Written by Chris McCullam on Monday 25 November 2013
I’ve blogged before about the new approach the FCA are taking to regulatory supervision; the focus on earlier parts of the FS value chain, regulating earlier and more stringently at the factory and wholesale side is seen as a way to remove some of the market weaknesses before they can impact a consumer. Business model and strategy analysis is being made central to the approval process and regulation of firms under the FCA; an assessment of how the firm embeds fair treatment of customers and ensures market integrity in the way it conducts its business to give a view on how sustainable the business would be in respect of conduct, and of where future risks might lie. This is tied in to a more forward looking approach defined through their ‘Firm Systematic Framework’ and ‘Issues and Product Work’ aiming to understand what might happen rather than ‘Event-Driven’ regulation picking up the pieces and patching up rules.
However patching up of rules is necessary as you don’t know how markets would have developed and some rules are in place to try and manage situations you can’t foresee. One such rule set being patched up are the CASS rules, specifically the ‘client assets regime for investment business’ (CP13/5) and some good proposals for changing the way client money is handled in the event of a firm insolvency are being made. The proposals are all working toward giving the client the most amount of protection available in the event of a firm going to the wall.
The proposals look at speed of resolution, ease of transfer for market stability and application of ‘hindsight’ to determine value for margined transactions. The FCA are also taking a look through the DvP window; currently there is an exemption from client money rules here for expected settlement at T+3, however, the FCA have noticed that this exemption is being liberally applied to transactions that take much longer to settle and this presents an unacceptable risk. If this window is closed then there will be significant changes required to the business models for many fund managers.
With a regulator looking to assess how a firm’s business model meets the needs of clients and customers, not placing them at undue risk, or placing at risk the integrity of the wider financial services system one wonders if the application of hindsight to the use of this exemption should prompt a bit of foresight by firms into other rule exemptions currently used within their business model.
Hindsight is a wonderful thing…