An Introduction to the UK FCA’s Client Money Rules for Investment Firms

They make up one chapter out of 12 in a set of recently revised rules published by just one regulator. Yet it would not be hyperbolic to describe the new client money rules set out in the Client Asset Sourcebook (CASS) of the United Kingdom Financial Conduct Authority (FCA) as one of the most excruciatingly detailed and prescriptive set of operational obligations imposed on investment firms, including asset managers, of any introduced since the financial crisis. They came fully into force on 1 June this year. Dominic Hobson spoke to John David Thiede of Sidley Austin LLP, who was closely involved in their drafting during his time with the FCA.

The spectre of Lehman Brothers continues to haunt the asset management industry. Seven years after the firm failed, and more than three years since the final United Kingdom (UK) Supreme Court judgements in the Lehman Brothers client money cases, the failure of the investment bank in 2008 continues to reverberate through the buy-side. Asset managers in the UK have spent a large part of 2015 updating the terms and conditions agreed with clients and the banks and other third parties by whom they hold client money, and implementing the changes to systems and procedures, to take account of the third and final stage of a comprehensive revision of the custody and client money rules in the Client Asset Sourcebook (CASS) published by the UK Financial Conduct Authority (FCA). Following earlier sets of revisions introduced from 1 July and 1 December 2014, the third and final set of revisions under the 410-page Policy Statement 14/9 came into force on 1 June 2015 (PS14/9). [1]

Understanding, implementing and then complying with the new rules has entailed massive investments of time and resources, including in many cases, the appointment of dedicated staff.[2]  “These rules are so comprehensive, and so detailed, that most asset managers of any significance have hired dedicated staff to comply with them,” says John David Thiede, an associate in the EU and UK Financial Services Regulatory Group at Sidley Austin LLP. “If you have a reasonable amount of client cash going through your books, you are going to have at least a couple of employees that are responsible, day-to-day, for your client money operations. They need to know the FCA’s client money rules well. There is considerable complexity in the rules but, in fairness to the FCA, the legal regime that underpins them is complex. The rules are aimed at ensuring that under property, trust and insolvency law, client money is protected on the failure of an investment firm. What we have is quite a detailed set of regulations trying to provide for this outcome.”

Having a high-level understanding of the obligations laid down in these regulations should be every asset manager’s starting point, and there is no better guide to the FCA’s client money rules than Thiede, since he was previously at the FCA, where he co-led the review of the FCA’s client assets regime for investment business, helping to draft the rules that are now in force. As he points out, the FCA’s new client assets regime for investment business really represents an attempt to apply the lessons learned through the failure of Lehman in particular, and later of MF Global. “The failure of Lehman Brothers International (Europe) proved that the UK’s client money rules were not fit for purpose,” explains Thiede. “Although there were operational compliance issues at Lehman Brothers, the client money rules themselves were arguably a light touch in terms of what regulated firms were expected to be doing on a day-to-day basis. In particular, the distribution and insolvency rules that kicked in after Lehman’s failure were not up to the task. Before any money could be returned to Lehman’s clients, a series of legal questions had to be answered. Through that experience, the FCA learned a lot about what works and what does not in its client money rules and the distribution and insolvency rules that underpin them. PS14/9 is the culmination of all that work. We have a complete re-write of the FCA’s client money rules, with final proposals to revise the related client money distribution and insolvency rules expected to be published at the end of 2015 by the FCA and the Government.”

To view the complete re-write of the FCA’s client money rules please click here.


[1] Financial Conduct Authority, Review of the client assets regime for investment business: Feedback to CP13/5 and final rules, June 2014, Policy Statement 14/9.

[2] A useful summary of the changes, published by the FCA, can be found here.