U.K. Seeks to Tighten Client-Money Rules After Lehman, MF

The U.K. markets regulator is seeking to strengthen rules for protecting ring-fenced client accounts after the collapses of Lehman Brothers International Europe and MF Global Holdings Ltd. exposed failings in the current framework.

The Financial Conduct Authority said it is seeking input from the industry on whether to make changes to current rules to allow client money to be returned faster if a firm is bankrupt. Client-asset rules apply to about 1,500 banks, brokerages and other companies in the U.K. which hold more than 100 billion pounds ($151 billion) of client money, the regulator said in a statement today.

“Under the current regime, accuracy is effectively prioritized, leading to a regime that takes months, and in some cases years, to return client money,” the regulator said in a consultation paper.

The agency stepped up enforcement of client-money rules after the bankruptcy of Lehman Brothers Holdings Inc. in 2008. The New York-based bank’s former U.K. unit failed to segregate billions of dollars of client funds from its own accounts, leaving creditors with competing claims that resulted in years of litigation. The issue resurfaced in the administration of MF Global’s U.K. unit.

The regulator has said that it will overhaul rules on the treatment of margin assets posted by failed companies for their derivatives trades. It also proposed that investment companies could divide up clients’ money into ring-fenced sub-pools, so not all clients would face the same losses in the event of insolvency.

The regulator, in its previous incarnation as the Financial Services Authority, began an investigation into whether firms were properly segregating client money from their own. It fined units of BlackRock Inc., JPMorgan Chase & Co., and Barclays Plc for failing to properly protect the accounts. No clients suffered losses in any of those instances.

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