Ric Wilding

Client Assets Policy

Prudential Banking and Investment Business Policy

Financial Services Authority

25 The North Colonnade

CanaryWharf

London E14 5HS

25 June 2010

Dear Ric,

AFM Response toCP10/9, Enhancing the Client Asset Sourcebook

  1. I am writing in response to this consultation paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Comment on the changes to the Client Asset Sourcebook.
  1. The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies. Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.
  1. AFM currently has 56 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 19 million people, and have total funds under management of over £80 billion.
  1. This paper will affect mutual insurers probably only to the extent that they have investment subsidiaries that control client money/ assets. Our comments, as attached, are therefore restricted largely to responding to the questions raised in Chapter 4, concerning “Increased CASS oversight”.
  1. In addition, with regard to recent Final Notices relating to CASS fines, it seems that an area that might have been overlooked is the role of the external auditor. The External Auditor is required to conduct an annual CASS audit - and given the length for which some problems went unnoticed this would be a useful area for FSA guidance.
  1. Wewould be pleased to discuss further any of the items raised by our response.

Yours sincerely,

Martin Shaw

Chief Executive

Association of Financial Mutuals

Responses to selected questions

Q1: Do you agree that existing CASS record-keeping requirements are sufficient? If not, please outline where you consider these could be enhanced.

We are content with current requirements.

Q9: Do you agree that we should impose a 20% maximum limit on intra-group client money deposits in client bank accounts and that we should change existing

Guidance into a rule? Do you have any views on alternative limits?

With regard to the proposal to impose a 20% maximum limit on bank intra group deposits, the paper states that "the regime does not envisage a 100% return to clients.....due to a bank's insolvency.." (paragraph 3.6). We would welcome clarity on how this proposal (and the CASS rules in general) interact with the Financial Services Compensation Scheme (FSCS).

We illustrate the potential for inconsistency in an example:

Bank A holds my money in its own Client Money account. Bank A subsequently (because of the 20% rule) moves my money (possibly without my knowledge)to a Client Money account at Bank B.

If Bank B fails, do I claim from Bank A or from the FSCS? If my claim must be to the FSCS, what is my position if I already hold separate investments of £50,000 or more with Bank B?

It would therefore be worthwhile for FSA to spell out how CASS interacts with the compensation regime.

Q16: Do you agree that we should establish the CASS oversight controlled function?

Whilst CASS is an important area of control, we are not convinced that it needs a specific oversight function of its own. In many firms the person responsible for CASS will already be an Approved Person. However, we have no strong objection to the proposal.

Q17: Do you agree that one person within the firm holding the controlled function should have ultimate oversight and control?

We agree.

Q18: Do you agree with our stratification of firms as small, medium and large with regard to client money and/ or asset holdings? If not, please provide us with yourthoughts as to an appropriate method of stratification.

The proposal appears appropriate.

Q19: Do you consider an assessment based on the previous calendar year is appropriate? If not, why?

We agree.

Q20: Do you agree with our proposal for the CMAR?

Q21: Do you consider monthly reporting for large and medium firms and bi-annual reporting for small firms appropriate frequencies?

Q22: Would you experience any difficultly in supplying the information requested in the CMAR? If so, please provide us with examples to illustrate.

We consider transparent reporting of the relevant information is appropriate. The proposals should not prove unduly onerous for most large and medium size firms (based on the definitions used in this paper), although we have not undertaken a detailed assessment of individual firms, and for some the requirements are more likely to be more onerous.

Similarly monthly reporting for large and medium firms should be achievable. However FSA should satisfy itself that it is capable of interpreting and acting on data provided with this regularity, and that in any event, whether data which changes daily, is particularly useful when reported as a snapshot at the month end.

Q23: What are your views on the benefits and costs of the proposed policy measures?

We have no specific comments to make on the costs and benefits as presented, though it would be useful to see some more quantified and tangible benefits presented at this stage, by which to review the impact post-implementation.

AFM Response to CP10/9, Client asset sourcebook1 of 4

June 2010