Dear CEO | Release Date: 24th July 2020
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a directive to brokers within the wholesale financial markets concerning the management and application of Title Transfer Collateral Arrangements (TTCAs). This letter provides detailed guidance and outlines the FCA’s concerns regarding the current practices and the necessary compliance requirements under the Client Assets Sourcebook (CASS).
Applicability and Scope
This directive is addressed to FCA-authorised firms that engage in offering services like clearing broker and prime broker services, which involve managing clients’ cash or securities as collateral. The communication clarifies the FCA’s position on the proper use of TTCAs and stresses the importance of adhering to the CASS rules.
Identification of Risks Associated with TTCAs
The misuse of TTCAs has been pinpointed as a significant area of non-compliance, exposing client assets to potential risks. These include the improper handling and allocation of client assets, which, in the event of a firm’s failure, could lead to substantial financial losses for clients due to their status as general creditors. This situation underscores the necessity for firms to use TTCAs judiciously and in accordance with established legal and regulatory frameworks.
Regulatory Permissions and Misuse of Prudential Matched Principal Exemption
There is an increasing concern regarding firms that misclassify certain financial transactions under the prudential matched principal exemption. This misclassification leads to a reduction in the financial resources that firms are required to hold, potentially escalating their risk of failure and subsequent negative impacts on market stability and consumer protection.
Compliance and Governance Expectations
Comprehensive Review and Monitoring: Firms are expected to undertake a comprehensive review of their use of TTCAs to ensure they are used appropriately and in cases where there is a clear and documented need. This review should also include monitoring systems to continuously oversee compliance with CASS obligations.
Ensuring Robust Financial Health: Maintaining adequate financial resources is crucial. Firms must ensure they meet the FCA’s capital adequacy requirements, maintain appropriate insurance coverage, and report any financial discrepancies to the FCA without delay.
Strengthening Internal Controls and Oversight: Firms need to bolster governance structures to effectively manage the risks associated with TTCAs. This involves setting up clear accountability frameworks, robust risk management protocols, and ensuring that the firm’s board has strong oversight capabilities.
Promoting a Culture of Compliance and Ethical Behaviour: Firms are required to cultivate a culture that prioritises ethical conduct and strict adherence to regulatory standards. This includes implementing comprehensive training programs focused on regulatory compliance and ethical decision-making for all relevant staff.
Actions Required and Reporting Obligations
Audit and Rectification: Firms must immediately audit their practices related to TTCAs and rectify any areas of non-compliance. Significant issues must be reported to the FCA, and firms must outline the steps taken to address these issues.
Future Proofing Through Modernisation: The FCA encourages firms to proactively modernise their operational and compliance practices to prevent future risks associated with TTCAs.
Enhanced Training and Education: Ensuring that all staff, especially those in control functions and senior management, are well-versed in the requirements and implications of TTCAs is critical. Firms should provide ongoing education and training to maintain high standards of compliance.
Conclusion and Proactive Engagement
Firms are strongly encouraged to take immediate action to ensure their practices are fully compliant with the regulatory expectations outlined in this letter. Active and ongoing engagement in enhancing compliance frameworks is essential to protect client assets and uphold the integrity of the financial markets.
Firms are required to confirm their compliance actions and report any corrective measures undertaken in response to this directive by the stipulated deadline. This commitment is crucial for maintaining regulatory compliance, ensuring operational resilience, and safeguarding client interests in the long term.