Financial Crime World

Investment Firms Must Ensure Robust Client Asset Risk Management

Safeguarding Client Assets: A Comprehensive Approach

The Central Bank has issued guidelines requiring investment firms to maintain a comprehensive Client Asset Management Plan (CAMP) that outlines all relevant risks and processes in place to mitigate them. This plan is essential for safeguarding client assets and ensuring their efficient distribution in the event of an investment firm’s insolvency.

Identifying Risks

The CAMP must identify various risks associated with client asset safeguarding, including:

  • Counterparty risk
  • Concentration risk
  • Contagion risk
  • Operational risk
  • Complexity of assets
  • Non-compliance with client instructions
  • Outsourcing risk
  • Over-reliance on group arrangements
  • Emerging risks
  • Risk of loss or misplacement of physical client financial instruments
  • Key person risk
  • IT risk
  • Market risk
  • Regulatory risk

Mitigating Risks

In addition to identifying these risks, the CAMP must outline the processes and controls in place to mitigate them. This includes:

  • Controls associated with the registration of client financial instruments
  • Removal of non-client funds from third-party accounts
  • Safeguarding physical client financial instruments
  • Ensuring that amendments to lists of third parties are approved by senior management

Governance Arrangements

Investment firms must document their governance arrangements, including:

  • Roles and responsibilities of the Head of Client Asset Oversight (HCAO)
  • Relevant reporting lines
  • Operational structure, including key committees and support functions
  • Management information provided to the board and relevant governance forums for monitoring client asset risks

Outsourcing Arrangements

In cases where an investment firm outsources functions related to client asset safeguarding, the arrangement must be clearly documented in the CAMP, including:

  • Details of the outsourced service provider
  • Jurisdiction of incorporation
  • Description of services
  • Rationale for outsourcing
  • Exclusions from the arrangement
  • Evidence of adequate oversight

Insolvency Section

The article concludes by emphasizing the importance of regular reviews and updates to the insolvency section of the CAMP, which should include information such as:

  • Lists of third-party accounts
  • Agreements with third parties
  • Arrangements with sub-custodians and outsourced service providers

Key Takeaways

  • Investment firms must maintain a comprehensive Client Asset Management Plan (CAMP) outlining all relevant risks and processes in place to mitigate them.
  • The CAMP must identify various risks associated with client asset safeguarding, including counterparty risk, operational risk, and regulatory risk.
  • Investment firms must document their governance arrangements, including roles and responsibilities of the Head of Client Asset Oversight (HCAO).
  • Outsourced service providers must be clearly documented in the CAMP, along with evidence of adequate oversight.
  • The insolvency section of the CAMP must include information such as lists of third-party accounts, agreements with third parties, and arrangements with sub-custodians and outsourced service providers.