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Government proposes client asset regulator

The Government has proposed the creation of the Client Asset Agency, a regulator to take responsibility for clients’ monies within FSA regulated firms.

In its latest consultation paper looking at potential resolution arrangements for investment banks, the Treasury proposes the creation of the CAA 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.

An asset regulator would also play a role post-insolvency to improve mechanisms that would make the compensation process more efficient.

The Treasury says those firms that hold client money would pay for the agency. It says an independent ‘client money and assets levy’ could even be added to the FSA fee block structure.

The paper also proposes that all investment firms introduce of an explicit requirement that counter parties offer facilities for their members to segregate client business into separate, ring-fenced accounts. It says clients could be made aware of the net margining benefits of unsegregated accounts, but the banks would also have to highlight the risks of placing money within the bank without a ringfence.

The paper says this would cost investment firms between £3m and £6m to implement, with additional costs of £3m a year.

The paper also proposes the creation of Business Information Packs, or ‘living wills’, which would help administrators glean the relevant information that would support and orderly wind-down of the failed firm. It says a BIP would also allow the authorities to better understand the risks to client funds and to be better prepared in communicating with the market when an investment firm fails.

Financial Services Secretary Lord Myners says: “The collapse of Lehman Brothers last October 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.

“Today’s proposals are about enhancing the UK’s reputation as the world’s premier destination for investment banking services.”

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