The Financial Conduct Authority's (FCA) consultation paper on Client Assets (Cass) rules is designed to improve the client assets regime following a raft of fines in the wealth sector.
However, the sheer magnitude of the proposals could prove challenging for the investment and wealth management industry, according to consultancy Walbrook Partners.
Wallbrook has gone through the source paper with a fine tooth comb and come up with the following seven threats to wealth and investment managers.
Removal of the Fund Manager’s DvP exemption
Requiring all money to be processed through client money accounts will add significant costs to firms. ‘Some will question whether this is justified by the perceived risk of an asset manager failure,’ said director Karen Bond (pictured).
‘All or nothing’ Interest payments on client money accounts
The proposals would allow firms to either keep the funds in their entirety with the client’s agreement, or not at all.
‘There is, surprisingly, no option to share,’ Bond commented. ‘Some firms could lose significant income, if cutting off interest from their clients altogether is unacceptable to them.’
Prohibiting ‘unbreakable’ term deposits
The paper also proposes a ban on ‘unbreakable’ fixed term deposits to safeguard against the fallout from insolvencies.
‘While it seems logical to ensure the speedy return of money, it is not clear who would bear the cost associated with breaking a term deposit. Potentially it could reduce the clients’ money, post-insolvency,’ Bond commented.
Restricting the alternative approach
Only the largest investment banks and institutions dealing with foreign currencies will be permitted the use the ‘alternative approach’, a system allowing them to receive money into their own accounts and segregate it later.
‘In our experience many firms are unaware of parts of their business which are using an alternative approach that hasn’t been either recognised or signed off,’ Bond explained. This could lead to ‘unpleasant surprises’ on implementation, she added.
Acknowledgement letters for overseas accounts
If the FCA proposals are executed, standardised acknowledgements letters for client money accounts could be impossible to obtain from many overseas banks for a variety of reasons, ranging from local market practice to differences in insolvency laws.
‘If implemented, this proposal could leave firms scratching around for an effective way of processing overseas business, which sidesteps the client money rules altogether,’ Bond said.
Allocation of all receipts within five business days
Firms will have to allocate receipts of client money to the relevant clients within five business days.
‘In practice, it is often not feasible to receive reliable details about corporate actions and distributions from all markets in time for allocation within 5 days of receipt, particularly for smaller firms. For overseas receipts, greater flexibility may be required,’ Bond explained.
Releasing unclaimed monies
Unclaimed cash will be forbidden to be released into firms’ balance sheets, even after undertaking to make good any claims.
‘Registered charities could be particularly pleased as substantial amounts of small balances could be flowing their way, and firms will benefit from the reduced administrative costs from releasing these leftover sums,’ explained Bond.
‘The proposed Cass changes need careful analysis to get under the skin of the practical implications for each firm as well as for clients. The changes will be lucky for some, but painful for others,' she added. '
'There are some useful clarifications and some enshrining of best practice into the new normal in this paper. However, there is plenty of discussion still to take place to ensure that the results of these proposals have the desired effects, pre- and post-insolvency, on client outcomes, which to some extent will depend on the costs and feasibility associated with their implementation.’