As the Financial Services Authority’s consultation on changes to the way investment firms handle cash on behalf of clients closes, business advisory firm Deloitte has identified 16 changes that are likely to increase costs for banks and brokers, and directly or indirectly raise trading costs for clients.
Mike Williams, partner in Deloitte’s banking and capital markets prudential regulation practice, says: “The amount of money affected by the new proposals is potentially vast - about GBP100bn. If the FSA decides to alter or potentially remove the UK-specific ‘alternative approach’ which is used by some of the larger banks and investment firms – under which banks are allowed to use client money on their own account during the trading day - this could impact their funding profile.
“The FSA is considering how to improve the speed at which client money is restored when an investment firm collapses, and the reasons behind its proposals are understandable. The FSA itself has identified the relatively slow return of investors’ money from the UK arms of Lehman Brothers and MF Global after their collapse as being a cause for concern, and has driven the wider initiative on resolution of client money and asset balances. All banks and investment firms which hold client money and assets need to have put in place a CASS Resolution Pack from 1 October 2012.
“The impact of the proposed changes under consideration could increase banks’ expenses in their UK trading operations, and the operational and clearing changes for EMIR are likely to be significant. These costs are likely to be passed on to end-users.
“Deloitte has identified 16 separate impacts arising from the consultation paper. Many will make client money safer, but at a probable cost of higher fees. The question of whether the customer protection benefits of more complex client money and assets arrangements across the market will outweigh the costs currently remains in the balance.”