Central Bank of Ireland publishes final form client asset regulations

On 23 June 2022, the Central Bank of Ireland (the CBI) published the final form Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2022 (the Investment Firm Regulations).

The Investment Firm Regulations impose obligations on investment firms which:

• hold client assets; or
• enter into Title Transfer Collateral Arrangements (TTCA) with clients.

In particular, the Investment Firm Regulations contain revised client asset requirements (CAR 2022), which will apply to MiFID investment firms and credit institutions (collectively defined as investment firms), and will come into effect in respect of MiFID investment firms on 1 July 2023 and credit institutions on 1 January 2024. The CBI expects investment firms to begin preparations to ensure compliance with CAR 2022 by these dates. The CBI has also published a draft Guidance Note on the Central Bank Client Asset Requirements dated June 2022 (the Guidance Note) to assist with this process (available here).

The current client asset requirements are contained in the equivalent 2017 regulations, which will remain in force until repealed by the Investment Firms Regulations on 1 July 2023. Therefore, firms coming within the scope of the existing regulations must continue to comply with these rules until repealed by the Investment Firm Regulations.

CAR 2022 will introduce a number of changes to the client asset requirements regime. These changes include the following:

Scope

CAR 2022 has an increased scope and will apply to credit institutions to the extent that they carry out MiFID investment business.

Currently, client asset requirements apply to credit institutions which act as a depository for investment funds or provide fund administration services to such funds.

Reconciliation Requirements

CAR 2022 contains individual reconciliation requirements in respect of:

• third party client asset accounts other than fixed term deposit account;
• third party client asset accounts which hold fixed term deposits;
• third party client accounts which hold client financial instruments; and
• client financial instruments which have not been deposited with a third party.

Calculation Requirements

CAR 2022 introduces:

• a monthly calculation requirement in respect of the client financial instrument resource¹;
• a deposit/withdrawal obligation in respect of client funds and client financial instruments in the event of a shortfall or excess of either arising;
• an obligation to maintain a record of actions taken to address a shortfall or excess in client financial instruments and when these have been addressed; and
• an obligation to resolve, promptly, any discrepancy identified in client asset records.

Disclosure and Reporting Obligations

Investment Firms

CAR 2022 introduces two new obligations relating to transfer of business:

• to disclose to clients or potential clients, prior to first receiving client assets, the arrangements relating to transfer of business in the terms of business; and
• to notify the CBI of its intention to effect a material transfer of client assets to or from another entity as part of a transfer of business. Such notification is to be provided as soon as possible but no later than 3 months in advance of the transfer taking place.

Credit Institutions

CAR 2022 will impose client disclosure obligations on in-scope credit institutions in advance of providing a service to, or performing an activity for, a client where such service or activity is MiFID investment business.

Transfer of Title Collateral Arrangements

CAR 2022 introduces the following in respect of TTCAs:

• a requirement to ensure that any TTCA is in the form of a written agreement between the investment firm and the client, which is to cover specific aspects of client agreement.
• rules regarding the termination of TTCAs.

Prime Brokerage Services

CAR 2022 introduces requirements in relation to prime brokerage services which require:

• investment firms that hold client assets in the course of providing prime brokerage services to provide a statement (containing certain information) to clients; and
• that prime brokerage agreements include information detailing the key provisions of the prime brokerage agreement as they relate to the use of client assets by the investment firm (to be known as a “Client Asset Annex”), and which is to be updated in the event of any amendment to the terms of the prime brokerage agreement.

Client Asset Management Plan

CAR 2022 introduces a requirement for the Client Asset Management Plan (CAMP) to include a client asset applicability matrix. The CBI have set out the information that should be included in the matrix in its Guidance Note.

In the Guidance Note, the CBI remarks on the necessity to incorporate a comprehensive risk identification process into the CAMP. In this respect, the Guidance Note states that investment firms should develop and maintain a client asset risk matrix², which can be used to present the information required under Regulation 72(4)(d) and Regulation 72(4)(e) of the Investment Firm Regulations. The Guidance Note also provides details of the matters the client asset risk matrix should address.

¹ Section 47(1) of the Investment Firm Regulations defines client financial instrument resource as the balance of client financial instruments deposited in an investment firm’s third party client asset account(s) or otherwise entrusted to an investment firm and recorded as such by the investment firm.
² Section 47(1) of the Investment Firm Regulations defines client asset applicability matrix as the information contained in an investment firm’s client asset management plan which identifies the investment firm’s investment services and business lines, and in each case indicates whether or not the requirements in Part 6 of the Regulations and the MiFID II safeguarding of client asset rules apply.