The UK's Financial Conduct Authority has finalised future changes to its rules that govern so-called client money (i.e. customers' money) and custody assets which, taken together, it calls 'client assets.' The important dates for the compliance officer's diary are 1 July 2014, 1 December 2014 and 1 June 2015.

The UK's Financial Conduct Authority has finalised future changes to its rules that govern so-called client money (i.e. customers' money) and custody assets which, taken together, it calls 'client assets.' These changes affect approximately 1,500 regulated firms that carry out investment business, from the largest investment banks to the smallest investment advisor. Policy statement 14/9 contains the new 'final' rules.

The 'client money' rules are there to protect financial firms' (and notably insurance intermediaries') customers' money. They ensure a clear separation between money that belongs to customer and money that belongs to the firms. The changes-to-be include a rewrite of the client money rules for investment firms and substantial amendments to the custody rules in the client assets sourcebook (CASS). They will affect segregation, record-keeping, reconciliations and the ways in which investment firms cover 'client asset risks.' They will not affect general insurance intermediaries that only hold client money in accordance with CASS 5 or debt management firms that only hold it in accordance with CASS 11. The FCA will consult interested parties for a second time about the client money distribution rules later this year.

Its policy document states: "These proposed changes aimed to address issues coming out of lessons learnt from recent insolvencies, feedback from firms, observations by our Client Assets Unit [estd 2010] and lengthy discussions with various industry professionals, including trade associations and auditors."

There are three main dates for the compliance officer's diary.

• 1 July 2014, when certain 'clarifications' to rules and guidance come into force, introducing optional arrangements with which firms may choose to comply and limiting the placement of client money in new unbreakable term deposits. Firms will be allowed to operate multiple client money pools.

• 1 December 2014, when certain rules and guidance come into force relating to the provision of information to or obtaining the agreement of new clients and the documenting of agreements and arrangements with any new counterparties with whom firms deposit or otherwise place custody assets or client money. These include requirements to notify the client in question of certain matters if the firm "operates the banking exemption," i.e benefits from an exemption that banks have from the client money rules (whose 'application' the FCA is 'clarifying' in CASS 7.4 to 7.19), and uses template acknowledgment letters with new clients' bank accounts and transaction accounts.

• 1 June 2015, when all of the remaining rules and guidance come into force.

Rules for trustees

For trustee firms, the FCA is ceasing to apply the client money distribution rules to the client monies they hold and is to allow them to opt in to certain client money rules (CASS 7.20 to 7.35).

Rebuffing a CADD

The FCA was thinking of forcing every firm subject to CASS to maintain a Client Assets Disclosure Document, a stand-alone disclosure document for clients to read which could summarise the key provisions of their client agreements "which modified rights or protections that would otherwise be available to the client under the custody rules or the client money rules." The idea was to force the firm in question to review it and send a copy off to the client every year at least and, in addition to this, before the provision of services or "whenever the terms of any underlying agreement were amended." This extra layer of bureaucracy will not, mercifully, be called for.

Sizes of firms

Every firm must, once every year, determine whether it is a large, medium or small firm according to the amount of client money or safe custody assets it holds. As a rough guide, CASS 1A.2.7R divides CASS firms into three types: large firms, with more than £1 billion as the highest total amount of client money held during the their last calendar year or more than £100 billion as the highest total value of safe custody assets held during their last calendar year; medium firms, with £1 million and £2 billion in the former category and £10-£100 million in the latter; and small firms, with less than £1 million in the former category and less than £10 million in the latter.

Insurance intermediaries

The rules in CASS 5, which are not to change, cover every firm that receives or holds money in connection with any insurance mediation activity it undertakes. These are worth a brief glance.

In the case of a firm whose customers pay for their insurance by making payments such as BACS transfers, cash, credit/debit card payments, standing orders etc. and/or the insurers the firm deals with refund premiums to it for onwards payment to customers who have cancelled policies, or if the insurers it deals with pay claims money to it for onwards payment to customers, the firm holds 'client money' and must arrange for its protection.

If the firm does not have written agreements with each of the insurers it deals with to receive and hold money on the insurers' behalf, the money is held to be at risk. If it does have agreements but not all of them say that it can hold premiums as agent, some money is still at risk. If the firm holds premium refunds or claims money, but the relevant agreements do not say that it can hold those as agent, the money is held to be at risk.