Client Money Thematic Review 2016

Summary

This is a GFSC report on the findings of its 2016 Thematic Review into how fiduciary licensees in Guernsey operate Client Money arrangements. It is an informational review, not new binding rules, but it restates existing obligations under the Codes of Practice and Principles of Conduct of Finance Business, highlights good and poor practice observed across the sector, and signals the Commission's intention to introduce formal Client Asset Rules.

• Existing requirement restated: Licensees must keep the funds of each client company, trust or foundation separate from each other and from the licensee's own funds, per the Codes of Practice and Trusts (Guernsey) Law 2007.
• Client asset protection: Principle 6 of the Principles of Conduct of Finance Business requires firms to arrange proper protection of customer assets they control, through segregation and identification.
• Good practice expectations: Firms are expected to assess the suitability of banks holding Client Money, reconcile Individual and Global Client Money Accounts at least monthly, and have policies preventing inappropriate use of Client Money to settle fees.
• Cash handling: Firms receiving or paying away cash should maintain strong controls including a register, appropriate authorisation and a documented rationale.
• Outsourcing: Firms outsourcing cash management, including to group entities, are expected to have formal outsourcing agreements ensuring beneficiaries' interests remain paramount.
• Staff training: Firms are expected to train staff in the operation of Client Money accounts on a regular basis.
• Future Client Asset Rules: The Commission intends to issue new Client Asset Rules in 2017 to align with the GIFCS Standard, following a Consultation Paper, applicable to both fiduciary and investment licensees.

The review found a gap between current Guernsey guidance and the more prescriptive GIFCS Standard on Trust and Corporate Service Providers (October 2014), which requires segregation, prompt reconciliation, disclosure of terms on which Client Money is held, dual signature payment controls, and safeguards against inappropriate use of fees. The Commission aims to close this gap by issuing Client Asset Rules and achieving GIFCS Standard compliance by April 2019.

Key obligations

• Keep the funds of each client company, trust or foundation separate from each other and from the licensee's own funds (existing Code of Practice requirement).
• Arrange proper protection of customer assets under the licensee's control, by way of segregation and identification, per Principle 6 of the Principles of Conduct of Finance Business.
• Maintain documented policies, procedures and controls for operating Client Money accounts, including preventing inappropriate use of Client Money to settle fees and disbursements.
• Reconcile Individual and Global Client Money Accounts promptly and regularly (at least monthly is cited as good practice).
• Apply robust due diligence to assess suitability of banking institutions used to hold Client Money.
• Maintain strong controls, including a register and appropriate authorisation, where cash is received from or paid to clients.
• Ensure formal outsourcing agreements are in place where cash management of Client Money accounts is outsourced to a third party.
• Provide staff with regular training on the operation of Client Money accounts.

Applies to

Fiduciary Licensees, Trust Service Providers, Corporate Service Providers, Foundation Service Providers, Investment Licensees

Deadlines

• first half of 2017: Commission intends to issue a Consultation Paper on proposed Client Asset Rules.
• during 2017: Commission considers it will need to issue Client Asset Rules.
• April 2019: Commission's target date for compliance with the GIFCS Standard.