Client money rules are being further strengthened. As a result, Treasurers need to ensure that they can clearly identify client from corporate money. Getting it wrong can (and has) resulted in significant fines - SEI was fined £900k in November 2013, Aberdeen was fined £7.2m in September 2013, and Blackrock was fined £9.5m in September 2012.
Our recent survey showed that only a few Treasurers understood or were aware of the recent changes. Whilst for some there is limited impact, Treasurers can apply their expertise and relationships to use the rules to drive greater transparency and better processing of client money – ultimately offering organisations improved controls and an increase in the funds available for investment.
Treasurers (and those involved in banking arrangements), working with client money, will need to ensure they follow the new rules. This can include:
1. Opening new bank accounts
2. Processing post-dated cheques
3. Dealing with new forms of banking arrangements (such as trust letters)
4. Faster reconciliation processes
5. Changes to the products available and the terms of business
As described below, the FCA’s July 2013 consultation paper CP 13/5 proposed significant changes to the client money rules. This regulation covers insurance intermediaries such as asset managers, wealth managers, and banks with investment operations; however, any Treasury that manages client money (including those of law firms) should consider the following when assessing the sufficiency of their operational, governance, and risk management frameworks in the context of best practice and regulatory compliance.
Reconciliations: The required frequency for internal and external client money reconciliations is to be made more explicit. The application of the ‘negative add-back method’ as a standard method of internal client money reconciliation will be restricted to asset managers only. The requirements for firms intending to use a non-standard method of reconciliation will be tightened up.
Treasurers must consider how an increase in the frequency of the internal and external client money reconciliations will impact their team’s workload and system requirements. Existing manual processes may require redesign and in some cases, a system applying auto-reconciliation may be a more cost effective tool.
Trust letters: the FCA continues to observe significant deficiencies in trust letters which are likely to delay or prevent the release of client money following the failure of a firm. The FCA proposes:
- a standardised template acknowledgement letter for money held in client money bank accounts,
- requiring the bank to agree that it will ‘release on demand all money standing to the credit of the account upon proper notice and instruction’,
- additional guidance for firms to ensure appropriate authority of the individual counter-signing the letter,
- requiring firms to obtain an acknowledgement letter for all client bank accounts including those outside the UK, and
- removing the 20 business days grace period for firms to obtain a duly countersigned acknowledgment letter. This in effect prohibits the placement of client money into an account until the relevant letter has been signed and returned to the firm.
- Firms must repaper all existing client money bank accounts with the new wording within a transitional period of six months and will be expected to review their letters at least annually.
Treasurers must consider how the increase in trust letter administration will impact business as usual. There must be a clear plan in place to execute the changes, to deliver external communications as required, to report to management internally, and to oversee future trust letter production and processing.
Unbreakable term deposits or notice accounts are to be banned. Time deposits subject to penalty clauses will be allowed provided money can be withdrawn within one business day of giving notice. On a positive note, provisions will be introduced to facilitate firms eliminating trivial balances of unclaimed client money by making a payment to charity.
Treasurers must confirm the business no longer offers unbreakable term deposits. Furthermore, Treasurers must continue to ensure that all client assets are protected and correctly classified in separate accounts from those used for investment for the business.
Overall, Treasurers must ensure that clients can be confident that their assets are being held within a framework of robust controls and strong risk management. This will be done through, among other activities, effective staff training, efficient bank account management, and timely reporting.
Furthermore, Treasurers must work with the business so that clients can be assured that their assets are safe and will be returned within a reasonable timeframe in the event of firm failure.
In summary, updates to client money regulation will significantly impact Treasury and banking resources (time, people and systems). Treasurers need to ensure that their organisations have a clear execution strategy for complying with this critical regulation.