Dear CEO letter on increased client money balances

A new Dear CEO letter has suggested that increased client money balances held by non-discretionary investment services firms may not be in the best interests of clients. The regulator has called for firms to discuss with clients whether it may be preferable to return excess funds. And the letter makes it clear that the FCA will monitor client money balances to this end.

Is holding more client money in your clients’ interests?

The FCA sent their latest missive on 12th August: Dear CEO letter: increased client money balances since coronavirus (Covid-19). As part of their ongoing management of the COVID-19 pandemic, the regulator has turned its attention to increased client money balances and potential client detriment.

Through its review of Client Money and Asset Return (CMAR) submissions, the FCA has identified a trend between January and June of this year of increasing client money balances being held by non-discretionary investment service firms.

The regulator goes on to say it understands that client money balances may have increased as a result of client re-balances triggered by the pandemic. However, it highlights that it may not be in the best interests of clients to have such large cash balances held at the firm. Instead, it may be better for clients to withdraw the excess money and hold it within their own current or savings account. As a result, the FCA has tasked firms and the relevant Senior Manager to communicate with clients and to consider whether it is in clients’ best interests during this period to have any excess client money returned to them.

Responding to the latest letter on client money

On the face of it, the request from the regulator may seem fairly straight forward, but there are a number of elements to consider.

Firstly, the firm will need to evidence that it has truly considered whether it is in clients’ best interests to have money returned or held at the firm. The FCA has stated that it will follow up with firms that continue to report significantly increased client money balances, therefore firms should be ready to demonstrate to the regulator that they have contacted clients where appropriate. Firms that continue to hold increased levels of client money should be able to evidence that this is in clients’ best interests as it will facilitate further investment in the short term.

If firms decide that holding the increased client money balances is appropriate, we suggest that consideration is given to the adequacy of systems and controls to protect client money.  In particular, consideration should be given to client money diversification and the use of unbreakable term deposits.

As the FCA will be following up with firms, this letter should not be readily dismissed. If you would like support with any of these steps, or to discuss the Dear CEO letter in general then please do not hesitate to get in touch.