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Client Asset Regime for Fund Service Providers

Ms Rosemary Hanna, head of the Central Bank’s Fund Authorisation and Supervision Division, gave a briefing on the new client asset regime at a workshop held by the Association of Compliance Officers in Ireland (ACOI) on 2 April 2014.

The briefing followed the Central Bank’s consultation on the Client Asset Regulations and Guidance which completed in late 2013.

Following completion of the consultation process, it was decided that separate sets of Regulations and Guidance would be put in place for investment firms and for fund service providers (FSPs).

It is anticipated that the finalised Regulations will be published this year.

Ms Hanna’s address to ACOI focused on the impact of the new client asset regime as it will apply to the operation of collection accounts by FSPs.

Collection accounts

Collection accounts are operated by FSPs for accepting investors’ money where 1) it is transferred from the investor to the FSP for onward transmission to the fund’s depositary and 2) the reverse process, i.e. where money is transferred back from the fund to the collection account for onward transmission to the investor.

The rationale for extending the client asset regime to collection accounts lies in the need to ensure the protection of investors’ money during the period when it is placed in collection accounts on subscriptions in and redemptions from a fund.

This new client asset regime is based on seven core principles:

  • Segregation – separation of the investors’ money from the FSP’s own money
  • Designation and Registration – clear identification of investors’ money in the FSP’s own records and in the records of external parties
  • Reconciliation – matching and comparing of FSPs’ internal records with third party records
  • Daily calculation – ensuring on a daily basis that the balance on the FSP’s collection account is equal to the amount that it should be holding
  • Client disclosure and client consent – provision of information to investors on where their assets are held and the resulting risks. As part of the implementation of this principle, it is proposed that a Client Asset Key Information Document (CAKID) setting out in plain language how investors’ money is held is provided to investors
  • Risk management – application of systems and controls to identify and mitigate risks to investors’ money. It is proposed that FSPs will be required to put in place a client asset management plan and appoint an individual responsible for the FSP’s compliance with the client asset regime
  • Client Asset Examination – engagement of an external auditor to report on the FSP’s client asset arrangements

Industry concerns

Ms Hanna acknowledged certain concerns expressed by the industry in its response to the consultation. These included the determination of ownership of the money in the collection account, the liability for funding a shortfall, the frequency of the calculation of the balance on the collection accounts and the usefulness of the CAKID in the context of all other information investors receive.

Ms Hanna concluded her address with the outline of the Central Bank’s continued engagement with the funds industry through the finalisation of the Client Asset Regulations and the complementing Guidance.

Contributed by Sergey Dolomanov