CP17/29 : Client money and unbreakable deposits — FCA — GB

Consultation Paper
CP17/29*
August 2017
Client money and unbreakable deposits

CP17/29 Financial Conduct Authority
Client money and unbreakable deposits
We are asking for comments on this Consultation Paper (CP) by 1 November 2017. You can send them to us using the form on our website at:
www.fca.org.uk/your-fca/ documents/consultation-papers/ cp17-29-response-form. Or in writing to:
Client Assets Policy
Client Assets and Resolution
Department
Financial Conduct Authority
25 The North Colonnade
Canary Wharf London E14 5HS
Email:
CP17-29@fca.org.uk
How to respond Contents
1 Summary 3
2 The wider context 5
3 Proposed amendments affecting unbreakable deposits 7
Annex 1
Questions in this paper 13
Annex 2
Cost benefit analysis 14
Annex 3
Compatibility statement 19
Annex 4
Abbreviations in this document 21
Appendix 1
Draft handbook text returns you to the contents list takes you to helpful abbreviations How to navigate this document onscreen

CP17/29
Chapter 1
Financial Conduct Authority
Client money and unbreakable deposits
1 Summary
Why we are consulting
1.1 This consultation paper (CP) consults on minor amendments to the Client Assets
sourcebook (CASS). Some investment firms are experiencing difficulty depositing client money at banks in accordance with CASS requirements. The proposals in this CP are intended to address the potential harm to consumers resulting from this. Who this applies to
1.2 This CP proposes changes to CASS that are applicable to certain regulated firms that
hold client money in relation to investment business. The proposals will not apply to general insurance intermediaries that only hold client money under CASS 5 or debt management firms that only hold client money under CASS 11. The proposals will also not apply to client money received by a firm in its capacity as a trustee firm.
1.3 This CP will interest banks with whom firms deposit client money. It may also interest
auditors in relation to the provision of client assets audit reports.
1.4 The proposals in this CP will ensure consumers continue to be appropriately protected
by firms receiving or holding their client money in accordance with CASS. We welcome feedback from consumer and consumers groups on these proposals. The wider context of this consultation
1.5 Some firms are experiencing difficulty depositing client money with banks. Feedback
from industry strongly suggests that this is partly due to the unintended combined effects of a rule1 in the client money rules (CASS 7) and the prudential liquidity rules applicable to banks. CASS 7 prevents firms from placing client money in bank accounts with unbreakable terms of longer than 30 days (30-Day Rule). Banks have cited the cost of liquidity requirements associated with such 30-day money as their main reason for their reduced appetite for client money.
1.6 Our proposals aim to prevent the potential harm to consumers if a firm reaches a point
where it is unable to deposit client money at banks which meet its risk tolerance. This could result in client money being returned to clients against their wishes or being deposited with banks that do not meet due diligence requirements.
1.7 We are consulting on an amendment to the 30-Day Rule to ensure consumers
continue to be appropriately protected by firms holding their client money. See
Chapter 2 ‘The Wider Context’ for further background.
1 CASS 7.13.13R(3)

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What we want to change
1.8 We are seeking views on the following proposed changes to CASS:

permit a firm to deposit an appropriate proportion of client money in an unbreakable
deposit (UD) of a maximum of 90 days
where a firm deposits client money in a UD of 31 – 90 days, it must comply with
certain conditions
require CASS medium and large firms to report client money in a UD of 31 – 90 days
in their client money and asset return (CMAR)
1.9 Our proposals are intended to enhance our client assets regime and improve
consumer outcomes by ensuring client money continues to be appropriately protected when it is held by firms. We welcome feedback from respondents on whether there are any unintended consequences that could result from our proposals and how these might be avoided. Outcome we are seeking
1.10 Our proposals aim to make it easier for firms to place client money in client bank
accounts, as banks should be more willing to accept this client money on a longer term deposit. This in turn will ensure clients don’t suffer harm as a result of firms needing to give money back to clients or needing to place client money at banks they would not otherwise choose. Measuring success
1.11 We propose to monitor the placement of client money in UDs through firms reporting
this information in the CMAR. Success will be firms continuing to be able to place client money in bank accounts, thereby helping to ensure that client money is not rejected by firms. Next steps
1.12 We want to know what you think of our proposals. Please send us your comments by 1
November 2017.
1.13 To submit a response, please use the online response form on our website or write to
us at the address in the contact box at the beginning of this CP.
1.14 Following consideration of feedback to this CP, we aim to publish a policy statement
making final rules. Our current expectation is for the rules to come into force concurrent to the Handbook changes required by the Markets in Financial Instruments Directive II (MiFID II) coming into force. The instrument in Appendix 1 has been drafted as applied post-MiFID II.

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Client money and unbreakable deposits
2 The wider context
The harm we are trying to address
2.1 CASS 7 applies to money received or held by a firm for, or on behalf of, a client in the
course of, or in connection, with its MiFID business, designated investment business or relevant ISA business.2 Pursuant to CASS 73 , firms are required to deposit client money in an account opened with an authorised bank, a central bank or a qualifying money market fund.
2.2 In July 20144
we introduced the 30-Day Rule in response to behaviour we had seen in the market, where some firms were depositing client money in three to four year UDs. We note that, generally speaking, the nature of client money is that it is held by a firm on a transitory basis en route to being invested.
2.3 The policy rationale behind introducing the 30-Day Rule was:

firms are required to carry out risk assessment on the banks with which they deposit
client money and should ensure they are able to react to that risk assessment by withdrawing and re-locating client money if necessary
client money must be readily available for distribution to clients in the event of the
failure of a firm
2.4 In that paper, we set out our view that the use of UDs with lengthy terms to hold client
money is incompatible with the purpose of the client money regime. The client assets regime aims to ensure client money held by a firm is well protected and, in the case of a firm insolvency, as much of the client money as possible can be returned to clients as quickly as possible.
2.5 We have received strong feedback that some firms are experiencing increasing
difficulty depositing client money at banks. Feedback from industry suggests this is partly due to the unintended combined effects of the 30-Day Rule and the prudential liquidity rules applicable to banks. The liquidity requirements applicable to banks under the Liquidity Coverage Ratio (LCR) require banks to have highly liquid assets to cover 100% of their potential net cash outflows over 30 days. All client money is therefore subject to the LCR. Banks have cited this cost associated with 30-day money as the main reason for their reduced appetite for client money. Industry feedback suggests the issue has been exacerbated by the significantly increased amount of client money in the system and low interest rates. 2 CASS 7.10.1R 3 CASS 7.13.3R 4 See PS14/9: Review of the Client Assets Regime for investment business, paragraph 7.98–7.106

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Client money and unbreakable deposits
2.6 The LCR is a component of the Basel III reforms, which are global regulatory standards
on bank capital adequacy and liquidity. The LCR standard has been implemented in the EU through the Commission Delegated Regulation (EU) 2015/61.5
2.7 There may be potential harm to consumers if a firm reaches a point where it is unable
to deposit client money at a bank. This could result in client money being returned to clients against their wishes and firms not being able to provide services to clients, or client money being deposited with banks outside the firm’s risk tolerance. The scale of the difficulties and the potential consumer outcomes differ from firm to firm. How it links to our objectives
2.8 Our proposals aim to improve protection for consumers by ensuring that firms can
continue to deposit client money at appropriate banks.
What we are doing
2.9 We are seeking feedback to our proposals set out in Chapter 3.
Equality and diversity considerations
2.10 We have considered the equality and diversity issues that may arise from the proposals
in this CP. Overall, we do not consider that the proposals in this Consultation Paper adversely impact any of the groups with protected characteristics ie age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation and gender reassignment.
2.11 We will continue to consider the equality and diversity implications of the proposals
during the consultation period, and will revisit them when publishing the final rules.
2.12 In the interim, we welcome any input to this consultation on such matters.
5 European Commission: ‘Commission Delegated Regulation (EU) No2015/61 of 10 October 2014 to supplement EU Regulation (EU) No 575/2013 of the European Parliament and Council with regard to liquidity coverage requirement for Credit Institutions’, http://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015R0061&from=EN.

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Chapter 3
Financial Conduct Authority
Client money and unbreakable deposits
3 Proposed amendments affecting unbreakable deposits
3.1 In this chapter, we outline:

the pre-consultation work that we have carried out in the lead up to this paper
our proposed changes to CASS 7 affecting the length of term a firm can deposit
client money in a UD
further explanation of certain aspects of the proposal
Pre-consultation work
3.2 In the first quarter of 2017, the FCA formed a technical working group comprising
a small number of firms (each representing an industry association) in order to investigate this issue in greater detail. We would like to thank the technical working group for their feedback.
3.3 Firms, banks and industry associations have also independently provided information
to the FCA in connection with this issue.
3.4 We have worked with the Bank of England to finalise the proposals in this CP.
The proposals
3.5 Feedback from industry has consistently recommended that if the 30-Day Rule were
amended to allow firms to place client money in bank accounts with unbreakable terms of longer than 30 days, banks would regain some appetite to hold client money. This is because client money held in UDs of longer than 30 days would not be as expensive to banks, as it would not attract the same treatment under the LCR. A range from 35 to 95 days has been suggested.
3.6 In this CP, we propose:
a. Firms are permitted to deposit an appropriate proportion of client money in client bank accounts with unbreakable terms or notice periods of between 31 and, up to a maximum of, 90 days (‘90-Day UDs’). b. Prior to a firm depositing client money in 90-Day UDs, it must:
i. produce a written policy that sets out:
– the maximum proportion of client money held by the firm, on a per business line basis, that it considers would be appropriate to hold in such accounts having

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Client money and unbreakable deposits regard to the need to manage the risk of the firm being unable to access client money when required, for example, to meet client instructions – the firm’s rationale for reaching this conclusion, and – the measures the firm will put in to place to manage the risk of the firm being unable to access client money when required, taking in to consideration a number of factors including historic and expected client money receipts and payments and stress scenarios
ii. provide each client with a written explanation of the risks that arise as a result of
the longer notice periods for withdrawals
c. Whilst a firm uses 90-Day UDs, it must:
i. take appropriate measures to manage the risk of the firm being unable to access
client money when required, for example, in order to carry out instructions for clients or act on a client’s behalf
ii. keep its written policy under review, amending it where necessary
iii. for CASS medium and large firms, report the 90-Day UDs in their CMAR under
section 3, data field 136
iv. before holding or receiving client money from new clients, provide them with a
written explanation of the risks that arise as a result of the longer notice periods for withdrawals
3.7 The proposed rules include an evidential provision setting out in more detail how a
firm can demonstrate compliance with the requirement to take appropriate measures to manage the risk of being unable to access client money when required. We are not proposing at this time a prescriptive ‘stress testing’ or liquidity risk management regime such as that set out in BIPRU 12.4, which is applicable to some firms in the context of their liquidity requirements. BIPRU 12.4 for example sets out detailed requirements that a firm must consider, including the potential impact of a range of scenarios on their liquidity position and different liquidity risk mitigation tools. In this CP we are proposing a less prescriptive set of provisions that a firm should consider to manage the risk of being unable to access client money when required.
3.8 We propose requiring a firm to retain the written policy (and any subsequent versions)
for a period of five years. We also propose requiring a firm to include the written policy in its CASS Resolution Pack (CASS RP).
3.9 The proposed rules make it clear that firms will not be in breach of the rules in cases
where the unbreakable term expires on a day the relevant bank is not open for business, provided that the firm is able to make the withdrawal of client money on the next day the bank is open for business.
3.10 The proposed rules do not allow the use of UDs in the context of client money subpools. Client money sub-pools are permitted in the CASS rules in the context of
regulated clearing arrangements between firms and clearing houses and are intended 6 CASS Small firms are not subject to the CMAR (SUP 16.14.1R)

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Client money and unbreakable deposits to facilitate the porting of client positions and monies where possible in the event of a firm failure. The use of any UD would not be appropriate in this context as this would have the potential to delay porting following a firm failure.
3.11 We note that firms are not prohibited from holding client money in long term breakable
deposits. Trustee firms are not prohibited from placing trustee firm client money in UDs7 (although the proposals in this CP would be applicable to client money these firms hold in a capacity other than as trustee firms). Further explanation
3.12 The risks of placing client money in lengthy unbreakable terms remain: the potential
for client money not being available for distribution to clients in the case of a firm insolvency and the inability of a firm to react to market information, putting all client money in a UD at risk of diminution. However, we have considered the 30-Day Rule in light of the current market environment for depositing client money.
3.13 In proposing an amendment to the 30-Day Rule, we have taken into account the
timelines of CASS firm insolvencies, the need for a firm to react promptly to its due diligence and the current market for client money deposits. We have also considered the PRA’s proposed regime applicable to banks that hold client money (see paragraph 3.17). 90 Days
3.14 As set out above, our view remains that the use of UDs with lengthy terms to hold
client money is incompatible with the purpose of the client money regime. However, we recognise the difficulties that firms are having in placing client money and the consequent, potential harm to consumers.
3.15 Keeping in mind our statutory and operational objectives, our position is that any
amendment to the 30-Day Rule must strike the right balance between upholding our policy intention (as set out in PS14/9) and having a regime that in practice allows firms to deposit their client money at banks.
3.16 In our pre-consultation discussions, feedback indicates that 90-day deposit products
are available for firms at banks and shorter term products are also available, but less widely so. However, to take into account (i) the fact that in certain three-month periods there may be (up to) 92 days rather than 90 days (eg March to May or July to September), this being relevant for term deposits, and (ii) the expiration of a 90-day notice period may fall on a weekend or a bank holiday, the suggestion has been that the CASS rule should permit up to 95-day term deposits or notice periods. Preconsultation discussions also indicated that term deposits are more administratively burdensome than notice accounts and more infrequently used. In addition, we understand that market convention is that if the expiration of a notice period falls on a Saturday, money is released the day before (ie Friday), whereas if the expiration falls on a Sunday, money is released the following day (ie Monday). 7 CASS 7.13.3R(4)

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3.17 On 13 July 2017, the PRA published Consultation Paper CP13/17 on Pillar 2 liquidity.8
In CP13/17, the PRA outlined its view that a 90-day horizon is essential to ensure an effective monitoring of firms’ liquidity risks and proposed to monitor credit institutions’ contractually due cash flows with daily granularity of up to 92 days (to accommodate months with 31 calendar months).
3.18 Should the PRA implement its proposal, an amendment to the 30-Day rule to permit
client money to be held in 90-Day UDs would ensure such deposits fall within the PRA’s proposed monitoring window for credit institutions. Conversely, an amendment of the 30-Day Rule to permit longer than 90 days would take the portion of client money held in a 90+ day account outside the PRA’s proposed monitoring window.
3.19 We note that under the Financial Services Authority’s previous liquidity monitoring
regime, banks were required to monitor their liquidity on 30 and 90-day bases. We therefore expect a number of banks are likely to have retained the systems and products set up to monitor and offer 90-day UDs. We note that setting the maximum unbreakable term of a client money deposit for any period longer than 30 days would not attract the same treatment under the LCR, which industry has cited is the main reason for bank’s reduced appetite for holding client money.
3.20 In light of this, in our view, setting the maximum unbreakable term of a client money
deposit at 90 days for a proportion of client money achieves the appropriate balance for the following reasons:

A range of products from 31 to 90 days are available and offered by banks, but up to
90-day products are more attractive to banks.
Extending the rule to 90 days will allow firms to place client money in bank accounts,
while protecting client money in line with the original policy intention.
As set out in this and other policy documents, one overall aim of the client money
regime is to ensure that, in the event of a firm’s failure, client money can be returned to clients or transferred to another service provider9 as soon as possible. While not all client money will necessarily be returned to clients or transferred within 30 or 90 days following a firm’s failure, where client money is ‘stuck’ in lengthy UDs, this process cannot start, potentially to the detriment of all clients expecting to share in the client money pool. That said, we recognise the need to balance firms’ compliance with the CASS rules on an ongoing basis and the rules in place to ensure client money can be returned as swiftly as possible in the case of a failure.
We consider that ensuring that client money deposits fall within the 31 to 90-day
monitoring period proposed by the PRA furthers our consumer protection objective by ensuring that banks and certain investment firms will also monitor these deposits as part of their own liquidity management.
As noted above, pre-consultation discussions indicated that term deposits are
infrequently used for client money compared to notice accounts, as they are administratively burdensome compared to notice accounts. Partly with this in mind, a maximum of 92 days is not reflected in the proposed rules. The proposed rules directly address the issue of the expiration of a 90-day term deposit or notice 8 Pillar 2 liquidity – CP13/17: http://www.bankofengland.co.uk/pra/Pages/publications/cp/2017/cp1317.aspx 9 PS17/18, CASS 7A and Special Administration Regime review

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Client money and unbreakable deposits account falling on a bank holiday, so firms placing client money in 90-day products should not be in breach of CASS 7 in this event. Q1: Do you agree with our proposal to permit firms to deposit client money in UDs of up to 90 days? If not, why not? Please provide specific examples. Q2: Do you agree with our proposal that where the expiry of a notice period falls on a day the bank is closed, provided that the firm is able to make the withdrawal on the next day that bank is open for business, this is not a breach of CASS 7. If not, why not? Please provide specific examples. Q3: Do you agree with our proposed conditions for firms that deposit client money in UDs of greater than 30 days? If not, why not? Q4: Are the provisions setting out how a firm can demonstrate compliance with the requirement to take ‘appropriate measures to manage the risk of the firm being unable to access client money when required’ understandable and achievable? Would it be helpful to set out more detailed requirements and guidance such as for example those found in BIPRU 12.4 for considering stress scenarios or developing a contingency funding plan? Q5: Do you agree with our policy to require a firm to include the written policy in its CASS RP? If not, why not? CMAR reporting
3.21 As set out above, for CASS medium and large firms, we propose requiring them to
report 90-Day UDs in their CMARs under section 3, data field 13.
3.22 Given that firms already complete the CMAR on a monthly basis and will be required to
monitor the amount of client money held in 90-Day UDs as part of the proposals set out in this paper, we do not consider it to be overly burdensome for firms to report this information in an existing field of the CMAR. Our intention is to use this information to help us supervise the use of these deposits, to understand which firms are using them, which banks are offering them and on what term lengths.
3.23 We have proposed amending the Guidance to the CMAR10 on how these UDs should
be reported by firms. This includes the table below as an illustration of how firms should complete data field 13 for UDs. Column B should be used to set out both the name of the institution and the length of the unbreakable term. Column C should be used to list the amount of client money in ‘up to 30 day’ deposits and then separately itemise the amount of client money in each different deposit term length. In the table below, at Bank A Ltd the reporting firm holds £500,000 in up to 30-day deposits, £25,000 in 35-day UDs and £30,000 in 90-day UDs, and at Bank B Ltd the reporting 10 SUP 16 Annex 29A

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Client money and unbreakable deposits firm holds £100,000 in up to 30-day deposits, £60,000 in 35-day UDs and £50,000 in 90-day UDs.
Table 1: Illustration of how firms should complete CMAR section 3, data field 13 if using a
90-day UD
A B C D E
Type Institution
Client money balances (£k)
Country of incorporation of the institution
Is this a group entity?
Bank Bank A Ltd 500 UK No
Bank Bank A Ltd unbreakable 35 25 UK No
Bank Bank A Ltd unbreakable 90 30 UK No
Bank Bank B Ltd 100 UK No
Bank Bank A Ltd unbreakable 60 60 UK No
Bank Bank A Ltd unbreakable 90 50 UK No etc
Q6: Do you agree with our proposal to require CASS medium and large firms to report UDs in this way? If not, why not.

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Annex 1
Financial Conduct Authority
Client money and unbreakable deposits
Annex 1
Questions in this paper
Q1: Do you agree with our proposal to permit firms to deposit client money in UDs of up to 90 days? If not, why not? Please provide specific examples. Q2: Do you agree with our proposal that where the expiry of a notice period falls on a day the bank is closed, provided that the firm is able to make the withdrawal on the next day that bank is open for business, this is not a breach of CASS 7. If not, why not? Please provide specific examples. Q3: Do you agree with our proposed conditions for firms that deposit client money in UDs of greater than 30 days? If not, why not? Q4: Are the provisions setting out how a firm can demonstrate compliance with the requirement to take ‘appropriate measures to manage the risk of the firm being unable to access client money when required’ understandable and achievable? Would it be helpful to set out more detailed requirements and guidance such as for example those found in BIPRU 12.4 for considering stress scenarios or developing a contingency funding plan? Q5: Do you agree with our policy to require a firm to include the written policy in its CASS RP? If not, why not? Q6: Do you agree with our proposal to require CASS medium and large firms to report UDs in this way? If not, why not. Q7: Do you have any comments on our cost benefit analysis? Please provide explanations and quantitative evidence to support your response where appropriate.

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Annex 2
Financial Conduct Authority
Client money and unbreakable deposits
Annex 2
Cost benefit analysis

The Financial Services and Markets Act 2000 (FSMA), as amended by the Financial
Services Act 2012, requires us to publish a cost benefit analysis (CBA) when proposing draft rules. Specifically, section 138I(2)(a) requires us to publish a CBA of proposed rules, defined as ‘an analysis of the costs, together with an analysis of the benefits’ that will arise if the proposed rules are made. It also requires us to include estimates of those costs and benefits, unless these cannot reasonably be estimated or it is not reasonably practicable to produce as estimate.
In this chapter we summarise the proposals and assess the costs and benefits. The
CBA compares the overall position if the proposed rule amendments are applied and the overall position if they are not (ie the baseline).
Table 2: Summary of estimated costs and benefits to industry as a whole 111213
Number of firms11
One-off costs to industry (£)
Ongoing costs to industry (£)
Ongoing net benefits to industry
(£)12
Ongoing net benefits to consumers13
(£)
CASS small 124 57,288 Minimal 41,850–
58,590
4,650–6,510
CASS medium 443 209,096 212,640 35,691,624–
50,044,824
3,965,736–
5,560,536
CASS large 29 64,380 13,920 97,862,472–
137,012,472
10,873,608–
12,223,608
Total 596 330,764 226,560 133,595,946–
187,115,886
14,843,994–
20,790,654
Benefits of the proposals
Pre-consultation feedback confirms that the main benefit to our proposal is that it will
make it easier for firms to place client money in client bank accounts, as banks should be more willing to accept this client money. The proposal will reduce the time and costs that firms spend in negotiating their banking arrangements, part of which may be passed on to consumers. This in turn will help to ensure that clients do not suffer as a result of firms needing to either give money back to clients or place client money at banks they would not otherwise choose.
The increased length from 30 to 90 days of the term (or notice period) on client money
in a UD is expected to increase the rate of interest earned on these deposits. Based on pre-consultation feedback, we estimate that the interest rate is expected to increase from zero by 25 to 35 basis points on a 90-Day UD.
The table below provides an estimation of the expected interest earnings of a firm
11 Figures as at 7 June 2017 of firms holding client money 12 90% of interest earnings estimated in Table 3 minus on-going costs estimated in this chapter 13 10% of interest earnings estimated in Table 3

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Client money and unbreakable deposits placing 50% of its client money in a 90-Day UD. We assume at least 10% of these earnings may be passed on to consumers.
Table 3: Estimated increased interest earnings for industry 14 15 16 17
Number of firms 14
Average client money holdings
(£)15
Estimated interest earnings for a firm (25–35 basis points) (£)16 Estimated interest earnings of proposal for industry as a whole (£)17 CASS small 124 300,000 375–525 46,500–65,100 CASS medium 443 72,000,000 90,000–126,000 39,870,000– 55,818,000 CASS large 29 3,000,000,000 3,750,000– 5,250,000 108,750,000– 152,250,000 Total 596 3,072,300,000 3,840,375– 5,376,525 148,666,500– 208,133,100
6. In PS 14/9, we noted that one of the purposes of the 30-Day Rule was to ensure that
a firm could respond swiftly to return client money quickly in the event of a firm’s failure.18 If a firm with client money in a 90-Day UD fails, on the face of it the firm will not be able to distribute that client money until it receives it when the 90-day term has matured. Analysis of recent firm failures shows that 20–30% of cases have taken less than 90 days to distribute or transfer some or all client money following a primary pooling event.19 We are aware that, in a firm failure situation, some banks may consider breaking the fixed term to return client money swiftly.
7. Similarly, a firm will not be able to withdraw money in response to market information
concerning a bank20 until the 90-day term has matured. However, firms will be able to get this client money back more swiftly than they might in the absence of any rule as firms may otherwise be tied into longer term UDs.21
8. In our view, a benefit of our proposal is that it strikes the right balance between
firms being able to respond to market information and collect client money in failure situations, and place this client money with banks on a business as usual basis. Costs of the proposals
9. We do not consider there to be any cost to firms associated with the term extension
from 30 to 90 days as, as stated above, we believe this will make it easier for firms to place client money in client bank accounts. As mentioned in paragraph 6, we also do not envisage any significant costs to consumers associated with the term extension from 30 to 90 days. 14 Figures as at 7 June 2017 of firms holding client money 15 Figures as at 7 June 2017 of firms holding client money 16 For 25 basis points, 0.25% x (50% x client money holdings); for 35 basis points, 0.35% x (50% of average client money holdings) 17 Number of firms x estimated interest earnings per firm 18 In accordance with the client money distribution rules (CASS 7A) 19 CASS 7A.2 20 For example, the bank’s failure which would trigger a secondary pooling event under CASS 7A.3. Clients who request to have their client money placed in a designated client bank account at a bank different from a bank that later fails should not suffer the loss of the bank that has failed (CASS 7A.3.5G). 21 PS14/9, Review of the client assets regime for investment business, paragraph 7.106

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10. There may be costs associated with the proposed conditions attached to allowing a
firm to place client money in 90-Day UDs and with reporting these in the CMAR. These are estimated below. Disclosure to clients
11. We estimate that a firm choosing to place client money in a 90-Day UD will incur the
following costs as a result of being required to disclose risks of this to their clients:
Table 4: Estimated cost of disclosure to clients 22 23 24
Number of firms22
One-off median costs for a firm (£)23
One-off median costs for industry as a whole (£)24 CASS small 124 250 31,000 CASS medium 443 250 110,750 CASS large 29 1,500 43,500 Total 596 2,000 185,250 Appropriate measures in place to be able to meet instructions from clients in relation to client money held
12. We are aware that many firms already have some form of management process to
ensure they have sufficient liquid client money to meet client instructions. Firms are also required to manage their own liquidity risk.25 In addition, firms currently subject to the 30-Day Rule would need to ensure client instructions can be met. We are therefore aware that firms already manage this risk in relation to client money. On this basis, we expect minimal costs associated with this proposal. Written policy document
13. As set out above, we are aware that many firms have some form of management
process to ensure that they have sufficient liquid client money to meet client instructions. We therefore expect that some of these firms will already have written policies and procedures in place around this. We estimate a firm will incur one-off costs in producing the written policy as follows:
Table 5: Estimated costs of written policy document 26 27 28
Number of firms26
One-off costs for a firm27(£)
One-off costs for industry as a whole28 (£)
CASS small 124 192 23,808
CASS medium 443 192 85,056
CASS large 29 240 6,960
Total 596 624 115,824
22 Figures as at 7 June 2017 of firms holding client money 23 Based on previous cost survey figures on disclosure to clients for CP13/5: Review of the client assets regime for investment business. 24 Number of firms x estimated costs per firm 25 BIPRU 12.3 26 Figures as at 7 June 2017 of firms holding client money 27 Based on previous cost surveys on compliance costs, we estimate this will take a compliance officer a maximum of four hours to complete at £48 per hour for CASS small and CASS medium firms (based on existing due diligence and risk management processes) and a maximum of five hours at £48 per hour for CASS large firms (given their complexity). 28 Number of firms x estimated costs per firm

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Client money and unbreakable deposits
14. We expect minimal ongoing costs to maintaining the policy as firms will already be
maintaining existing policies around liquidity risk management. We also expect a firm will incur minimal incremental costs as a result of having to retain all versions of the written policy document for five years (for example, we expect incremental costs of no more than £0.05 per firm annually).29 Adding written policy document to CASS RP
15. We estimate the following one-off costs for a firm adding the written policy document
to its CASS RP:
Table 6: Estimated costs of updating CASS RP 30 31 32
Number of firms30
One-off costs for a firm31
(£)
One-off costs for industry as whole32 (£)
CASS small 124 20 2,480
CASS medium 443 30 13,290
CASS large 29 30 870
Total 596 80 16,640
16. We expect a firm will incur minimal ongoing costs to ensure that the written policy
document is up to date in the CASS RP, as a firm will only need to update it when the written policy document is updated. CMAR reporting
17. We expect there will be minimal costs associated with CASS medium and large firms33
reporting their client money balances in a 90-Day UD in their CMAR, given these firms already complete the CMAR on a monthly basis and, as part of the proposals set out in this paper, will be required to monitor the amount of client money held in a 90-Day UD. We estimate the following ongoing costs based on previous cost survey figures relating to reporting processes.34
Table 7: Estimated costs of CMAR reporting 35 36 37
Number of firms 35
Ongoing costs for a firm36 (£)
Ongoing costs for industry as whole37 (£)
CASS medium 443 480 212,640
CASS large 29 480 13,920
Total 596 960 226,560
29 See NERA report, Estimated compliance costs of conduct of business regulation for general insurance, 2003 (figures adjusted for inflation), p 28, available at www.fsa.gov.uk/pubs/cp/187/nera.pdf 30 Figures as at 7 June 2017 of firms holding client money 31 Based on previous cost surveys on the CASS RP for CP11/16, Recovery and Resolution Plans. We estimate this will take an employee a maximum of one hour to complete at £20 per hour for CASS small firms and £30 per hour for both CASS medium and CASS large firms. 32 Number of firms x estimated costs per firm 33 CASS small firms are not subject to the CMAR requirement (SUP 16.14) 34 CP11/16, Recovery and Resolution Plans, Annex 1 35 Figures as at 7 June 2017 of firms holding client money 36 We estimate this will take an employee a maximum of one hour per month to complete at £40 per hour for both CASS medium and CASS large firms. 37 Number of firms x estimated costs per firm

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Client money and unbreakable deposits
Q7: Do you have any comments on our cost benefit analysis?
Please provide explanations and quantitative evidence to support your response where appropriate.

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Annex 3
Financial Conduct Authority
Client money and unbreakable deposits
Annex 3
Compatibility statement
Compliance with legal requirements

This annex explains how our proposals for consultation in this CP are compatible with
the requirements under section 138I of FSMA.
When consulting on new rules, we are required by section 138I(2)(d) of FSMA to
explain why the proposed rules are compatible with our strategic objective of ensuring relevant markets function well, advances one or more of our operational objectives, and has regard to the statutory principles in section 3B of FSMA. We are also required by section 138K(2) of FSMA to state our opinion on whether the proposed rules will have a significantly different impact on mutual societies as opposed to other authorised persons.
This annex also sets out our view of how the proposed rules are compatible with our
duty to discharge our general functions (including rule making) in a way that promotes effective competition in the interests of consumers (section 1B(4) of FSMA). This duty applies in so far as promoting competition is compatible with advancing either or both of our consumer protection and integrity objectives. The FCA’s objectives and regulatory principles: Compatibility statement
Our proposals in this CP aim to improve protection for consumers by ensuring firms
can continue to deposit client money at appropriate banks, thereby reducing the risk that client money may be returned to the client against the client’s wishes or being deposited with banks that do not pass firms’ due diligence requirements.
In preparing the proposals in this CP, we have had regard to the principles set out in
section 3B of FSMA.
Compatibility with the principles of good regulation The need to use our resources in the most efficient and economical way
We believe that the proposals in this CP will have minimal impact on our resources.

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Client money and unbreakable deposits
Expected effect on mutual societies
7. We do not expect that the proposals in this CP will have an impact on mutual societies
as we are not aware of any mutual societies that hold client money and would, therefore, be subject to these proposed rules. Compatibility with the duty to promote effective competition in the interests of consumers
8. We have a duty to discharge our general functions (which include rule making) in a
way that promotes effective competition in the interests of consumers (section 1B(4) of FSMA). This duty applies in so far as promoting competition is compatible with advancing our consumer protection and/or integrity objectives.
9. In relation to competition, we do not expect that the proposed changes will materially
affect the number of firms providing investment services, or their incentives to compete with each other for customers. However, we expect it will improve competition to the extent that it will make it easier for firms to deposit client money at appropriate banks. Equality and diversity
10. We are required under the Equality Act 2010 to have due regard to the need to
eliminate discrimination and to promote equality of opportunity in carrying out our policies, services and functions. As part of this, we have conducted an equality impact assessment to ensure that the equality and diversity implications of any new policy proposals are considered.
11. Our findings indicate that these proposals have no anticipated positive or negative
impacts on particular groups as a result of any protected characteristic. Legislative and Regulatory Reform Act 2006 (LRRA)
12. We are required under the LRRA to have regard to the principles in the LRRA and to the
Regulators’ Compliance Code when determining general policies and principles and giving general guidance (but not when exercising other legislative functions).
13. We have also considered the Regulators’ Compliance Code for the parts of the
proposals that consist of general policies, principles or guidance. We consider that the proposals are proportionate to the potential risk to consumers identified.

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Annex 4
Financial Conduct Authority
Client money and unbreakable deposits
Annex 4
Abbreviations in this document
CASS Client Assets Sourcebook
CASS RP CASS resolution pack
CBA Cost-benefit analysis
CMAR Client money and asset return
CP Consultation Paper
FCA Financial Conduct Authority
FSMA Financial Services and Markets Act 2000 ISA Individual savings account MiFID II European Parliament and Council Directive on markets in financial instruments (No. 2014/65/EU), commonly referred to as the ‘Markets in Financial Instruments Directive II’ PRA Prudential Regulation Authority QMMF Qualifying money market fund UD Unbreakable deposit We have developed the policy in this Consultation Paper in the context of the existing UK and EU regulatory framework. The Government has made clear that it will continue to implement and apply EU law until the UK has left the EU. We will keep the proposals under review to assess whether any amendments may be required in the event of changes in the UK regulatory framework in the future. We make all responses to formal consultation available for public inspection unless the respondent requests otherwise. We will not regard a standard confidentiality statement in an email message as a request for non-disclosure. Despite this, we may be asked to disclose a confidential response under the Freedom of Information Act 2000. We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by the Information Commissioner and the Information Rights Tribunal. All our publications are available to download from www.fca.org.uk. If you would like to receive this paper in an alternative format, please call 020 7066 9644 or email: publications_graphics@fca.org.uk or write to: Editorial and Digital team, Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS

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Appendix 1
Draft handbook text

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CLIENT ASSETS (TERM DEPOSITS) INSTRUMENT 2017 Powers exercised A. The Financial Conduct Authority makes this instrument in the exercise of the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):
(1) section 137A (The FCA’s general rules);
(2) section 137B (FCA general rules: clients’ money, right to rescind etc); (3) section 137T (General supplementary powers); (4) section 138C (Evidential provisions); and (5) section 139A (Power of the FCA to give guidance). B. The rule-making provisions listed above are specified for the purposes of section 138G(2) (Rule-making instruments) of the Act. Commencement
C. This instrument comes into force on [date].
Amendments to the Handbook
D. The Client Assets sourcebook (CASS) is amended in accordance with Annex A to this instrument. E. The Supervision manual (SUP) is amended in accordance with Annex B to this instrument. Citation F. This instrument may be cited as the Client Assets (Term Deposits) Instrument 2017. By order of the Board [date]

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Annex A
Amendments to the Client Assets sourcebook (CASS) In this Annex, underlining indicates new text and striking through indicates deleted text. 7 Client money rules …
7.13 Segregation of client money
…
7.13.13 R (1) An account which the firm uses to deposit client money under CASS
7.13.3R(1) to CASS 7.13.3R(3) must be a client bank account.
(2) Each In respect of each client bank account used by a firm must be held on terms under which to satisfy its obligation under CASS 7.13.3R(1) to (3):
(a) the relevant bank’s contractual counterparty is must be the firm itself that is subject to the requirement under CASS 7.13.3R; and (b) unless the firm has agreed terms that comply with CASS 7.13.13R(3) subject to paragraph (3A), the firm is must be able to make withdrawals of client money promptly and, in any event, within one business day of a request for withdrawal. Transitional provision CASS TP 1.1.10AR applies to (2). (3) Firms may use client bank accounts held on terms under which withdrawals are, without exception, prohibited until the expiry of a fixed term or a notice period of a maximum of 30 days. [deleted] (3A) Where the requirement under sub-paragraph (2)(b) is not satisfied and provided that the client bank account is not included in a subpool, a firm may use a client bank account from which it will be unable to make a withdrawal of client money until the expiry of a fixed term or notice period lasting:
(a) up to 30 days; or
(b) provided the firm complies with CASS 7.13.14AR, from 31 to 90 days. (4) Paragraphs (2)(b) and (3) (3A) do not apply in respect of client

FCA 2017/XX money received by a firm in its capacity as a trustee firm.
7.13.14 G CASS 7.13.13R(2)(b) and CASS 7.13.13R(3) (3A) do not prevent a firm
from depositing client money on terms under which a withdrawal may be made before the expiry of a fixed term or a notice period (whatever the duration), including where such withdrawal would incur a penalty charge to the firm. 7.13.14 A R A firm may only use one or more client bank accounts under CASS 7.13.13R(3A)(b) if:
(1) prior to using any such client bank accounts, it:
(a) produces a written policy that sets out:
(i) for each of its business lines, the maximum proportion of the client money held by the firm that the firm considers would be appropriate to hold in such client bank accounts having regard to the need to manage the risk of the firm being unable to access client money when required; (ii) the firm’s rationale for reaching its conclusion(s) under (i); and (iii) the measures that it will put into place to comply with sub-paragraph (2)(a) of this rule, having regard to CASS 7.13.14CE; and (b) provides each of its clients with a written explanation of the risks that arise as a result of the longer notice period for withdrawals that:
(i) is clear, fair and not misleading; and
(ii) in respect of the medium of the explanation, satisfies whichever of COBS 6.1.13R (Medium of disclosure) or COBS 6.1ZA.2.15EU (Medium of disclosure) applies to the firm in respect of its obligations to provide information to the client; and (2) while the firm uses any such client bank accounts, it:
(a) takes appropriate measures to manage the risk of the firm being unable to access client money when required; (b) keeps its written policy under sub-paragraph (1)(a) under review, amending it where necessary; (c) if SUP 16.14 (Client money and asset return) applies, allocates a specific row in data field 13 of its CMARs for each client bank account that falls under CASS 7.13.13R(3A)(b),

FCA 2017/XX marking them as “unbreakable” within data field 13B and also specifying in that data field the length of the relevant period under CASS 7.13.13R(3A)(b) for that client bank account; and (d) provides any of its clients to whom it has not previously provided the explanation under sub-paragraph (1)(b) with such a written explanation before it starts to hold or receive client money for them. 7.13.14 B R (1) A firm must make and retain a written record of:
(a) the written policy it produces under CASS 7.13.14AR(1)(a); and (b) each subsequent version of the written policy it produces as a result of CASS 7.13.14AR(2)(b). (2) The firm must make the record:
(a) under sub-paragraph (1)(a) on the date it produces the written policy; and (b) under sub-paragraph (1)(b) on the date it produces the new version of the written policy. (3) The firm must keep each record under this rule for a period of five years after the earlier of:
(a) the date on which the version of the policy to which the record relates was superseded; and (b) the date on which the firm ceased to use client bank accounts under CASS 7.13.13R(3A)(b). 7.13.14 C E (1) Appropriate measures under CASS 7.13.14AR(2)(a) include the firm considering the need to make, and making where appropriate, quarterly or more frequent adjustments to the amount of client money held in client bank accounts under CASS 7.13.13R(3A)(b), taking into consideration the following factors:
(a) historic and expected future client money receipts and payments; (b) the firm’s own analysis of its exposure to the risk of being unable to meet instructions from its clients in relation to client money that it holds, applying an appropriate set of time horizons and stress scenarios; and (c) the content of the firm’s written policy under CASS

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7.13.14AR(1)(a)(i) and (ii).
(2) Compliance with (1) may be relied on as tending to establish compliance with CASS 7.13.14AR(2)(a). (3) Contravention of (1) may be relied on as tending to establish contravention of CASS 7.13.14AR(2)(a). 7.13.14 D G (1) Under CASS 7.13.14AR(2)(b) a firm should consider whether amendments to its written policy under CASS 7.13.14AR(1)(a) are needed for any reason, including in light of the firm’s analysis in the course of its measures under CASS 7.13.14AR(2)(a). (2) Each time a firm amends its written policy under CASS 7.13.14AR(1)(a), it should also update the rationale for the amended policy under CASS 7.13.14AR(1)(a)(ii). (3) The stress scenarios under CASS 7.13.14CE(1)(b) should include a variety of severe yet plausible institution-specific and market-wide liquidity shocks. 7.13.14E R A firm will not be in breach of CASS 7.13.13R(3A) in cases where a fixed term or notice period for a withdrawal that is permitted under that rule expires on a day on which is not a business day for the relevant bank, provided that the firm is able to make the withdrawal on the next business day for the relevant bank. … 10 CASS resolution pack …
10.3 Existing records forming part of the CASS resolution pack
10.3.1 R A firm must include, as applicable, within its CASS resolution pack the
records required under:
…
(5B) CASS 7.13.14BR (policy for use of client bank accounts under CASS 7.13.13R(3A)(b)); … … Insert the following new row in the appropriate numerical position in Schedule 1 (Record keeping requirements). The text is not underlined.

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Sch 1.3G
Handbook reference
Subject of record
Contents of record
When record must be made
Retention period
…
CASS
7.13.14BR
The firm’s written policy produced under
CASS
7.13.14AR(1)(a) in respect of the firm’s use of client bank accounts under CASS 7.13.13R(3A)(b), and subsequent versions of it (i) For each of the firm’s business lines, the maximum proportion of the client money held by the firm under CASS 7.13.3R(1) to (3) in respect of the business line that the firm considers would be appropriate to hold in such accounts; (ii) the firm’s rationale for reaching its conclusion(s) under (i); and (iii) the means by which the firm will comply with CASS 7.13.14AR(2)(a), having regard to CASS 7.13.14CE. On the date it creates the version of the policy Five years after the earlier of:
(1) the date on which the version of the policy was superseded; and (2) the date on which the firm ceased to use client bank accounts under CASS 7.13.13R(3A)(b).

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Annex B
Amendments to the Supervision manual (SUP)
In this Annex, underlining indicates new text and striking through indicates deleted text. 16 Reporting requirements …
Annex
29AG
Guidance notes for the data item in SUP 16 Annex 29R …
Section 3 Segregation of client money
…
13B Institution where client money held
A firm should report the full name and firm reference number (if applicable) of the individual legal entity with which it has placed client money. If the firm used client bank accounts under CASS 7.13.13R(3A)(b) during the reporting period, then to comply with CASS 7.13.14AR(2)(c) it should use this section to report:

the banking institution where that client bank account is held;
the fact that the firm cannot make a withdrawal for a given period, using the
marker “unbreakable”; and
the duration of the relevant period under CASS 7.13.13R(3A)(b), expressed in
days.
The firm should adopt the following format for this: “Bank Name unbreakable [duration in days]”. See Table 13C for an example of this. 13C Client money balances A firm should report the total amount of client money which it has placed with each institution identified in 13B. If the firm used client bank accounts under CASS 7.13.13R(3A)(b) during the reporting period, then to comply with CASS 7.13.14AR(2)(c) it should report both:

FCA 2017/XX

the total balance of client money held at that institution in client bank accounts
falling under CASS 7.13.13R(2)(b) or CASS 7.13.13R(3A)(a); and
in separate rows, the total balance of client money held at that institution in each
of the client bank accounts under CASS 7.13.13R(3A)(b).
See Table 13C for an example of this.
…
The balance shown in that row may also include any balance that is included in data field 17.
Table 13C
Table 1 shows an example of how a firm that used client bank accounts under CASS
7.13.13R(3A)(b) during the reporting period should complete data field 13. A B C D E Type Institution Client money balances (‘000) Country of incorporation of the institution Is this a group entity? CRD Credit Institution Bank A Ltd 500 UK No CRD Credit Institution Bank A Ltd unbreakable 35 25 UK No CRD Credit Institution Bank A Ltd unbreakable 90 30 UK No CRD Credit Institution Bank B Ltd 100 UK No CRD Credit Institution Bank B Ltd unbreakable 60 60 UK No CRD Credit Institution Bank B Ltd unbreakable 90 50 UK No …

Lineage