• Enhancing the Client Assets Sourcebook
  • April 15, 2010 | Authors: Peter Anthony Bibby; Christopher Leonard; Helen Janet Marshall
  • Law Firm: Bingham McCutchen (London) LLP - London Office
  • The FSA has indicated (in its Consultation Paper 10/9 “Enhancing the Client Assets Sourcebook”) that, in the light of lessons learned from high-profile insolvencies in recent years, it intends to make a number of changes to its client money and client assets rules. The asset management industry is likely to welcome most of the changes, although it is unlikely that it will be satisfied that they go far enough in addressing the concerns that were raised following the collapse of Lehman Brothers International (Europe).

    The following changes are proposed:

    • Prime brokers will be required to attach to their prime brokerage agreements an annex summarising the contractual re-hypothecation arrangements. The FSA proposes that prime brokers be required to re-paper their existing client arrangements over a six-month transitional period (prime brokerage clients should be concerned to ensure that prime brokers do not use this requirement as an excuse to standardise previously negotiated arrangements). The summary will not be contractually binding, but the FSA hopes that it will highlight the risk to the client upon the prime broker’s default and may help reduce the time required for due diligence undertaken by an insolvency practitioner following a prime broker’s collapse;
    • Prime brokers will be required to offer daily reporting to clients (including the daily cash value of cash and securities loans, current settlement amount to be paid under any futures contracts, collateral held by the prime broker, total secured obligations, all safe custody assets held for the client, and the location of all safe custody assets including the name of the sub-custodian or bank where the assets are held);
    • Firms which hold client money will be restricted from placing more than 20 percent of the firm’s total client money in intra-group bank accounts (i.e., depositing the money with banks that are in the same group as the firm). The FSA believes that this restriction will mitigate the risk of a firm depositing more money intra-group in order to support its operations as its financial position deteriorates;
    • Firms which place client assets with custodians will be required to ensure the custodian’s terms of business do not impose a general lien over the firm’s assets which may prevent or delay the distribution of client assets in the event of the firm’s insolvency;
    • Firms with relevant client asset permissions and which hold client money or assets with a value of £1 million or more would be required to appoint an executive responsible for the oversight of and responsibility for client assets and money. This would be a controlled function requiring approval of the individual by the FSA. These firms would also be required to make regular reports to the FSA as to the amount of client monies and assets held.

    The FSA has asked that comments on these proposals be submitted by 30 June 2010. If the proposals go ahead it is likely that a policy statement will be published in Q3 2010 and that the rules will become effective in Q1 2011.