Having been heavily stung over the resolution of the Lehman failure, the regulator – not this regulator, of course, for all the failings lay with FSA – is carrying out a spring clean of the whole of CASS (CP 13/5). If only CASS had said what the regulator meant back in the dark days of Lehman, much money and embarrassment in court could have been avoided. Fortunately for the FSA, the Supreme Court accepted, albeit not unanimously, that it had the power to set aside the defective drafting and distribute the client money as intended. So now, both intentions and requirements are to be spelt out so that even those who do not take CASS to bed every night can divine the meaning. At least, that is the plan.

And that is a welcome intention. And in some areas it has been well achieved. At last the regulator has actually stated what it expects to achieve from an internal reconciliation, a point that has eluded many for years on end. In fact the striking point to emerge from the various Consultation Papers on CASS that we have enjoyed over the last couple of years is just how much mis-understanding there has been generally. That is quite a worry where such basic protections are concerned.

The trouble, though, is that in some areas you are left wondering what FCA does want to achieve. When they do something in the draft rules but say nothing about it in the policy commentary, do we assume that they have made a drafting error, that they thought the matter too insignificant for comment or that they are trying to slip it through unnoticed? You might be inclined to discount this last, but I remember well when, as a regulatory supervisor, I was told by a policy staffer that she proposed just that – to slip it through unnoticed. Imagine my relish at the thought of supervising firms’ compliance with that change!

Does it really arise? Well, cast an eye at what FCA tells us about client money interest and custody liability. Handling of interest payments has been the subject of some confusion, we are told. Failure to comply with the regulator’s intention would certainly be unsurprising since little or nothing was said about it in the first place. So, good to know that clarification is on its way. The trouble is that what we have got is not clarification but rather a significant policy shift. Out with the idea that the firm can tell the client whether or not interest will be paid and, if so, on what terms. In with the all or nothing where ‘any interest earned’ must be paid to the client, unless the firm has said that ‘no such interest will be payable’. The firm that has hitherto shared interest with its clients will have to choose between these two poles. How does that benefit clients?

Odd too that FCA thinks that the allocation of all the interest – not just some or most – must be achieved within one day of receipt. That does not give you much time to work out the precise basis on which the bank has paid it, what rates they applied on which dates, why they took so long to clear the payment that affected 37 clients, or anything else much. And why the rush? So long as the interest is sitting in a client money account, it is safe from marauding insolvency practitioners, so at least five days, as applies to most other allocation matters, might be rather more reasonable. But none of this is worthy of a mention in the commentary.

And what about custody liability? Luckily, as we know from the negotiations on AIFMD, nobody in the industry really cares about it. That would explain why resolving discrepancies rates just a single, two sentence paragraph. If the antennae are still twitching by the time you reach para 5.42, there are clues in the ambiguous wording that set the pulse racing. So you dig feverishly to find the rules that implement the statement, even with no word that policy here is changing. Only then do you see that FCA has dropped the crucial phrase on which limitation of liability has rested all these years. ‘A firm must promptly correct any discrepancy……..for which there are reasonable grounds for concluding that the firm is responsible.’ Search in vain for the replacement of those words in the new draft. Conclude instead that when discrepancies result in a shortfall, ‘the firm must make good the shortfall.’ So here we are: absolute liability introduced to safe custody without so much as an announcement in the Personal Columns. Is the policy wrong? Maybe not; it is certainly consistent with AIFMD and UCITS. Might we expect to be clearly consulted? You bet.