Template:Inadvertent use

Settlement fails and shortfalls and express prior consent

Warning: tedious passage approaching
The Jolly Contrarian’s view is that shortfalls arising through settlement failures in an omnibus account are covered by CASS 6.6.54 and not the “omnibus use” in 6.4.1(2) and therefore do not require a client’s express prior consent:

• Shortfalls arising as a result of inbound settlement failures are not in the nature of deliberate, or even really “inadvertent” use of client assets: They are shortfalls arising as a result of complying with client instructions on their own assets, and are covered by the Shortfalls language introduced after PS14/9 by CASS 6.6.54 R.
• As shortfalls, they have been subject to comprehensive review (PS14/9) and detailed specific provisions (CASS 6.6.54R) which do not require prior express consent.
• There is no mention of “inadvertent” use in CASS 6.4.1.
• If one accepts that a shortfall is not a “use” per se (inadvertent or otherwise), then a non-compliant use under CASS 6.4.1 sounds like an operational failure or contractual breach whereby the custodian (intentionally) uses assets wrt which it had no permission from the client to use.
• The “express prior consent” requirement of 6.4.1 applies to all clients (not just retail ones – simply the earlier text specified precisely how that prior express consent was to be evidenced for retail clients) has substantively been in place since 2007 (MiFID I) and was not materially been changed either by PS 14/9 or MiFID II.
• The meaning of “prior express consent” in the context of MiFID was discussed by then regulator CESR in 2007 a discussion paper (albeit in the context of best execution) and said: “Where MiFID requires “prior express consent”, CESR considers that this entails an actual demonstration of consent by the client which may be provided by signature in writing or an equivalent means (electronic signature), by a click on a web page or orally by telephone or in person, with appropriate record keeping in each case.”