The Financial Services Authority (“FSA”) has released a consultation paper (CP12/15) which details the proposed amendments to CASS 8 regarding mandates. These rules will be important for any firm that has control over client assets but which doesn’t actually hold them – such as investment managers.
Due to the degree of inconsistency between firms and their auditors over the understanding of the mandate rules, the FSA has proposed amendments which will clarify the scope of the mandate rules (“the Rules”).
To whom do the Rules apply?
The Rules apply to firms carrying on investment business, or insurance intermediation, that:
- control (rather than hold) clients’ assets; or
- are able to create liabilities in the name of a client.
What amendments are proposed?
The sole requirement of the Rules is that firms should establish and maintain a system of internal controls and adequate records to prevent any misuse of the authority granted by the client; the result of any misuse could result in consumer detriment. In particular, this will require firms to maintain:
- an up-to-date list of all mandates;
- a record of all transactions undertaken under each mandate;
- internal controls to ensure that each transaction under a mandate complies with the mandate’s requirements; and
- details of the procedures and internal controls around the giving of instructions under each mandate.
Clarification as to the application of the mandate rules
The Rules will not apply:
- to an operator of a regulated collective investment scheme, in relation to activities carried on for the purpose, or in connection with, the operation of the scheme.
- in relation to client money held by a firm in accordance with CASS 5 (client money: insurance mediation activity) or CASS 7 (client money rules), or client assets held by the firm in accordance with CASS 6 (custody rules).
In addition, the Rules will not affect the duties that a firm has in relation to an account or assets it holds, where another firm has a mandate in respect of that account or those assets.
Definition of “mandate”
To aid clarity, the FSA has proposed to define what a mandate is within the Rules. A summary of the definition of a mandate is:
“any means by which a firm obtains in written form from (with the client’s consent) the client and subsequently retains, and which gives the firm the ability (without the client’s further involvement) to control the client’s assets or liabilities”
It should be noted that the definition clarifies that a mandate can be in any written form (i.e., it does not have to state that it is a “mandate”; a power of attorney could be, or could contain, a mandate).
The importance in the definition is placed on the client’s consent being required and the client’s further involvement not being necessary; should the client’s consent be required prior to the firm giving instructions then this would not amount to a mandate due to the “further involvement” required from the client.
When will the proposed rules come into effect?The consultation period runs until 30 September 2012 and the final rules are planned to come into force on 1 January 2013.