Client Assets Regulation (CASS) #2

The FCA published COVID-19 guidance on the application of client asset regulations on 6 April 2020.

As expected, the FCA are not relaxing any of the CASS rules. Where a regulated firm has a query about how to apply the CASS rules in the current circumstances, the FCA has stated that firms can contact the FCA by emailing CASSgeneral@fca.org.uk. However, the FCA expects firms to have undertaken clear analysis and considered the potential options available before it contacts the FCA with any CASS queries.

In its publication the FCA considered the following six areas:

• Cheque handling
• CASS audit reports
• Segregation and diversification of client money
• Notification of CASS breaches
• CASS firm classification
• Delays to CASS improvement programmes.

Cheque handling

A number of firms have told us that being able to handle cheque receipts is one of the key reasons as to why they are retaining some onsite presence in their offices. Where cheques are unable to be banked the FCA has suggested the mitigating steps of contacting the client and asking them to send funds directly to the firm’s client money bank account or using firm’s money to fund the cheque receipts until the cheque has been banked and is available as cleared funds. We note that many firms will be unaware of cheque receipts until they are physically received so firms may need to consider wider communications to customers encouraging them to use alternative payment methods thereby reducing the level of cheque receipts and risk in this area. The FCA has stated that firms should consider the potential for harm caused by failing to bank a cheque on a case by case basis. Where a firm being unable to bank a cheque has an impact on the customer’s experience this should be clearly communicated to the customer.

CASS audit reports 

The FCA has stated that many firms are concerned about additional breaches and the impact that this may have on CASS audit costs. Whilst the FCA has indicated that they are not expecting additional costs, we note that additional breaches and changes to a firm’s CASS control environment may lead to additional work for CASS auditors. Many of our readers will be aware that one aspect of a CASS audit is for the CASS auditor to assess the adequacy of the firm’s systems to comply with applicable CASS rules. Where firms have had to amend or change key controls as a result of new working practices triggered by COVID-19, the CASS auditor will need to assess the effectiveness of the control before and after the change. Additionally the impact of new working practices may introduce new CASS risk or increase existing CASS risk which may impact on the overall CASS audit approach.

Physical custody asset reconciliations

By their very nature, physical custody asset reconciliations will normally require onsite staff presence to be completed. The CASS rules require these reconciliations to be performed at least every 6 months. The FCA has not relaxed this rule and has reminded firms of the need to notify the FCA where this reconciliation cannot be completed. Where the reconciliation cannot be done, the FCA expects the firm to have taken mitigating actions to ensure that custody assets remain protected.

On a related note regarding the handling of physical custody assets, firms should consider the impact of its inability to handle receipts and disbursements where staff presence may not be available across all sites. Where alternative sites are used to safe keep physical custody assets, firms should ensure their physical security arrangements are sufficiently robust.

Segregation and diversification of client money 

The publication indicates that some firms have told the FCA that they are struggling to comply with segregation and diversification rules as client money balances have substantially increased. The FCA has stated that it expects firms to continue to comply with segregation and diversification rules. We note that the segregation rules, keeping firm’s money and assets separate from client money and assets, is of critical importance when affording CASS protection so firms must do all they can to ensure their control environment remains fully effective in this respect.

CASS firm classification 

Whilst increasing client money balances may change a firm’s CASS classification under 1A2.7R. There is no expectation from the FCA that firms will make any interim notifications. The FCA has stated that the normal calendar year notification of 31 December 2020 applies and that firm’s should notify the FCA in January 2021 as usual.

Notification of CASS breaches

The FCA reminds firms that it is business as usual for the notification of breaches to the FCA, whether these fall under CASS, SUP or Principle 11, the FCA expects firms to remain diligent in this respect.

Delays to CASS improvement programmes 

Where firms need to delay planned CASS compliance improvement programmes, firms should consider whether they need to notify the FCA under SUP 15 or PRIN 11 and, if relevant, notify existing FCA CASS contacts on expected progress towards compliance. Firms should consider the risks and any potential customer harm of delaying the plans and whether interim solutions may need to be implemented.

In summary, the FCA does not appear to be relaxing any of the CASS rules. CASS remains a high priority area of FCA regulation, regardless of market circumstances. Where firms cannot operate their normal business as usual CASS control environment they must take mitigating steps, which may include changing operational practice and implementing new controls to ensure that client assets remain protected.