A leading City of London law firm

Article

Tim Goodger comments on the FSA’s recent publication of “Client Money & Assets report” and subsequent announcements.

By Tim Goodger of Elborne Mitchell
First published: Elborne Mitchell website [22nd January 2010]

 “Apart from being an apparent reaction to the issues that have arisen in respect of client money rules in the banking sector, the FSA’s recent pronouncements seek to address issues that have been prominent in the insurance market for some considerable time.  In my view, the client money regime has been shown to be fraught with problems, particularly due to the existence of established law relating to trusts and insolvency in circumstances where the FSA has superimposed a statutory regime for the holding of client money and distribution of that money on an insolvency event. There has been an obvious tension between these three strands which has now been highlighted in a catastrophic way by the recent decisions in Global Trader Europe Limited and Lehman Brothers International (Europe).

Counterparty failure should be at the foremost in the thoughts of any parties dealing in the current market.  For regulators not to have addressed the various issues more proactively in the past and for counterparties to have assumed that intermediaries were compliant with client money rules (or to place reliance upon auditors of intermediaries to ensure it) underlines that it was not clear who should take responsibility for checking intermediaries’ compliance. Proper record-keeping along with regular adjustments and reconciliations of balances is key but where large entities are dealing in very large sums on a daily basis it will not necessarily address the problem of the time-lag between the receipt and processing of payments into the relevant trust accounts. The publication of this report highlights the FSA’s failure to give adequate direction in respect of its rules in the past and the apparent delay in making a bolder statement until now. The question will be whether the FSA has the resource to be tough on intermediaries, but in reality the rules need serious reconsideration.”