The FSA plans to launch a consultation later this year into asset managers’ use of term deposits when holding client money.
In November, the regulator wrote to asset management houses saying it was “concerned” about the placement of client monies in term deposits. These deposits mean firms have no contractual ability to request the return of the funds prior to the end of an agreed term.
The FSA intends to consult on new rules covering these unbreakable client money term deposits at some point in 2013 – most likely in the second quarter of the year. Currently, the watchdog’s client assets division has no specific rules on this practice.
According to the regulator, unbreakable client money term deposits create two potential risks for asset managers’ clients.
Firstly, asset managers cannot be sure banks will pass due diligence for the whole of the term the deposit is held, creating the risk client monies could be trapped if the bank were to fail. Secondly, the term of the deposit might delay an insolvency practitioner’s ability to return money to clients if the investment manager itself failed.
In addition, similar concerns surround asset managers’ use of notice accounts, which require a period of notice prior to withdrawing funds.
The FSA also notes there are two broad approaches when using unbreakable client money term deposits – at the asset manager’s discretion without the involvement of the client and with the consent of the client.
In its letter to asset managers, the regulator said: “The FSA is of the view that placing client money out in unbreakable term deposits, or in notice accounts, without the instruction or express consent of a client places all clients at unacceptable risk.
“Accordingly we expect your firm to cease placing new unbreakable client money deposits, and give notice on all notice accounts, from the date of this letter.”
It added that firms using unbreakable client money term deposits or notice accounts on the instruction, or with the express consent, of clients should explain to the regulator why they consider it appropriate given the risks and why the deposits are not being placed in the client’s own name.