Written by Chris McCullam on Wednesday 3 February 2016
As part of the Altus ‘10 years in Financial Services’ review I’ve seen significant events and changes in several areas of the industry; one that’s been a particular interest of mine is Client Money.
Using the flux capacitor feature (yes, a ‘Back to the Future’ film reference) in the online Financial Services (FS) Handbook; the earliest point you can time travel the CASS rules back to is 1st January 2005. In 2005 the CASS sourcebook ran to about 102 pages, today it stands at 326. So what happened over those 10 years to prompt three times the amount of regulation?
I think everyone reading this will think ‘Lehmans’ – and they’d probably be right. 2008 saw one of the worst financial disasters ever recorded (I won’t go into the time we bought a Citroen); as far as I can tell they’re still trying to sort the mess out (Lehmans, not Citroen). The impact of that collapse has had far reaching consequences that are still being felt today as firms, subject to client money rules work to implement changes to reconciliations for intraday (within the day) balances, profile the impact of the Delivery versus Payment (DvP) window narrowing and propositional updates as unbreakable term deposits cease to be viable.
In 2005 chapters 6 and 7 of the CASS sourcebook didn’t exist; Assets were covered in their own chapter, and Client Money was combined with Mandates. Assets and Cash now stand as separate chapters in their own right, at 36 and 108 pages respectively; all geared toward knowing where each penny and each unit is at any one time. You’ll have noticed that the section dealing with client money (7 & 7A) are actually longer than the whole sourcebook was back in 2005.
The breadth of coverage has also increased in line with the way consumers engage with investments. Some 10 years ago the fund supermarkets accounted for 20%-25% of fund sales but the lion share followed the same path through life company products. As advisers and investors realised the benefits of using a platform and started to hold cash and assets outside of traditional bank and life company products the level to which regulatory focus was needed increased. The way in which consumers needed to be protected had changed significantly.
So, where will the next 10 years take us?
Most platforms today operate a model where the client is expected or obliged to keep a small percentage of their portfolio wealth in cash, the drivers for this being assurance there is sufficient money available to pay fees and also support the aggregation model behind platform operations. This aggregation was born of a need to address the transactional costs associated with multiple individual purchases.
As banks adopt new technologies (such as mobile payments and blockchain), faster transaction times and better ways of managing many billions of individual transactions will cause costs to fall into the fractions of pence. We will also see the removal of the need to aggregate payments and transactions at all. Platforms will no longer need to hold cash on behalf of clients. Instantaneous bank transfers will mean a platform can hold a mandate over a client account so when fees are due, or a purchase instructed, the cash can be immediately debited from the clients account and credited to the adviser, platform or fund manager as appropriate. Record and reconciliation of transaction will be carried out as part of the transaction itself.
Does this mean we are heading to a world where client money won’t exist as a concept anymore? I doubt that, I think the need to ensure robust control and governance on the new technologies will shift the regulatory focus to a different area. Rather than the current weight of text sitting around ‘holding and management of Client Money and Assets’ I believe the focus will shift to responsible management of the Mandate giving access to multiple accounts.