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What has happened?

In August 2020, the FCA issued a Dear CEO letter to firms in relation to their client money holdings, under the title We expect you to act to prevent harm to your clients. The issue raised is not brand new since it was previously raised by Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA in a speech in June on financial resilience and the industry’s response to Covid-19, but it may have slipped under the radar. At the time, Megan Butler commented;

……firms must maintain adequate arrangements to protect client money and custody assets according to our requirements. We are aware that some firms are reporting an increase in client money balances during the coronavirus pandemic. Firms are required to consider the best interests of their clients at all times. Pursuant to this, we expect firms to return balances which are unlikely to be reinvested in the short term. In any case, we are reviewing the financial positions of firms to identify those which are more vulnerable to failure and to ensure they have appropriate plans in place to wind-down in an orderly way if necessary.

What do you need to do?

This letter, which directly raises with firms the issues commented on by Megan Butler, is intended only for those providing a non-discretionary investment service and it is not applicable to client money balances held within a tax-efficient wrapper or under a collateral arrangement for margined transactions.

The FCA is aware that clients may have rebalanced their portfolios to mitigate volatility during the coronavirus pandemic. As a result, a number of firms that hold client money have reported an increase in client money balances, some of which have been significant, in their CMAR reporting from January to June 2020. Firms’ relevant Senior Managers are being asked to consider whether the firm needs to hold client money balances which are unlikely to be reinvested, or whether it would be in clients’ interests to place these balances directly with their own current or savings account providers. This may well be the case if firms do not pay interest on these balances.

The FCA considers it good practice in this period for firms to communicate with clients about increased client money balances to ascertain whether these should be returned to them or continue to be held by the firm to facilitate further investment in the short term.

The FCA will continue to review client money balances and will follow up with firms that report significantly increased balances.

How can we help you?

If you’d like to know more about how we can help you with your client money arrangements, wind-down planning or any other aspect of FCA compliance, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.