In March last, the Central Bank of Ireland published its ‘Review of the Regulatory Regime for the Safeguarding of Client Assets’, declaring its plans to strengthen the protection of client assets held by investment firms.
The Review is the result of the findings of a Client Asset Task Force, comprised of risk professionals from the financial industry and sought a review of the regime currently in place for client asset protection.
The Central Bank plans to enhance security through “tougher supervision, better rules, stronger audits, assumption of new powers and more accountability for firms’ directors”, said Matthew Elderfield, Deputy Governor of the Central Bank.
Client Asset Requirements
The Review recommends that the current Client Asset Requirements be revised to make greater use of higher level principles, to introduce improved flexibility and to set out the rules in a manner that will avoid unnecessary, and potentially contradictory statements, in turn, increasing levels of compliance.
It is also recommended that where firms are authorised to hold client funds, a maximum of 10% of turnover on any unregulated business that they write be imposed.
A joint consultative group from the Central Bank and the investment industry is now to be established to develop detailed proposals to revise and improve client asset requirements.
The risk advisors found that the Central Bank had no power to intervene directly with regard to a firm’s management, short of withdrawing its authorisation, or winding the company up. The principal recommendation of the Review is that the Central Bank ought to be given the power to apply to the High Court for the appointment of an administrator, to take control of an investment firm, in the event that it has client asset concerns. Consequently, the Central Bank has requested that the Department of Finance include provisions to appoint administrators to investment firms in the new legislation; the Central Bank (Supervisions and Enforcement) Bill 2011.
The Review also recommends that the Central Bank establish an internal specialist team to supervise the management of client assets and compel investment firms to appoint a director, or senior manager, pre-approved by the regulator, to be responsible for client assets.
The need for improved external audits was clearly substantiated; the Review found that 284 breaches were identified by Central Bank supervisors in 43 inspections. It is proposed that external audit reports be replaced by an annual ‘client asset examination’. The examination will be derived from the new ‘client assets management plan’ document, to be compiled by investment firms, disclosing in detail their business model and framework for the safeguarding of client assets.
In light of the recent failure of prominent investment companies, where considerable client asset protection issues arose – including Lehman Brothers, MF Global, and in Ireland, Morrogh Stockbrokers and Custom House – the publication of the Review and the Central Bank’s declared intention to strengthen the protection of client assets is important progress in preventing the repeat of such cases, and towards improved protection for investors.
Ireland - Whitepapers & Webinars