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Compound Growth

10th March 2016

FCA set to discuss CASS Rules and the Special Administration Regime

The FCA have published a Discussion Paper (16/2) that looks to seek out feedback on a number of aspects of the client assets regime.

Of particular interest are the rules within CASS 7A that relate to client money distribution and their interaction with the Special Administration Regime (SAR).

Why the discussion?

Should an investment firm that holds client assets fail, its client estate is generally dealt with by the relevant insolvency practitioner (IP) in accordance with the Client Assets Sourcebook (section CASS 7A) and the Special Administration Regime (SAR).

Together, upon the failure of an investment firm, these two regimes look to ensure that client assets are returned to their owners as soon, and as intact, as possible.

What is the SAR?

The Special Administration Regime, or SAR, was established following the failure of Lehman Brothers in 2008. Created by the Treasury, SAR is a regime that specifically tackles insolvency for investment firms holding client assets.

The SAR lays out three particular objectives for administrators:

• That client assets be returned to customers as soon as reasonably practicable
• That engagement with market infrastructure bodies and authorities, such as clearing houses and exchanges, is done so in a timely fashion.
• That the firm is either rescued as a going concern or wound up in the best interests of its creditors

In 2013 HM Treasury commissioned Peter Bloxham to undertake an independent review of the SAR. Bloxham’s final report was published in January 2014 and contained various recommendations relating to SAR and CASS, as well as the procedures administrators undertake upon the failure of an investment firm.

The FCA last discussed proposals for the Client Assets regime in 2014, when consultation paper CP 13/5 was issued and followed up with Policy Statement PS14/9, entitled ‘Review of the client assets regime for investment business.’

DP 16/2 now sets out the FCA’s responses to both the recommendations made in Bloxham’s report, as well as to the ‘speed proposal’ that was previously raised by the FCA in CP13/5. This includes CP13/5 proposals relating to currency conversion, the definitions of a primary pooling event (PPE) and secondary pooling event, the treatment of post PPE receipts and additions to the CASS Resolution Pack.

Summary of topics DP16/2 raises:

• the method of valuing transactions to determine client money entitlement;
• transfer of the client money pool to another firm;
• need for CASS rules to address lessons learned from case law;
• the provision of additional information to clients and administrators ; and
• recommendations for the treatment of allocated but unclaimed and de minimis client money

At the same time, the regulator informs that HM Treasury is presently publishing a consultation containing a number of proposed changes to the SAR regime, which should be read alongside DP16/2 to fully comprehend the entire regime for the insolvency of a failed investment firm. 

It is anticipated that once the finalised legislative changes to SAR have been made, the FCA will consult upon detailed changes to the CASS rules. 

HM Treasury’s consultation closes on 20th April 2016 whilst comments on the topics discussed in the FCA’s DP16/2 should be provided to the FCA by 9th May 2016.

Client Money Rules Under Discussion (DP16/2)

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