Broking Business Summer 2019: Executing NST deeds: how to get it right
Read time: 4 mins
Service: Audit & assurance Sector: Financial services
UK regulations allow a broker to hold client money in a client bank account, which can be protected by an NST or a statutory trust. The main purpose of the trust structure is to protect clients by ensuring the funds held are ring-fenced from the broker’s own funds.
This means there is no possibility of client money being at risk (for example, should the broker become insolvent). In this article we focus on setting up an NST.
To set up a valid NST, a broker must properly execute an NST deed in accordance with the rules in CASS 5 of the FCA Handbook.
What are the formalities of a deed?A deed will only be properly executed by ensuring the formalities for a valid deed are met. The document must be:
- in writing;
- clearly intended to take effect as a deed (the “face value” requirement);
- executed as a deed; and
Why proper execution mattersUnder English law, there are certain execution requirements which must be satisfied in order for the deed to be valid. If an NST deed is not properly executed, not only is there regulatory non-compliance, there is also a risk that the client money will not be segregated from the broker’s own money, which goes against the very purpose of setting up the trust.
How should a deed be executed?It can be executed by a broker that is a company in England and Wales in the following ways:
- affixing its common seal to the document;
- two directors signing the document;
- a director and the company secretary signing the document; or
- a director signing the document in the presence of a witness (the witness cannot be a party to the deed) who attests the director’s signature.
The following methods apply to LLPs:
- affixing its common seal to the document;
- two members signing the document; or
- one member signing the document in the presence of an attesting witness.
The following methods apply to partnerships:
- all partners signing the document in the presence of an attesting witness; or
- one or more partners who have been granted authority by deed to execute on behalf of the partnership signing the document in the presence of an attesting witness.
Avoid the pitfallsBrokers should also ensure that the contents of the NST deed comply with CASS 5.4.7. This rule sets out wording which brokers can use in the NST deed. Here are some common areas of confusion:
- Don’t assume the company’s articles of association or constitution (or partnership agreement where applicable) apply the standard requirements regarding execution of a deed.
- A deed can’t be signed by the same person who is signing as both director and company secretary. In such cases, such a person should sign solely in their capacity as director in the presence of an attesting witness.
- If the deed is to be executed by more than one person, they should both sign the same deed (rather than separate copies) to avoid risk of invalidity.
- Although there is no strict legal requirement, it is best practice for an attesting witness to be independent, since he or she may have to provide unbiased evidence relating to the execution of the deed. Brokers should therefore avoid using spouses, other relatives of the signatory or relatives of other directors of the company as witnesses.
Can electronic signatures be used?Although there is a requirement for a deed to be in writing, a broker can execute a deed electronically by each of its two authorised signatories (two directors or a director and company secretary) signing using an electronic signature (which can take a variety of forms) either in counterpart or by one signatory signing, followed by the other adding his or her signature to the same version (electronic or hard copy) of the deed. However, case law has yet to crystallise regarding the validity of electronic signatures in cases where a director signs on behalf of a company in the presence of an attesting witness.
When is a deed ‘delivered’?A deed is generally deemed ‘delivered’ when a broker shows an intention to be bound by it, even if it retains possession of the document. For companies, a deed will be deemed to be delivered (and therefore bind a broker) at the point of execution, unless a contrary intention can be proved. At a practical level, a broker can execute a document but specify a delivery date by including clear wording in the document that the deed will be delivered on the date at the head of the document.
Making it validBrokers should be mindful of the following non-exhaustive steps before executing an NST deed:
- prepare standard form execution clauses containing the relevant signatories;
- carry out background checks on potential attesting witnesses;
- avoid using counterparts where possible;
- review articles of association and board minutes to confirm directors’ or other signatories’ powers to bind the company; and
- ensure the deed’s date reflects when the parties intend to be bound (i.e. the date of delivery) – the signature block should begin: ‘This Deed has been executed as a deed and delivered on the date stated at the beginning of this Deed.’
What are the rules for overseas companies?An overseas company can execute a deed in two ways:
- by affixing its common seal; or
- in any manner permitted by the laws of the territory in which the overseas company is incorporated for the execution of documents by that company.