COVID-19 has presented a number of business, operational and regulatory challenges to regulated firms in circumstances that seemed unfathomable at the start of the year. As we approach the end of a tumultuous year, the FCA has reiterated its call in a recently published ‘Dear CEO’ letter emphasising the importance of maintaining adequate arrangements for safeguarding client assets and has reminded firms of their continued obligations to oversee those arrangements.
Unlike many things 2020, this Dear CEO letter was not ‘unprecedented’ and follows an increasingly interventionist streak from the FCA to ensure firms are abiding by principle 10 of the FCA handbook to arrange ‘adequate protection for clients' assets’ when they are responsible for them. Indeed, this year the FCA have already published Dear CEO letters on, client money balances, Transfer-Title Collateral Arrangements (TTCAs), CASS expectations under Covid-19.
This latest pronouncement and other regulatory hot topics was discussed in our recent Deloitte Insurance client assets webinar held on 17th November 2020, when we were joined by Emad Aladhal (Head of the Resolution Strategy and Client Assets) who underlined the key points stressed in the Dear CEO letters.
The FCA’s most recent Dear CEO letter stressed that client asset handling arrangements are never more important than in times of economic uncertainty and potential downturn. Governance and oversight remain key focus area for the FCA and maintaining adequate governance and Senior Management oversight structures is paramount, whether it is via the application of CASS to business models, oversight of third parties, client money calculations and reconciliations or ensuring appropriate bank acknowledgement letters.
The temptation for firms to use client assets to resolve problems with short-term liquidity is amplified by the Non-Statutory Trust regime that CASS 5 permits, thereby exposing firms to additional credit risk. The FCA reiterated the importance of maintaining up to date and compliant Trust deeds and of Risk Transfer agreements with insurers to ensure client assets protection at all times, including in the unlikely (but with increased risk during an economic downturn) of a pooling event.
Another regulatory hot topic is operational resilience. Operational resilience – how organisations use non-financial resources to withstand shocks to its demand, people, technology and facilities - has been area of the FCA since their discussion paper in 2018. It overlaps with client asset oversight in the key areas such as oversight of third parties, risk transfer arrangements, due diligence and appointed representatives. As the events of 2020 have shown, unlikely risks and materialise and show that even the most thorough plans were inadequate to deal with the threat of a global pandemic and move to a fully remote-working model for most firms. Firms should continue to build on their plans, read the recent consultation paper, and think about operational issues, such as the banking of cheques for example, that arise and could impact client asset handling arrangements.
Any discussion of key regulatory priorities would not be complete without an update on COVID-19.
On COVID-19, the FCA wanted to remind firms of their continued client money reporting duties, particularly in the areas of notifiable breaches and adverse opinions, while ensuring that whatever measures are taken to ensure financial and operational resilience, they should be mindful of clients’ best interests and the adequate segregation and protection of client assets. A specific coronavirus page has been set up to address firm’s queries, which should be the starting point for all firms considering changes to their control environments as a result of the pandemic. This reflects FCA concerns over CASS oversight and the level and the increased focus on the reliance and operating effectiveness of key controls.
Our webinar also covered a few other topics, including Brexit and de-regulation (the removal of client money permissions).
With 2020 drawing to a close, Boards will be expected to demonstrate the actions in response to the letter.