FCA proposals to no longer allow companies to share interest on client monies could hit wealth management firms’ incomes, according to a leading consultant.
The proposals form part of the FCA’s consultation paper on CASS rules aimed at improving the client assets regime, and follow a raft of fines in the sector. The measures seek to ensure all firms follow the alternative approach to client money rules so that all client money must be received directly into a client bank account.
This means no client money would be received into the firm’s own accounts, preventing firms from making payments from these into client bank accounts. The paper also proposes a ban on using ‘unbreakable’ fixed term deposits to safeguard against the fallout from insolvencies, warning failure to comply with the rules could result in ‘hefty fines’.
Ongoing costs associated with complying with the new rules for the asset management, broking and wealth management segments are an estimated £2.49 million, with one-off costs of £383,000.
However, Karen Bond, a director at Walbrook Partners, warns these costs could be ‘much more expensive’, as the industry would still have to deal with any hidden costs.
She also warns the proposal that firms either keep interest on client money in its entirety, with the client’s agreement, or not at all, with no option to share, will mean a cut in margins for wealth managers. The regulator hopes the measures will ensure clients receive interest they are entitled to.
‘Many managers take a percentage of the deposit rate and give the rest to their clients. The agreed rate with the clients represents quite a substantial part of some firms’ margins. Some firms could lose significant income, if cutting off interest from their clients altogether is unacceptable to them,’ she said. ‘The proposal at the moment doesn’t really allow that sharing mechanism, it’s either all or nothing, which is not great news for flexibility.’
Yvonne Clough, head of risk at Multrees Investor Services, said increased costs could also come from the focus on the speed of returning assets. This would result in an ‘even more stringent’ monitoring of the format of reconciliations or quality of data, and additional audit and reporting costs.