The amended rules enable firms to hold a proportion of client money in a UD longer than 30 days, subject to certain conditions.
The UK Financial Conduct Authority (FCA) has published amendments to the rules concerning client money that come into force today – January 22, 2018.
The need for the changes dates back to 2012, when the UK financial services regulator conducted a survey in which firms reported client money holdings in three to four year unbreakable deposits (UDs). The regulator subsequently issued a letter to firms stating its concerns and expectations on the use of lengthy UDs.
To address its concerns, in July 2014, the FCA introduced the 30-Day Rule to ensure that:
- firms carry out risk assessments on the banks with which they deposit client money and are able to react to that risk assessment by withdrawing and re-locating client money if necessary, and
- client money is readily available for distribution back to clients as soon as is reasonably practicable in the event of the failure of a firm.
After the 30-Day Rule came into force, the FCA received feedback that firms are experiencing increasing difficulty depositing client money at banks. The banks have cited the cost of the Liquidity Coverage Ratio (LCR) as their main reason for refusing to accept client money from firms. The LCR requires banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days.
The FCA notes that there may be harm to consumers if a firm reaches a point where it is unable to deposit client money at a bank. This could result in client money being returned to clients rather than invested in line with the clients’ instructions, including subscriptions in ISAs, or client money being deposited with banks that do not meet firms’ due diligence requirements.
Feedback from the industry, the FCA says, has consistently suggested that permitting firms to place client money on deposits with unbreakable terms of longer than 30 days would ease the situation, as banks would regain some of their appetite to hold client money.
In response, the FCA introduces a new instrument – CLIENT ASSETS (TERM DEPOSITS) INSTRUMENT 2018. The rules enable firms to hold a proportion of client money in a UD longer than 30 days, subject to certain conditions.
Under the amendments:
“Where the requirement under sub-paragraph (2)(b) is not satisfied and provided that the client bank account is not included in a sub-pool, a firm may use a client bank account from which it will be unable to make a withdrawal of client money until the expiry of a period lasting: (a) up to 30 days; or (b) provided the firm complies with CASS 7.13.14AR, from 31 to 95 days“.
Here is what CASS 7.13.14 AR states:
“A firm may only use one or more client bank accounts under CASS 7.13.13R(3A)(b) if:
(1) prior to using any such client bank accounts, it:
- (a) produces a written policy that sets out:
(i) for each of its business lines, the maximum proportion of the client money held by the firm that the firm considers would be appropriate to hold in such client bank accounts having regard to the need to manage the risk of the firm being unable to access client money when required;
(ii) the firm’s rationale for reaching its conclusion(s) under (i); and
(iii) the measures that it will put into place to comply with sub-paragraph (2)(a) of this rule, having regard to CASS 7.13.14CE; and
- (b) provides each of its clients with a written explanation of the risks that arise as a result of the longer notice period for withdrawals that:
(i) is clear, fair and not misleading; and
(ii) in respect of the medium of the explanation, satisfies whichever of COBS 6.1.13R (Medium of disclosure) or COBS 6.1ZA.19EU (Medium of disclosure) applies to the firm in respect of its obligations to provide information to the client; and
(2) while the firm uses any such client bank accounts, it:
- (a) takes appropriate measures to manage the risk of the firm being unable to access client money when required;
- (b) keeps its written policy under sub-paragraph (1)(a) under review, amending it where necessary; and
- (c) provides any of its clients to whom it has not previously provided the explanation under sub-paragraph (1)(b) with such a written explanation before it starts to hold or receive client money for them.”
The list of firms that have provided feedback on the matter includes names like IG Markets Limited, Lloyds Banking Group Plc and Aviva UK Life.