UK Financial Conduct Authority Consults on Allowing 31-90 Day Unbreakable Deposits for Holding Client Money

The Financial Conduct Authority has launched a consultation on changes to its client money rules (CASS 7) to amend the existing 30-Day Rule under which firms are prevented from placing client money in bank accounts with unbreakable terms of longer than 30 days. The FCA introduced the 30-Day Rule in July 2014 to restrict the practice of some firms of depositing client money in unbreakable deposits for periods of up to years. The placing of client money in lengthy unbreakable terms attracts the risk of diminution if a firm is unable to withdraw that money in response to market events and the risk that client money may not be available for distribution in the case of a firm insolvency. Therefore, the FCA was (and remains) of the view that placing client money in unbreakable deposits for long periods is incompatible with the purpose of the client money regime. However, it is now proposing to allow the use of 31-90 day unbreakable deposits following feedback from firms about an increasing reluctance of banks to provide 30-day unbreakable deposits.

The reduced appetite from banks appears to have arisen due to the interaction between the 30-Day rule and the liquidity requirements of the prudential regime. All client money is subject to the Liquidity Coverage Ratio which requires banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days. Unbreakable deposits of a maximum of 30 days are therefore capital inefficient.

The consultation outlines proposed changes to CASS 7 which would permit the placing of client money in unbreakable deposits of periods between 31-90 days, provided that firms produce a written policy containing prescribed information and also that they provide prescribed risk information to clients. Firms using longer term unbreakable deposits will also be subject to new record-keeping requirements. The proposed new rules set out ongoing obligations with which a firm must comply while using 31-90 day unbreakable deposits. No changes are proposed to the rules on the use of breakable deposits longer than 30 days.

The proposals will not apply to general insurance intermediaries that hold client money under CASS 5, to debt management firms that hold client money under CASS 11, or to client money received by a firm in its capacity as a trustee firm. The proposed rules will also not allow the use of unbreakable deposits in the context of client money sub-pools held at clearing houses, given that use of an unbreakable deposit in this context would have the potential to delay porting following a firm failure.

Comments on the proposals are invited by November 1, 2017. The FCA is expected to time its Policy Statement and final rules to coincide with the Handbook Changes for MiFID II implementation in January 2018.

View Consultation Paper.