Brexit and the changing regulatory landscape is pushing firms to carefully consider the implications and potential impact on the holding of client money and client assets.
Brexit and CASS
Many firms are considering moving their Home State regulator to Germany (under BaFIN) and France under the following regulators, but still wish to remain in the EU MiFID region:
- Autorité des Marchés Financiers (France) (AMF) the stock market regulator in France
- Registre Unique des Intermediaries en Assurance, Banque et Finance (France) (ORIAS), register the insurance, banking, payment services (IOBSP), financial investment advisors (CIF) and the related agents of service providers
- Autorité de Controle Prudentiel (France) (ACPR), French Prudential regulator
- French Takeover Panel.
The Bank of England has recently stated that up to 75,000 jobs could be lost through firms moving their Home State regulator to either France or Germany. This move could have potential issues for firms and clients, as the two main EU jurisdictions do not have specific CASS rules, rather client money protection is regulated under the Deposit Takers Regime. This means, many firms will potentially be in countries where the safeguarding and safekeeping of client assets and client money (CASS rules) would be different and not offer the same level of protection.
Countries where client money is protected under a deposit taker regime could create two sets of problems:
- protection levels differ from country to country: Countries, which follow the MiFID requirement, may only protect client monies or assets up to €85,000. This could lead to potential substantial loss where a client has more than €85,000 held at an institution
- a firm, which is an investment only firm and not a bank, might be required to hold a banking licence: This would mean applying and obtaining authorisation as a bank to obtain deposit taker permissions. This would also create a requirement for a larger amount of firm capital held under CRD IV and affect the firm’s ICCAP. This could call into question what service lines are still viable/profitable.
What do firms need to consider?
- firms will have to make decisions about key areas of the business, which hold client assets and determine whether clients would potentially move their investments to UK firms who could afford adequate protections for their client money and client assets.
- firms may have to change their Home State regulator. This becomes very complex depending on the jurisdictions. Some of the complexities are setting up new legal entities, for example, in Germany the requirement could be that even if the legal entity is a holding company, this company and any connected companies would be subject to BaFIN requirements and may be subject to both investment BaFin authorisation in Frankfurt or BaFIN Banking and Prudential regulation in Bonn.
- firms would have to monitor those businesses in the other jurisdictions from afar.
Special administration regime (CASS 7A)
Following the 2008 collapse of Lehman Brothers International (Europe, LBIE), the HM treasury created an insolvency regime for investment firms called the Special Administration regime (SAR). The SAR works with the client assets sourcebook (CASS) and in particular the client money distribution rules (CASS 7A), to provide a mechanism under which client assets can be retired to clients in the event of an investment failure.
The Consultation Paper, CP17/2 proposed changes to CASS in relation to an investment form failure and their interaction with the SAR. Collectively, these proposals aim to speed up the distribution of client assets, improve consumer outcomes and reduce the market impact of an investment firm failure.
For further information on our CASS services please contact Patricia Sanjurjo-Razzell.