Investment firms are required to issue a Client Assets Key Information Document to new retail clients from 1 October 2015 onwards, and to existing retail clients by 1 January 2016. This Briefing sets out further detail on this new obligation.
NEW CLIENT ASSET REGULATIONS
The new Client Asset Regulations1 (the 2015 Regulations) issued by the Central Bank of Ireland (the CBI) in March 2015 will come into operation on 1 October 2015, and will replace the existing Client Asset Requirements issued in November 2007 under the MiFID Regulations2 and the Investment Intermediaries Act 1995 (as amended, the IIA).
The CBI has also issued helpful Guidance for Investment Firms and an Industry Presentation on the 2015 Regulations. The 2015 Regulations apply to (a) MiFID investment firms, (b) investment business firms under the IIA, (c) UCITS management companies in respect of services conducted under Regulation 16(2) of the UCITS Regulations3, (d) alternative investment fund managers in respect of services conducted under Regulation 7(4) of the AIFMD Regulations4, and (e) each of the foregoing in respect of passported activities carried out by them from branches in other EEA countries.
NEW REQUIREMENT FOR A KEY INFORMATION DOCUMENT
Regulations 7(18)-(21) of the 2015 Regulations oblige firms, from 1 October 2015 onwards, to provide new retail clients (i.e. new clients who would be categorised as retail clients under the MiFID Regulations) with a Client Assets Key Information Document (CAKID) before those retail clients sign terms of business or investment agreements with those firms.
PAPERING EXISTING CLIENTS
In respect of existing clients who are retail clients on 1 October 2015, firms will have until 1 January 2016 to make a CAKID available to them. The CBI's Guidance confirms that the CAKID may be provided to existing clients via the firm's website (the ability to provide the CAKID for the first time via a firm's website applies only to papering existing clients and not to the provision of the CAKID to new clients).
HOW SHOULD THE CAKID BE PROVIDED?
The CAKID must be provided as a separate, stand-alone document in a durable medium. The firm's Client Asset Management Plan (CAMP)5 must document the medium to be used, and the firm must be able to demonstrate, on request, that it has provided the CAKID to its retail clients.
WHAT KEY PROVISIONS MUST THE CAKID INCLUDE?
- The key features of the 2015 Regulations, and a reference to the Guidance, together with links to the 2015 Regulations and the Guidance on the CBI's website. The CAKID must also highlight that the client assets regime cannot fully eliminate all risks relating to client assets (such as fraud and negligence).
- An explanation (using plain English to the extent possible) of what constitutes "client assets" under the 2015 Regulations. The firm should also clarify that the client assets regime does not relate to the value of a client's investment.
- The circumstances in which the 2015 Regulations apply and do not apply. In particular, the CAKID should clarify when assets cease to be client assets, which financial instruments are subject to the client assets regime and which are not, and any unique circumstances in which the client assets regime will not apply.
- The circumstances in which the firm will hold client assets itself, hold clients assets with a third party (such as an eligible credit institution or a custodian), and hold client assets in another jurisdiction. Where client assets will be held by a third party, the firm must clarify the regulations that the third party is subject to, any applicable risks or limitations, the basis on which that third party was selected, and whether it is related to the firm or independent of it. Where client assets will be held in another jurisdiction, the firm must confirm what investor compensation scheme applies.
- The arrangements that apply to the holding of client assets, the risks associated with those arrangements, and controls in place to mitigate such risks.
HOW MUST THE CAKID BE PRESENTED?
The CAKID must be presented in a clear manner and must be easy for retail clients to understand. The CBI has, in particular, indicated that the CAKID should not contain unnecessary branding, or branding that detracts from the content of the document. Further, references to potential returns from investment products should not be included.
IS THERE A TEMPLATE?
No, the CBI has decided not to provide a CAKID template as it expects each firm to prepare a CAKID that reflects that firm's own particular business model and the services it offers to its retail clients.
ANNUAL REVIEW
A firm must review the contents of its CAKID annually to ensure that the information in the CAKID continues to be accurate and relevant. When issuing annual statements to retail clients, a firm must also include a notice that the CAKID is on its website.
CHANGES TO THE CAKID
If a firm makes material changes to its CAKID, it must inform retail clients, using a durable medium, about these changes within one month of making them. The firm must document, in its CAMP, how it will make that notification – however, the firm's website is not regarded as a durable medium for a change notification. It should also be noted that where the firm changes its CAKID, it need only notify the changes to its retail clients, and need not provide the complete CAKID to them (although it may, in fact, be easier to do so).
Footnotes
1 S.I. No. 104 of 2015 - Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Client Asset Regulations 2015 for Investment Firms.
2 S.I. No. 60 of 2007 – European Communities (Markets in Financial Instruments) Regulations 2007.
3 S.I. No 352 of 2011 – European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.
4 S.I. No. 257 of 2013 – European Communities (Alternative Investment Fund Managers) Regulations 2013.
5 Investment firms are required, under Regulation 8(3) of the 2015 Regulations, to produce a client asset management plan by 1 January 2016.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
