feedback to its proposals and the final rules, is available by clicking here.

A summary of the CASS changes is available at the FCA website by clicking here.