Posted on 20 December 2009
Two issues have been reported concerning the holding of client assets and the return of client money in the event of a failure by an investment firm.
The CASS rules provide for client money to be identified and promptly paid into client accounts, segregated from the firm’s house accounts. The firm holds this money on trust for the client. On the failure of a firm, the rules provide for client money to be pooled (into a Client Money Pool (CMP)) and distributed back to those that are entitled to it.
In a ruling on one of the many cases following the collapse of Lehman Brothers, the judge ruled that:
- The trust over client money takes effect from the moment client money is received by the firm and not from when it is segregated.
- The CMP consists only of client money in the firm’s segregated client accounts. Money which is not segregated correctly does not form part of the CMP.
- There is no justification under CASS or the general law for any shortfall in the CMP to be corrected by topping it up using client money held outside the CMP or from a firm's general estate.
In effect, the judge found that the CASS rules set out how a firm ought to hold client money, but do not provide a mechanism for correcting non-compliance with those rules.
Separately, HM Treasury (HMT) has published a consultation paper entitled “Establishing resolution arrangements for investment banks”. This consultation paper provides further detail on the Government’s thinking, and outlines a package of more than 30 policy initiatives aimed at mitigating the impact of the failure of an investment firm.
These include the development of resolution plans for firms, a set of special administration objectives and new responsibilities to be placed upon the board.
The paper also contains proposals for specific new requirements for investment firms, which would be mandated by FSA rules. These include:
(i) creating a role for “business resolution officers” (BROs)
(ii) requiring the implementation of “investment firm resolution plans” and the development of “business information packs” (BIPs)
(iii) establishing continuity of service measures for staff and suppliers; and
(iv) requiring firms to hold liquid operational reserves.
The Government is proposing steps to improve outcomes for the clients of a failed investment firm.
The paper also deals with the impacts of the proposed policies on the unsecured creditors of a failed firm and discusses possible changes to the International Swaps and Derivatives Association (ISDA) Master Agreement.
Related Link: Lehman Bros ruling
Related Link: HMT Consultation paper
