FCA Amends Client Money Rules Following Industry Feedback

FCA Amends Client Money Rules after industry participants noted that it appears difficult to deposit client money at banks. What exactly changed?

24 January, AtoZForex The UK Financial Conduct Authority (FCA) has issued the changes to the rules in regards to client money that came into effect on the 22 of January. The regulator has been intending to amend the rules from 2012. That time, the FCA has carried out a survey, in which firms have reported client money holdings in 3 to 4 years unbreakable deposits (UDs).

FCA 30-Day Rule

The UK financial regulator has issued a letter following the survey to the firms expressing its concerns about the use of lengthy UDs. In order to address its concerns, back in 2014, the FCA has introduced the 30-day rule to make sure that the following points were met:

  • Entities carry out risk assessments on the banks where they deposit client money. Firms should be able to react to the risk assessment by either withdrawing or re-locating client money if needed
  • Client money should be readily available for distribution back to clients once is reasonably practicable in case of a firm’s failure.

Following the implementation of the 30-Day Rule, the FCA has received a feedback from the industry participants. The firms were noting that it appears difficult to deposit client money at banks. The banks, in turn, have cited the cost of the Liquidity Coverage Ratio (LCR) as their key reason for declining the deposits from firms. The LCR requires banks to hold highly liquid assets to cover 100% of their potential net cash outflow over the period of 30 days.

FCA Amends Client Money Rules Following Industry Feedback

The FCA further noted that there might be harmful to consumers in case a firm cannot deposit client money at a bank. This could lead to the client money being transferred back to clients rather than invested as needed. This also could result in client money being deposited with banks that do not meet the due diligence requirements of the firms.

The regulator has suggested its solution for the current situation. The FCA has introduced a new instrument, called client assets (term deposits) instrument 2018. The guidelines allow firms to hold a proportion of client money in a UD loner than 30 days, with certain conditions.

The recent FCA statement on client money deposits rules amendments reads:

“Where the requirement under sub-paragraph (2)(b) is not satisfied and provided that the client bank account is not included in a sub-pool, a firm may use a client bank account from which it will be unable to make a withdrawal of client money until the expiry of a period lasting: (a) up to 30 days; or (b) provided the firm complies with CASS 7.13.14AR, from 31 to 95 days“.

The official FCA Client money and unbreakable deposits report can be found here.

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