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COBS 18 – Client Assets – Custody and Control Requirements

PostedJune 24, 2025
UpdatedJune 24, 2025
ByAndy

1. Chapter Summary

COBS 18 sets out the regulatory requirements for firms handling client assets, ensuring that these assets are properly identified, safeguarded, and segregated from the firm’s own property. This chapter aims to protect clients by mandating clear custody arrangements, recordkeeping, and controls, thereby reducing the risk of loss or misuse of client assets. It is vital within the regulatory framework to maintain client trust and market integrity, especially in cases of firm insolvency.

2. Applicability

This chapter applies to firms that have custody or control of client assets, such as investment firms, depositaries, and asset managers dealing with financial instruments or other assets on behalf of clients. The rules primarily concern MiFID business and regulated activities involving client assets, with specific provisions for retail and professional clients. Some exemptions apply depending on the type of asset or the nature of the firm’s activities.

3. Key Rules and Their Meaning

  • COBS 18.1.1R – Custody of Client Assets Firms must ensure client assets are held in a manner that protects the client’s ownership rights and allows easy identification. In practice: This means firms must segregate client assets from their own and use reliable custodians or nominee arrangements.
  • COBS 18.2.1R – Record-Keeping and Reconciliation Firms must maintain accurate and up-to-date records of client assets, including holdings and transactions, and regularly reconcile these records with custodian statements. Meaning: This rule ensures transparency and accuracy in asset management, helping detect discrepancies early.
  • COBS 18.3.1R – Use of Third Parties and Disclosure to Clients When client assets are entrusted to third parties (e.g., custodians), firms must disclose this to clients and obtain their consent. Nuance: Firms must conduct due diligence on third parties and ensure appropriate contractual protections are in place.
  • COBS 18.4.1R – Controls over Asset Transfers and Instructions Firms must establish controls to verify the authenticity of client instructions and to prevent unauthorized asset transfers. In practice: This includes robust verification processes and audit trails.
  • COBS 18.5.1R – Treatment of Client Assets on Insolvency Client assets must be segregated and identifiable such that they can be returned to clients promptly if the firm becomes insolvent. Meaning: This rule protects clients from losses due to the firm’s financial failure.

4. Interpretation Notes / FCA Expectations

  • The FCA expects firms to exercise due care when selecting custodians or third parties and to continuously monitor these relationships.
  • Guidance emphasizes the need for clear and comprehensive client disclosures regarding custody arrangements to maintain transparency.
  • Firms should maintain a strong governance framework around client asset safeguarding, including senior management accountability.
  • FCA commentary highlights that failures in asset safeguarding often stem from weak controls or inadequate reconciliation procedures.

5. Practical Considerations for Firms

  • Maintain separate accounts or holdings for client assets with clear client identification.
  • Implement robust record-keeping systems that track asset movements and holdings in real time.
  • Establish formalized procedures for client consent and disclosure when using third parties.
  • Set up comprehensive internal controls and audit trails for all asset-related transactions and client instructions.
  • Conduct regular reconciliations between firm records and custodian statements and resolve discrepancies promptly.
  • Provide ongoing staff training and senior management oversight on client asset rules.

6. Related Handbook References

  • COBS 17 – Client Money and Assets (handling and safeguarding of client money)
  • SYSC 10 – Systems and Controls (governance of custody arrangements)
  • PRIN 2A – FCA Principles for Business (integrity, client interests)
  • CASS – Client Assets Sourcebook (overlapping detailed rules)
  • COBS 10 – Client communications and disclosures

7. Regulatory Focus / Enforcement Risk

  • FCA enforcement actions often focus on failures to segregate client assets properly or inadequate controls leading to client detriment.
  • Mismanagement of client assets is a priority area given the high potential for loss or fraud.
  • Firms face significant scrutiny over due diligence on custodians and the quality of client disclosures.
  • Firms should proactively maintain strong controls and transparency to mitigate enforcement risks.