Written by Chris McCullam on Monday 6 January 2014
As the majority of the country returns to work after the Christmas break many lunch hours and weekends will be taken up queuing in retail outlets, customers clutching ill-fitting or unwanted items and the little slip of paper entitling them to an exchange or return of money. The recent news from Hartmann Capital means that, sadly, for some customers the next few months will be taken up with attempts to get a return of money of a very different sort.
A £1.2m shortfall in regulatory capital, the £1.5m shortfall in client money and the intention to utilise client money to fund outstanding operational costs was enough for the FCA to instigate a primary pooling event; drawing a line under (or around) the client money remaining to protect consumers. The ins and outs of the case are complicated by additional requirements from the FCA that Hartmann settle any outstanding non-derivative trades (where the client has provided money for such and they were due to settle at the time of the pooling notice) and to close out any open derivative positions.
While many of us were enjoying mince pies and delivering presents to friends and relatives the CF10a will have dug out the CASS Resolution Pack and bundled up reconciliation and account records for delivery to the FCA. The Resolution Pack will hold ‘a copy of the firm’s manual in which are recorded its procedures for the management, recording and transfer of the client money and safe custody assets that it holds’ but the non-trivial task of closing out derivatives and settling trades needs to be done and for a firm that wasn’t able to appoint a special administrator due to lack of funds, whether those key people (named in the CASS Resolution Pack or not) who are needed for these tasks would want to join the line of creditors is a big question.
Questions no doubt will be asked as to how the shortfall in client money occurred, the calculations can become complex when dealing with margined transactions, derivatives and the forex that Hartmann worked with but a 6% shortfall in client money is not insignificant and it may be that the ‘procedures for the management, recording and transfer’ of client money detailed in the resolution pack are in part responsible for the current situation. The CASS rules are complex as they try to cover a very broad spectrum of investment types and the many business models that exist in the market to support them. Getting a clear and consistent view of how client money flows into, around and out of a firm and how to classify it at different points in the trading cycle for different products is something that takes time and effort but having that view makes the job of understanding your client money obligations much easier.
As the various creditors of the firm circle around to stake their claim to what remains of the firm’s money the various clients will be searching out their receipts to support their entitlement claim on the client money pool. While it won’t be as quite as simple as joining the queue for the returns desk in Marks & Spencer we can hope that no one suffers from undue delays as the potentially protracted determination of the pool entitlement is done.