The Financial Services Authority (FSA) has proposed a set of rules which aim to maximise and speed up client money returns when investment firms fail.
In a combined consultation and discussion paper issued today, the FSA set out how it will implement changes required by the European Markets Infrastructure Regulation (EMIR) to protect client money.
However, it has also proposed to go further, in what it described as the "most radical change that has been made to the client money regime in over 20 years".
Instead of all client money being treated as part of a single pool in the insolvency of an investment firm, the new regime would allow firms, with their clients' agreement, to operate legally and operationally separate client money sub-pools.
By doing this, the FSA said it would be possible to restrict any client money shortfalls to a particular sub-pool, so that all the clients of a firm do not share all losses, thereby maximising client money return for some clients.
In addition to this, it believes the proposals would allow the distribution of client money from a particular sub-pool where no contentious issues have arisen, leading to a more rapid distribution of some client money.
The proposed rules will apply to all regulated firms that hold client money or custody assets in relation to investment business.
Meanwhile, the discussion element of today's paper looked at a general overhaul of the client money and custody assets regime in the wake of the MF Global and Lehman Brothers failures.
Richard Sutcliffe, the FSA's client assets unit leader, said: "The protection of client assets remains a key priority for the FSA and today's proposals will go a long way to ensure confidence in UK markets is maintained.
"In addition to the changes required by EMIR the FSA proposals will lead to the most radical change in the client assets regime in over 20 years with the introduction of client money sub-pools that are designed to bring further safeguards to the industry.
"Furthermore, the fundamental review of our client assets regime also invites debate on the changes required following the lessons learned from ongoing insolvencies."
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