The UK’s new chief regulator has called for a “robust debate” to help determine new rules protecting customers’ assets as it seeks to end the legal delays that have held up the return of money to clients of failed firms Lehman Brothers and MF Global.
Martin Wheatley, chief executive of the Financial Conduct Authority, said he wanted market participants to offer their opinion over “which direction the regime should take”. There would be more emphasis on the fair treatment of counterparties under the FCA, he added.
It was his first public comments outlining the future markets regulation of Europe’s largest financial centre as the FCA prepares to open its doors next spring. UK lawmakers have split its predecessor, the Financial Services Authority, and divided oversight of market structure between the FCA and the Bank of England.
The regulator is making what it has called “the most radical change in 20 years” to its rules governing the protection of asset clients amid incoming European legislation and the high-profile collapse of broker-dealers Lehman Brothers and MF Global in recent years.
Many customers have had to wait years for the return of their funds from the UK units of the US brokers, in part owing to the uncertain legal status of the assets. That has drawn some criticism from investors, who have compared it unfavourably to the US system.
The overhaul will also include incoming European rules, which will make it easier for customers to transfer open derivatives positions from a failed firm to another member of the same clearing house. As London is the centre of most European derivatives trading, UK rules are seen as critical. The FSA estimates it oversees more than £100bn of client money and £9.7tn in client assets.
“To oversimplify somewhat, increases in the speed of return of assets following the failure of a firm will normally come with some sacrifices in accuracy [about who owns what]; and vice versa,” Mr Wheatley told a conference in London. “Our regime aims to get the best of both, but beyond a certain point they can work against each other.”
He pointed out that the UK’s client assets regime was built on legislation that included insolvency and company law. A US-style system would allow assets to be returned more quickly but also required an industry-funded insurance scheme, known in the US as the Securities Investor Protection Corporation (SIPC).
“Someone would need to fund any SIPC-style arrangements, and insolvency practitioner liability is enshrined in UK law,” he added.
The European regulations are designed to allow clients to continue trading or more easily wind up positions. Investors and lawyers have warned the changes would offer more security but increase operational complexity and cost.
Trade associations such as the Investment Management Association have called for rules to allow clearing houses to identify the true owner of positions and assets at all times.