CitySolicitor Insurance Law Committee


The Insurance Law Committee has recently welcomed several new members and now contains a good cross-section of insurance practitioners, contentious and non- contentious, in smaller and larger firms and in private practice and in-house.


The Committee continues to monitor developments in the insurance sector. The CEO of the London and International Insurance Brokers Association (LIIBA), David Hough, attended the Committee’s December meeting to discuss the revised Insurance Mediation Directive (known as “IMD2”), reform of the rules on client assets (on which the Committee has made a submission) and the EU Commission’s investigation of the insurance subscription market and pools. The Law Commissioner for commercial and common law, David Hertzell, is due to attend the first Committee meeting of 2014 to obtain feedback on the draft Insurance Contract Law Reform Bill, which is expected to be published in early 2014. The Committee has commented on each of the Law Commissions’ consultation papers.


The Committee recently submitted responses to the PRA’s consultation papers on solvent schemes of arrangement (CP 6/13) and on capital extraction (CP 7/13). The consultation paper on solvent schemes of arrangement received a great deal of attention in the market, and the Committee’s response was covered by an industry magazine.


Finally, Christian Wells of Hogan Lovells International LLP has retired from the Committee in December, after more than 25 years as a member, which included a successful period as Chairman. The Committee would like to record its gratitude to Christian for his substantial contribution to the work of the Committee throughout this period.


Richard Spiller, Chairman, Holman Fenwick Willan LLP


Regulatory Law Committee


The Regulatory Law Committee (the “Committee”) meets monthly and has, since October, responded to the following consultations and statements.


1. FCA CP 13/5 – Review of the 6 • City Solicitor • Issue 84


client assets regime for investment business


The Committee has responded to the FCA’s review of the client assets regime for investment business. The key elements of the response were as follows:


Application of the banking exemption


The Committee noted that the FCA’s proposed amendments to CASS 7 appeared to have the effect of making the application of the “banking exemption” (i.e. the rule that permits Banking Consolidation Directive credit institutions to hold cash deposits which would otherwise be client money without applying the client money rules to such deposits) conditional upon notification to the relevant client.


The Committee, while noting that there was an obligation to disclose to clients that the banking exemption applies in any given case, explained its view that the new rule would be inconsistent with the wording of the MiFID Implementing Directive and would introduce undesirable risks and complications when determining which money was part of the client money pool of a BCD credit institution. The Committee also noted that the proposed notification was potentially misleading in its wording.


Interpreting the requirements for the Delivery versus Payment (“DvP”) window


The Committee noted that there was some uncertainty about the proposed definition of the term “commercial settlement system” for the purposes of the DvP exclusion (i.e. the exclusion permitting the client money and client asset rules to be temporarily disapplied during the course of a DvP transaction effected through a commercial settlement system, subject to certain conditions). In particular, the Committee’s response noted that firms may need to rely on the exclusion not only for domestic transactions settled through CREST, but also for other transactions in a range of instruments which may be traded via venues outside the UK.


The Committee suggested that in the first instance, it would be preferable if the term were not defined, since it might inadvertently exclude certain systems intended to be within scope. If that argument were to be rejected, the Committee proposed that the FCA should undertake further analysis of the


existing proposed definition to clarify outstanding issues – for example, whether a firm needed to be a direct participant in such a system in order to be able to benefit from the exemption. In particular, the Committee was concerned that the definition should be expanded to include a reference to a “system and/or arrangements” in order to avoid an unnecessarily narrow scope which would cause practical difficulties.


Proposed client money amendments


The Committee outlined its objection to the FCA’s proposed new rule that the specific consent of the client should be required before a transfer of client money to a client’s bank account would cease to be client money. It explained that the rationale behind this requirement was unclear and that there would be potential difficulties if clients were uncooperative.


The Committee also expressed its disagreement with the proposed rules relating to allocated but unclaimed client money, noting that the effect of the new provisions was to force a firm to pay the money to a registered charity while leaving it with a potential monetary liability in the event of a future claim in respect of that money.


The Committee was concerned by the FCA’s proposals to modify the wording in CASS in relation to client money transferred to a third party. In particular, the wording used in the consultation paper, if read literally, appeared to imply that if a third party held money for a person, that money could be client money simply because that person was also a client of the firm. However, the Committee also identified that the proposed rules could be under-inclusive in some aspects, in that they appeared to link the rules concerning client money held by a third party to specific transactions, when client money could be held by a third party more generally and ought to benefit from the same protection.


Acknowledgement letters


The Committee noted that the FCA’s proposed requirement that firms obtain acknowledgement letters from all banks in the specified form, irrespective of whether or not the relevant account is in the UK, was likely to lead to significant practical difficulties. The response identified that many non-UK banks were likely to be resistant to giving acknowledgement letters in an


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