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Control centre for client cash

Chris Salih and Hannah Stodell report on plans for a new body to regulate how firms deal with client money

The Government has unveiled plans to create a new regulator to take responsibility for client money within FSA-regulated investment firms.

The Client Asset Agency will look to take over some responsibility from the FSA for the regulation and ongoing supervision of systems and controls relating to client money and assets within FSA- authorised firms. It would also have a role in post-insolvency issues in a bid to improve the efficiency of the compensation process.

The Treasury plans for those firms that hold client money to pay for the agency, with an independent “client money and assets levy” put forward as a possible addition to the FSA fee block structure. The paper says it would cost investment firms £3m to £6m to set up new systems to comply with the agency and additional costs of £3m a year.

Other facilities proposed include counterparties being forced to offer facilities to segregate client business into separate, ringfenced accounts. The consultation paper also calls for the creation of business information packs to help administrators in the orderly wind-down of failed businesses. It says Bips would allow the authorities to better understand the risks to client funds and be better prepared for communication with the market when an investment firm fails.

Financial Services Secretary Lord Myners says: “The collapse of Lehman Brothers had a major impact on financial centres across the world. It is important that the Government acts to ensure that any future failure of an investment bank does not cause the same degree of damage to markets or investors. The proposals are about enhancing the UK’s reputation as the world’s premier destination for investment banking services.”

Investment Management Association chief executive Richard Saunders says the IMA welcomes the Treasury proposals, which he feels complement the reforms in the Banking Act 2009 in transforming resolution arrangements for banks.

Saunders says the next change is to transform the resolution procedures in capital markets.

“Taken with the pro- posals in the Financial Services Bill for living wills and prospective reforms to capital requirements by the G20, there is a real prospect of a more stable system in the future.”

Saunders says the proposals are important for the UK as a financial centre.

“Investors, whether domestic or international, want well regulated markets in which they can invest their money with confidence. The Lehman collapse exposed a number of problems with the way in which UK law and regulation interacted with market arrangements, as well as with some market practices. Getting this right will be good for financial stability, good for investors and good for the UK as a financial centre.”

CandidMoney.com founder Justin Modray says: “Following the recent demise of NDFA and Keydata, there is clearly a need for more robust controls relating to client money and assets. Despite positive moves by some structured product pro-viders to offer better transparency and education regarding counterparty risk, there is no doubt that many advisers and investors remain wary.

“If the CAA is established and does what appears to be on the tin, then I think that can only be a good thing both for structured products and the wider industry. The price tag looks steep but it is probably worth paying.”

But AES International managing director Sam Instone says the proposed definition of an investment bank outlined in the Trea- sury’s proposals would encompass a wider range of investment firms and add an extra layer of regulation that is unnecessary and costly.

He says: “Under these guidelines, we would be classified as an investment bank. This will affect very few financial intermediaries because not many hold client money but it will affect many providers, investment services firms and stockbrokers.

“I understand the need to ensure major investment banks such as Lehman Brothers pose less systemic risk, the introduction of another layer of regulation in addition to UK client assets sourcebook rules and Mifid legislation for every firm that hold client assets seems excessive.”

Blue Sky Asset Manage- ment product develop-ment and operations director Mark Dickson says: “We are supportive of any measures which maintain confidence in the financial system and improve the effectiveness of the security of investors’ assets but see the proposed CAA as something that is intended for the largest investment banks, to avoid future disruption should an event similar to Lehman’s occur, rather than something applicable to structured products. The fact is that although there have been four structured product firms recently placed into administration in the UK, in each and every case, the underlying structured product assets and cash have been clearly ringfenced for investors.”

Independent consultant Richard Hobbs says: “The pros of it are that it might give investors greater confidence, which would be very valuable as there is no doubt this has been dented.”

“Against that, it is creeping regulation. This drives up costs which eventually consumers have to bear and that itself reduces individuals’ propensity to invest.”

The Treasury’s recommendations add detail to living will plans already mooted.

Hobbs says: “Given the complexity of the financial institutions to which living wills apply how anyone can work out what will happen in the event of a failure is anybody’s guess. It is not clear that these arrangements would work effectively.”

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