On 3 December, the Central Bank of Ireland (Central Bank) published the paper ‘Consultation on enhancements to the Central Bank Client Asset Requirements, as contained in the Central Bank Investment Firms Regulations’ (CP133).
The Central Bank has carried out an assessment of the Irish client asset landscape and, based on this assessment, is now proposing to make amendments to the Client Asset Requirements (CAR), as is set out in Part 6 of the Investment Firms Regulations (S.I. No 604 of 2017) (Investment Firms Regulations).
Currently the CAR apply to MiFID investment firms, investment business firms, and, in certain circumstances, UCITS management companies and alternative investment fund managers. The CAR do not currently extend to credit institutions.
The changes seek to improve the CAR in order to ensure that client assets held by investment firms and credit institutions (collectively, Investment Firms), authorised by the Central Bank, are appropriately safeguarded. Significant changes include:
1. Bringing credit institutions undertaking MiFID investment business into scope – The Central Bank is proposing that credit institutions should be brought within the scope and application of the CAR, to strengthen client asset protection and reduce the risk of client exposure, particularly in an insolvency scenario.
2. Introducing new requirements regarding client disclosure and consent – The Central Bank has considered whether the CAR could be amended to ensure that the information disclosed by Investment Firms to clients relative to client asset holdings is appropriate, particularly in the context of emerging business models. The proposed changes relate to client agreements, client disclosure, client consent and client reporting. The Central Bank is of the view that enhancements could be made in respect of the following:
a. Investment Firms’ use of client financial instruments: The Central Bank is proposing to introduce new provisions to require Investment Firms to evidence that prior express consent has been received from a client allowing the Investment Firm to enter into arrangements for securities financing or otherwise use that client’s financial instruments;
b. Title Transfer Collateral Arrangements (TTCAs): The Central Bank is proposing to introduce new provisions regarding the establishment and termination of TTCAs; and
c. Investment Firms providing prime brokerage services: The Central Bank is proposing to introduce new provisions requiring regular reporting by Investment Firms providing prime brokerage services to clients, to ensure that clients have access to up-to-date and accurate information concerning any assets the Investment Firm holds on their behalf.
3. Introducing new CAR guidance to clarify the Central Bank’s expectations as to how client funds should be segregated – The Central Bank is proposing to clarify in CAR guidance its expectation as to how client funds should be segregated in accordance with Regulation 49(3) of the Investment Firms Regulations. The Central Bank views immediate segregation as a key safeguard in the protection of client funds, particularly in the event of an insolvency or other critical business interruption.
4. Introducing new requirements, and placing some existing CAR guidance on a legislative footing – The Central Bank has identified proposed enhancements to the reconciliation requirements in Regulation 57 of the Investment Firms Regulations which would effectively place CAR guidance G5 (1)(b) on a legislative footing. The overarching objective of these proposed enhancements is to ensure that Investment Firms maintain complete and accurate records, thereby ensuring that the correct amount of client assets are being held and safeguarded by Investment Firms on behalf of their clients. In addition, the Central Bank is proposing to enhance the CAR to require that an Investment Firm maintains a record of the actions it has taken to remediate a client asset reconciliation difference or discrepancy identified through the performance of a reconciliation process.
5. Introducing new requirements and CAR guidance on the contents of the Client Asset Management Plan (CAMP) – In determining whether any enhancements should be made to the risk management provisions in the CAR, the Central Bank has focused its review on the CAMP requirements as set out in Regulation 64 of the Investment Firms Regulations. In assessing what amendments should be made to the current CAMP requirements, the Central Bank took into account good practices and issues identified through direct client asset supervision and authorisation work. The Central Bank has proposed that Investment Firms develop and maintain a Client Asset Applicability Matrix (Matrix) in their CAMP. The purpose of the Matrix is to ensure that an Investment Firm has carried out a robust assessment of where client assets arise across its business lines and services.
Future considerations in respect of the CAR
In Section III of CP133, the Central Bank has set out its objective in seeking to ensure that the client asset regulatory and supervisory regime continues to evolve in order to take into account new developments in the Irish client asset landscape.
Accordingly, the Central Bank may in time consider other matters requiring further enhancement. As is set out in CP133, the Central Bank may seek to enhance CAR provisions regarding the Client Asset Examination, assurance report, and associated guidance.
When the consultation process is complete, the Central Bank intends to publish a feedback statement and the third edition of the Investment Firms Regulations. The Central Bank is proposing a transitional period of 12 months for Investment Firms following the publication of the third edition of the Investment Firms Regulations within which to comply with the revised CAR. A draft version of the third edition of the Investment Firms Regulations, reflecting the proposed enhancements set out in CP133, is contained in Schedule A to the CP133.
Any stakeholders wishing to submit a response have until the 10 March 2021. A link to CP133 can be found here.