The UK's Financial Conduct Authority has long wanted to speed up the distribution of clients' assets, improve results for customers and reduce damage to the market in the event of an investment firm failing. It has now changed the rules in its Client Assets Sourcebook (CASS) accordingly.

When Lehman Brothers International (Europe) failed in 2008, HM Treasury created an insolvency regime for investment firms called the ‘Special Administration Regime’ (SAR), which works with CASS and in particular the client money distribution rules (CASS 7A) to provide a mechanism under which clients' assets can be returned to clients in the event of a firm's failure.

The FCA has decided to allow a firm, after a primary pooling event (PPE), to transfer the client money pool (CMP), in whole or in part, to another entity as long as certain conditions are met. These conditions dictate that:

• the transfer does not result in other clients receiving less than they would otherwise receive in a distribution or transfer;
• subject to the SAR regulations, the transferor obtains specific consent from the client to the transfer or has in place a written agreement with the client which allows the firm to transfer the client’s money to another person;
• the transferor either obtains a contractual undertaking from the transferee that says that the money being transferred will be held as 'client money' in accordance with CASS 7 or is satisfied that the transferee will take adequate measures to protect the client's money after the transfer; and
• certain client notifications are made.

The FCA adds: "It is for the firm to assess that the transferee will apply ‘adequate measures’ to protect client money following a transfer, in the particular circumstances of the transfer. The rules permit transfers to non-CASS firms (as well as CASS firms). We are not adopting de minimis values on obtaining client consent. A firm can include consent provisions in its terms of business with clients, which means that it does not need to obtain consent at the time of the transfer."

CASS 6.7.2R now says that before a firm takes any steps to dispose of a safe custody asset it must try to return it to the relevant client or transfer it to another person for safekeeping on behalf of the client and take reasonable steps to notify the client of its proposed course of action for disposing of the safe custody asset. The firm is not required to try to return or transfer a safe custody asset if the client to whom the safe custody asset belongs has told it that it disclaims all its interests in the safe custody asset. The firm need not notify the client if it is able to return the safe custody asset to the relevant client or transfer it to another person on behalf of the client in accordance with CASS 6.7.8R; or the client to whom the safe custody asset belongs has told the firm that it disclaims all its interests in the safe custody asset.

If there has been a transfer of business (including client assets) and if clients have not been given the opportunity to consent to the specific transfer, the FCA says that clients should be made aware of the transfer and its implications quickly. In response to feedback, the FCA has extended the period in which firms can send notifications to clients to 14 days.