Non-statutory trusts - what's the use?

Given my comments in last week's article, you may be thinking why use a non-statutory trust at all. A non-statutory trust does provide the customer with some of the benefits of protection but critically allows a firm to pool the client money and provide a funding source other than actually borrowing money itself. By its very nature, the UK customer will see such an account as having a higher risk, but equally they could potentially gain by receiving interest from the collective investment of such funds. Its creation and use is very much favoured by the larger and often international broker. This is because they may be receiving client money in respect of transactions that are subject to FSA regulation and also transactions that are not. The FSA rules provide the firm with the option of how to account for those 'other' cash transactions, but many brokers will elect to use the non-statutory trust as a way to collect them all together and adopt a single treatment.

Accounting requirementsShould a firm elect to operate a non-statutory account then there are some basic and additional requirements that have to be met. Many of them should not prove too onerous as it would be expected that such firms would have someone dedicated to their accounting, and similarly that their current capital requirements will already exceed £50,000. With regard to the IT system, this too may require even the larger firms to have to dedicate more time to selecting their client money management. The FSA requires that the systems are capable of quantifying and managing the credit risk exposure. However, given that some of these clients may also be retail clients, this is likely to require facilities similar to a banking system. I use this comparison because your supporting systems will need to be able to:

strike a balance of exactly what the position is on your client accounts;

where there is funding, calculate the notional interest that may be payable to clients who have provided such funds;

where necessary evaluate your credit exposure to any individual client.

Where firms have elected to include a standard interest in their terms of business on the grounds that they do not require express consent to their interest treatment (because interest is estimated at below £20), the system will need to be designed to monitor and confirm this on a daily basis as notional interest earned as a result of the funding would be required. There is some irony in the fact that despite much of the business generated in the UK passes though either wholesale or international brokers, smaller brokers will be able to dictate the need for firms to operate a combination of both a statutory and non-statutory trust as it is the first broker in the chain that will set the cash management options available for their client and obtain the necessary express consents if a non-statutory account is to be used.

Technology demandsOnce the decision is made as to which accounts are to be operated (which you should do pre-application), firms are going to face the challenge of making sure their IT systems can cope. This means that such systems will have to meet the demands of operating the selected accounts and equally that the base data that brokers currently hold will be re-coded. With things needing to be finished by December this year, firms need to be thinking about beginning the physical transfer of funds around July or August to allow for the re-training of staff and to fix the mistakes that will inevitably arise in the transitional period.

Alex Peterkin is a director of the RWA Group. Email: apeterkin@fsasolutions.co.uk