On 3 February 2023, the Central Bank of Ireland (the "Central Bank") published an addendum to the Draft Guidance on the revised Client Asset Requirements (the "CAR") (the "Addendum").
The Central Bank originally published the Draft Guidance in June 2022 to assist firms in interpreting the revised CAR, which is contained in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023 (published on 23 January 2023) (the "Revised Central Bank Investment Firm Regulations").
In its feedback statement to its December 2020 consultation paper on enhancements to the CAR ("CP133") the Central Bank noted that it intended to update the CAR to include transfer of business as a standalone item under Regulation 59(1) of the CAR.
The Addendum updates Chapter 5 of the Draft Guidance and introduces a new Chapter 9 to include guidance in respect of the transfer of client assets as part of a transfer of business. Below is a summary of the Addendum's requirements.
Client Disclosure and Consent
The Central Bank indicated that it did not expect firms to address in their terms of business all eventualities of a potential transfer of business but at a minimum it states that firms should consider including the following in their terms of business:
(a) a commitment to notify clients in writing of any potential transfer of business in accordance with the timeframes outlined in the Addendum;
(b) a description of the information that the investment firm will provide to clients in relation to any potential transfer of business, including but not limited to (i) the relevant timeframes; (ii) the options available to clients; (iii) any changes to client asset protections resulting from the proposed transfer; and (iv) in the case that client assets will not be held in accordance with the Irish client asset regime following the transfer, an overview of the new/revised client asset protections that will be afforded to the client.
Material Transfers of Client Assets
This section of the Addendum is limited only to an investment firm effecting a material transfer of client assets to or from another entity. The Addendum highlights that the guidance in this section does not replace or supersede other requirements or guidance that may be applicable to transfers of business.
1. Effecting a material transfer of client assets to another entity
Notification to the Central Bank
Firms are required to notify the Central Bank three months in advance of any material transfer of client assets to another entity taking place (note, such notification is not a request for approval and should be provided to the Central Bank for information purposes).
Firms must appoint a point of contact for the duration of the business transfer (preferably be the Head of Client Asset Oversight ("HCAO")). If the transfer is taking place between two CAR regulated entities, then both must notify the Central Bank.
When considering the materiality threshold for notifying the Central Bank, firms should take into account the monetary value/percentage of client assets involved, the number/percentage of clients impacted and whether the level of client asset protection may be impacted (e.g. where client assets are to be transferred to an entity that is not subject to the CAR).
The notification to the Central Bank should include at minimum details of the transferee, a breakdown of the number of clients expected to be impacted and that will need to provide client consent, the approach to obtaining consent, the timeframe for the transfer and the firm’s proposed plan to notify clients of the transfer of business.
Client consent
In addition to reviewing the existing terms of business between the client and the investment firm to understand what provisions have been included in relation to the transfer of client assets and to understand its client consent and/or notification obligations, the Addendum states that the investment firm should consider its obligations under the CAR, with particular regard to its obligations under Regulation 63(1).
The Addendum provides separate guidance on client notification and consent obligations for both situations where (1) client consent to a transfer of client assets is provided for in the terms of business/contractual arrangements with clients and (2) where client consent to a transfer of client assets is not provided for in the terms of business/contractual arrangements. This includes obtaining consent (if not already provided), notification requirements, content of the notification and options available to the client.
Uncontactable clients
As noted in our June 2022 insight on the finalisation of the revised CAR, the Central Bank indicated in the Feedback Statement to CP133 that it would be introducing guidelines on how investment firms should deal with an uncontactable client in the context of a transfer of business.
The Addendum notes that to obtain client consent to the transfer, investment firms should:
- contact clients to obtain their consent at least two months in advance of the transfer taking place.
- determine, as far as reasonably possible, the correct contact details for all impacted clients and consider using multiple methods of communication to contact those clients.
- make at least two further attempts (following the initial contact attempt) to obtain clients’ written consent prior to the transfer of client assets taking place.
- where a client has not responded to the investment firm’s requests for written consent to the transfer of client assets by the specified deadline, attempt to contact the client on at least one further occasion by any means other than that used previously.
- where a client has not responded to the further notification, the investment firm should write again to the client either by post to the client’s last known address or by e-mail to the client’s last known e-mail address to inform them of the default position to be implemented.
The Central Bank notes its expectation that investment firm maintain a record of uncontactable clients identified in the course of a transfer of business including the following at minimum, (i) the date of the last known successful contact with the client; (ii) the date of the last attempt to contact the client; and (iii) the means by which the last contact attempt was made.
2. Effecting a material transfer of client assets from another entity
Notification to the Central Bank
The guidance in this section is very similar regarding transfer of assets to another entity. Firms are required to notify the Central Bank three months in advance of any material transfer of client assets from another entity taking place, a point of contact must appoint for the duration of the business transfer and if the transfer is taking place between two CAR regulated entities then both must notify the Central Bank. However, when considering the materiality threshold for notifying the Central Bank, firms should also take into account whether the transfer forms part of a new line of business being taken on by the investment firm
Notification to clients post transfer
The notification to clients requirements are also different where a firm is receiving client assets, an investment firm effecting a material transfer of client assets from another entity, should send a communication to all impacted clients notifying them that their client assets are now being held by the investment firm within one month of the conclusion of the transfer of business. This notification should include, at a minimum, details of any changes to the clients’ existing products and services, where not already provided, the revised terms of business that are applicable to the client and the Client Assets Key Information Document, and any other relevant information.
Residual Balances
The Addendum notes that small value and/or illiquid client assets are subject to the CAR in the same way as other client assets and investment firms must continue to treat them as such.
Application
The Revised Central Bank Investment Firm Regulations will be applicable to investment firms from 1 July 2023 and credit institutions from 1 January 2024. The final guidance on the revised CAR will also apply from those dates. Please note that the guidance and addendum are still in draft form.
This article was co-authored by partners, Joe Beashel, Louise Dobbyn and Ian O'Mara. Should you have any queries in respect of the above, please do not hesitate to contact any member of Matheson LLP's Financial Institutions Group, or your usual Matheson LLP contact.