The Financial Conduct Authority (FCA) has today published a Discussion Paper (DP), which seeks feedback on the FCA Client Assets sourcebook, specifically the client money distribution rules (CASS 7A), and how these rules work with the Special Administration Regime (SAR).
Following the failure of Lehman Brothers in 2008, the Treasury created a specific insolvency regime for investment firms holding client assets, the SAR. This works with the CASS rules to create the mechanism under which client assets are dealt with in a failed investment firm. The SAR sets out three special objectives for administrators:
- to return client assets to customers as soon as reasonably practicable
- to ensure timely engagement with market infrastructure bodies and authorities (eg clearing houses and exchanges)
- to rescue the firm as a going concern or wind it up in the best interests of its creditors
HM Treasury (The Treasury) commissioned Peter Bloxham to undertake an independent review of the SAR. His final report was published in January 2014 (Bloxham final report) and contained a number of recommendations relating to the SAR regulations, the CASS rules and the procedures administrators follow in the event of an investment firm failure.
This DP sets out our response to the recommendations in the Bloxham final report addressed to the FCA and seeks industry views on the discussion points raised. The recommendations aim to improve the speed of return of client assets to an investment firm’s clients in the event of its failure and minimise the market impact of its entry into special administration. This DP also contains the FCA’s response to the ‘speed proposal’, which we proposed in CP13/5.
Topics in the DP include the method of valuing transactions to determine client money entitlement, transfer of the client money pool to another firm;, the need for CASS rules to address lessons learned from case law, the provision of additional information to clients and administrators and recommendations for the treatment of allocated but unclaimed and de minimis client money.
The Treasury is concurrently publishing a consultation containing various proposed changes to the SAR regime. This paper should be read alongside our DP to understand the full regime for the insolvency of a failed investment firm. Once the legislative changes to the SAR have been finalised, we are looking to publish a consultation paper containing detailed changes to the CASS 7A rules.
Megan Butler, Executive Director of Supervision said: 'This review is essential to ensure that the client money distribution rules work as well as possible with the insolvency legislation so that client assets are returned as soon as possible to customers after the failure of an investment firm. The discussion paper is a great opportunity for the industry to come forward and give us their views and opinions on this critical piece of work.'