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

The Financial Conduct Authority (FCA) has today finalised changes to the client money and custody assets (client assets) rules. These changes affect approximately 1,500 FCA regulated firms that carry out investment business, from the largest investment banks to the smallest investment advisor, who collectively hold over £100bn of client money and £10tn of custody assets.

The final rules address lessons learnt from recent insolvencies, feedback from firms themselves and observations from the FCA’s specialist Client Assets Unit.

David Lawton, Director of Markets said:

“The protection of client assets is central to confidence in the UK markets and fundamental to consumers’ rights and the trust they place with firms. 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. Coupled with the increased focus the FCA has had on client assets, they will go a long way to ensure that confidence in UK markets is maintained and consumers are protected.”

The extensive and detailed changes include a rewrite of the client money rules for investment firms and substantial amendments to the custody rules in the client assets sourcebook (CASS). 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 is not proceeding with most of the proposals it consulted on around the client money distribution rules. In parallel with the work that the FCA has been carrying out in reviewing the client money distribution rules, a HMT-commissioned independent review of the special administration regime (SAR) has been in progress (the SAR review). The final report was published in January 2014.  The report contains a large number of recommendations to improve the operation of the SAR, including changes proposed to the SAR legislation and CASS. HM Treasury is now considering the recommendations that fall within their remit and their response. In light of this, the FCA will conduct a further review of the client money distribution rules in line with HMT’s implementation of the SAR review recommendations and intends to publish a further consultation on the client money distribution rules later this year.

The FCA will continue to engage with the industry on these issues.

Notes for editors

  1. The Policy Statement.
  2. The FCA continues to focus on the protection of client assets following the establishment of the Client Asset Unit by the FSA in 2010. The Unit carries out specialist and intensive supervision of client assets, with the aim of ensuring that firms have robust systems in place to ensure the swift return of client assets in the event of firm insolvency.

  3. The FCA’s client assets rules are built on a framework of primary and secondary legislation (including the relevant insolvency and company law). Some of the issues relating to the prompt return of client assets relate to the overall legislative insolvency framework.
  4. Following the insolvency of Lehman Brothers International (Europe) the government introduced the SAR. It was first used in the failure of MF Global (UK) Ltd and has since been used in a number of other administrations.
  5. On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  6. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  7. Find out more information about the FCA.