Written by Adam Jones, Guest Blogger on Wednesday 6 February 2013
Although not as high-profile as some of the FSA’s recent publications, CP12/22 (Client assets regime: EMIR, multiple pools and the wider review) may yet make a few headlines. Broadly speaking it’s in three parts; a fast track change to CASS and client money rules to support EMIR, new client money sub-pool proposals for all firms and business lines; and a wide ranging discussion on the future of client assets. For those interested, you can read our official response to the paper here.
For me, one of the most interesting things to come out of the CP (leaving aside the possible removal of the alternative approach to client money which really is a matter for another day!) is the introduction of sub-pools and the risks and benefits they might present to firms. Any change to client money rules tend to send shivers down the spines of compliance teams, but is there cause to be alarmed?
System capability and banking setup will determine the detailed answer to this question but, for now one interesting angle to consider is the impact on wrap platforms. These platforms are almost always focussed on retail, non-margined investment which is the FSA’s target area for clients who require the safety net of distinct client money sub-pools. In a simple example where the wrap platform holds client money for its clients directly, it is unlikely that this arrangement will need to be changed, and as such, sub-pools are unlikely to cause many ripples. That said, there are a couple of subtleties which could affect this;
1 – White labelling
In this scenario, the platform operates a white label for a firm andis the trustee of the client money held. All client money is held in platform owned bank accounts. Based on the content of CP12/22 it seems unlikely that there will be a mandatory requirement here for sub-pool division of client money. However, a key consideration for firms considering any kind of white label approach is the security of its client affairs. As such, there may well be a requirement from the firm in question to separate client money relating to white label client holdings into a sub-pool which is distinct from normal platform business. This would safeguard its clients in the event of platforminsolvency. The operation of multiple white labels alongside standard platform business could complicate matters even more and the platform’s cash processing systems will need to be robust enough to cope with this.
2 – Software as a Service
Here, the platform is providing technology for the firmbut the firm is the trustee of client money in all cases and uses their own client money accounts. The firm will likely need to separate its platform client money accounts from its other client money accounts as part of the new sub-pooling rules although the technicality of sweeping cash into the new sub-pool account structure will need to be handled by the platform.As such, a capability to support such sweeping will be needed and the platform will need to ensure that any funds being held or swept at any point are kept separate from funds which would populate other sub-pools.
3 – Investment Managers and platform trades
A further platform related issue with the sub-pool proposals is presented for investment managers who will have accounts for the receipt of client money for trades being processed. While CP12/22 does not explicitly mention IMs outside of the scope of derivative trading and margined investment, it is likely that IMs will need to split retail and non-retail investment into separate sub-pool accounts. This poses a potential paradox within the proposal. If we look at an example where a platform is placing trades on behalf of its clients (via a nominee arrangement) we see the lines between retail and wholesale investment being blurred. The platform is likely aggregating retail clients’ trades and placing these from the platform. This makes the cash movement to support these trades a wholesale movement which would need to be held separately from any retail investment. This could be seen as counter intuitive to the FSA’s aim of safeguarding retail clients against risk and as such as it may result in platform client money being held with margined investments or similar.
While still early days, the concept of sub-pool accounts generally seem likely to support the FSAs plan of ensuring retail clients are safeguarded during insolvency events. However, the platform space presents some complication, especially in light of the differing business models being used by providers. It seems likely that, whatever legislation is spawned from CP12/22, platform operators will need to assess their operations and processes on an individual basis to ensure they comply with sub-pool requirements.