Regulatory zone - Client assets and living wills

1) Client assets

Client assets are assets (including money) that belong to a client but are held for safekeeping by a firm (typically investment firms and insurance brokers) on behalf of the client under a trust.  Firms will hold client assets to enable the provision of brokering, trading, portfolio or other services.  Firms that hold client assets are generally required to keep them separate from their own resources in order to protect them.  Client assets are distinct from deposits accepted by banks and building societies, which are not generally required to be held on trust and ring-fenced in the same way.

The main issues in the world of client assets are identified in this quick reference chart, and further expanded on below. 

Click here for the slides to our September 2010 seminar on the client assets regime.

Click here for Robert Purves, our guest speaker from 3 Verulam Buildings, on the regulation of client money under FSA rules and the consequences of the Lehman Brothers judgement

i) Lehman Brothers litigation

The 2009 High Court judgment in relation to the distribution of client money held by Lehman Brothers International (Europe) has been revisited (and to some extent overturned) by the Court of Appeal.  This complex case has served to highlight that the general law and rules around how firms must treat client money are difficult to apply in the context of the insolvency of a large firm.  See here for our analysis of the Court of Appeal judgment and its consequences, and see here for our analysis of the first instance High Court judgment.

A further appeal of the Court of Appeal judgment is now scheduled to be heard in the Supreme Court (commencing on 31 October 2011).  It is anticipated that the Supreme Court's judgment will not become available until early 2012.

ii) Dear CEO letter

On the back of a Dear CEO letter (see here) and a client assets report that raises multiple concerns about how firms are discharging their client assets obligations (see here), the FSA has adopted a low-tolerance approach towards CASS compliance.  The FSA’s newly-formed client assets risk team will conduct further visits, which are likely to result in widespread remedial work, and we expect further enforcement action in some cases.  See here for our analysis of the client assets report.

iii) Rule changes

The FSA is conducting a series of consultations on enhancements to the client assets regime.  The first of these consultation papers (see here) drew on some of the bold proposals on client asset recovery set out in a prior Treasury consultation on living wills (see below). Click here for our analysis of these proposals. 

In its second round of consultation, the FSA announced its intention to prevent investment firms using title transfer collateral arrangements in respect of retail clients.  Click here for an analysis of FSA's proposals in CP 10/15. 

Click here for our revised November 2010 client money/assets update.

Most recently, the FSA has enhanced the regime for client assets auditor reporting (see here), having expressed very serious concerns about the scrutiny applied by auditors during their annual reviews, and the quality of the reports that are being produced.  This new regime has the potential to increase the risk of enforcement for firms, and this danger (and how to mitigate it) is discussed further here.

iv) Advisers

For an analysis of how recent developments affect advisers read our report 'FSA gets tough on client money'.

v) Insurance brokers

The FSA has announced its intention to undertake a complete review of the rules for insurance brokers under CASS 5.  For an analysis of how recent developments affect insurance brokers, read our report 'Insurance brokers and client money: Time to put things in order'; and our article Client money: time to smarten up, which appeared in the September 2010 edition of Insurance Day.


2) Living wills

The concept of living wills showcases a new style of regulation, which is costly, intrusive and complicated – stress and failure management.  In a nutshell, the living wills regime requires firms to draw up and agree with their regulators detailed plans to restore those firms to good health in times of stress, or to unplug them from the financial system when they are at the point of collapse, in each case with minimal impact to the taxpayer and the markets.

With the support of both leading political parties in the UK, as well as in other jurisdictions, and with a current living wills pilot involving some 25 ‘systemically important’ firms across the continent well underway, it seems inevitable that living wills will soon become an everyday feature of regulation for many firms, including all deposit-takers, and most likely the larger investment firms, insurers, life offices and funds.

Please see here for our summary of the living wills regime, and here for our commentary on the impact of living wills.  To read more on the implementation of living wills as set out in an FSA speech, please click here.

If you would like to look at these topics in more detail, follow the sequence for developments or read the underlying publications, click here to access our daily monitoring reports on this subject - starting with the most recent; each report contains a summary and a hyperlink to the publication concerned.


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