Responsible banking practices study 2021
Financial institutions increasingly recognise that climate change and other environmental, social and corporate governance risks jeopardise the world’s economy and financial system.
Client Asset Requirements under the microscope
Last December, the Central Bank issued a consultation on proposed enhancements to the Client Asset Requirements (the Consultation).
The Central Bank is proposing that the guidance be updated by enhancing existing obligations relating to some of the seven core principles set out in the guidance. These include segregation, designation and registration, reconciliation, daily calculation, client disclosure and consent, risk management; and client asset examination.
An overview of the proposed enhancements in each of the areas are outlined below:
The principle of segregation is considered central to ensuring client funds are sufficiently safeguarded in the event of the insolvency of an investment firm. The requirements state that client funds should be held separately to the investment firm’s assets, with accounting segregation maintained between these assets, thereby ensuring that client funds are protected.
The Central Bank is proposing to clarify in the guidance previously issued its expectation that client funds must be deposited directly into a third-party client asset account, thereby ensuring immediate segregation and further strengthening the safeguards around client assets held.
Under this principle, the investment firm must ensure that all client assets are clearly identified in both internal and third parties’ records, allowing them to be easily distinguished from the investment firm’s own assets.
No enhancements have been proposed by Central Bank in this area.
The principle of reconciliation requires investment firms to, firstly, keep accurate records and books to enable it at any time, and without undue delay, to provide an accurate record of the client assets held and the total held in each client asset account. Secondly, conduct regular reconciliations between its internal records and those external records of a third party with whom client assets are deposited.
Several enhancements are proposed by Central Bank in respect of this section, with these changes being a combination of new requirements, with some enhancements adopted to place existing CAR guidance on a legislative footing.
The key amendments are outlined below:
The overarching objective of these proposed enhancements is to ensure that investment firms maintain complete and accurate records, thereby ensuring that the correct amount of client assets are held and safeguarded by investment firms on behalf of their clients.
Under this principle, the investment firm must conduct a daily check to ensure that the aggregate of client assets held is equal to the amount of funds that should be held.
The Central Bank is proposing to align the process for the remediation of client fund differences or discrepancies, identified through the performance of the daily calculation, with the process for remediating reconciliation differences, as set out in Regulation 57(7) of the Client Asset Requirements. This would require investment firms to investigate, within one working day, the cause of any difference or discrepancy, identify the cause of the difference or discrepancy within five working days and resolve the difference or discrepancy as soon as practicable.
The objective of this amendment is to ensure that the internal records an investment firm uses in the performance of the daily calculation are accurate.
This principle governs the requirements surrounding the provision of information to clients on how and where their client assets are held and the resulting risks.
The enhancements proposed have been prompted by the increase seen in client asset holdings reported to the Central Bank by Irish regulated entities, including new and evolving market entrants.
Central Bank has identified many areas where enhancements could be made to this area, with the Central Bank proposing to introduce new provisions:
The purpose of these proposals is to enhance investor protection further and provide a standardised approach to more frequent reporting to clients.
Investment firms are required to ensure that systems and controls appropriate to identify risks in relation to client assets are established, and any mitigants to address these risks implemented.
Under this principle, firms are also required to develop and maintain a Client Asset Management Plan (CAMP), with Central Bank proposing some additions to the CAMP with the most significant points including:
The enhancements proposed have been driven by good practices and issues identified by Central Bank through direct client asset supervision and authorisation work.
The regulations require an external auditor to provide an assurance report annually on the investment firm’s safeguarding of client assets.
No enhancements have been proposed by Central Bank in respect of this principle.
The most significant proposed change that the consultation paper outlines for widening the scope of the client asset regulations to now includes Credit Institutions who are providing Mifid Investment Services. Currently, the Client Asset Requirements apply to a range of regulated entities authorised under several different regulatory frameworks. These include MiFID investment firms, non-MiFID investment firms, UCITS management companies and alternative investment fund managers who are also permitted to provide MiFID services. To date credit institutions are subject to the safeguarding requirements under the Irish MiFID Regulations when holding client financial instruments, so the CBI’s desire is now to expand the remit of credit institutions undertaking MIFID investment business to be fully subject to the Client Asset Requirements.
The Consultation will close on 10 March 2021, and following this, the Central Bank will publish a Feedback Statement on the Consultation, which will set out its final proposals. Once those proposals become law, the Central Bank plans to give in-scope regulated firms a 12-month transitional period to allow for timely preparation for compliance with the enhanced Client Asset Requirements.
This article first appeared in Finance Dublin in February 2021.
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