The large fine handed to Bank of New York Mellon in April underlined the importance of complying with the UK regulator’s new rules on client assets and money. What do firms need to be aware of ahead of the June 2015 deadline?
In June 2014, the Financial Conduct Authority (FCA) published a raft of proposed changes
to its Client Assets Sourcebook (CASS). The changes came into force in two waves later that year: 1 July and 1 December.
From 1 June 2015, FCA-authorised firms will need to comply fully with all of the changes published last June. Unlike the 1 December 2014 changes, compliance will now be necessary for all clients.
The FCA’s CASS regime, revised after the collapse of Lehman Brothers in 2008, is designed to help ensure that clients’ assets and money are safe in the event of firms failing and exiting the market.
The importance of CASS compliance was made clear in April, when the FCA fined
the Bank of New York Mellon's London branch £126m for failing to protect its customers' assets. Georgina Philippou FCSI, Acting Director of Enforcement and Market Oversight at the FCA, emphasised that other firms “should take this as a further warning that there is no excuse for failing to safeguard client assets”.
With the 1 June 2015 deadline for total CASS compliance looming, we highlight ten key areas that firms need to address.
1. Write plainly and thoroughly
You may know exactly what you’re doing, but the FCA expects firms to be able to prove, in a document, that they understand the money flows, emphasises Julian Sampson, Chartered FCSI, Director of Fulcrum Compliance and former Chairman of the CISI Compliance Forum
The document must explain, amongst other things, how and why you carry out reconciliations. “This may seem like stating the obvious, which makes writing such a document harder to do,” says Sampson.
“The best way of doing this is to get some colleagues together in a room and ask, ‘what are we doing in this area?’ and then put all those questions up on a whiteboard. You might want someone who doesn’t know about client assets in the room, so they can ask for answers that might otherwise seem too obvious for you to consider.”
2. Persevere with acknowledgement letters
The FCA has issued new mandatory templates (called acknowledgment letters
) for use when opening new client money bank accounts and also for all existing client money bank accounts.
Firms should be prepared to show plenty of persistence in their efforts to get the signatures required for the letters. Andrew Henderson MCSI, Partner at corporate law firm Eversheds, says: “Where dealing with overseas banks, it has been proving difficult for firms to get the letters signed.”
3. Be clear about who has access
The FCA has revised the circumstances in which authorised fund managers (AFMs) will be permitted to cease to treat money as client money for a one-day window. During this time, AFMs will carry out a ‘delivery versus payment’ (DVP) transaction for the purpose of setting a transaction in relation to units in a regulated collective investment scheme.
“An AFM will have to ensure that, where it is unable to pass money received from a client to the depositary of the fund which the AFM manages by close of business the day following receipt, it treats that money as client money,” says Henderson.
Refresh your memory on CASS
The CISI offers members a Professional Refresher elearning module on Client Assets and Client Money. Click this box to find out more 4. Ensure organisational agreements are transparent
The FCA is reiterating the principle that one client’s money should not be used to fund another client’s investment business.
“The basic principle is that a firm should not be using Peter’s money to pay for Paul’s securities,” says Henderson. “It doesn’t mean, however, that the FCA expects you to use your own firm’s money to pre-sell acquisitions.”
He adds that a firm must ensure its organisational arrangements are adequate to minimise the risk that client money may be paid for the account of a client whose money is yet to be received by the firm.
5. Be ready to report
Provisions in CASS will now require firms to honour client requests for information on their holdings of client assets, but will permit firms to agree to charge clients reasonable costs for doing so.
6. Register titles carefully
CASS will restrict a firm’s ability to register a title to its own assets in the same name as any custody assets that are registered in the name of a nominee to circumstances in which this is necessary to facilitate a client transaction.
Firms need to review the manner in which assets are registered and make changes to comply with the revised rules.
7. Brush up on your record-keeping skills
The FCA is establishing clear requirements as to the steps a firm is expected to follow when undertaking an internal client money reconciliation.
It is also mandating the minimum frequency at which firms should undertake client money reconciliations and introducing more detailed notification and record-keeping requirements.
Firms need to review record-keeping, reconciliation and reporting systems and change as necessary, then test the effectiveness of any changes made.
“You need to be able to demonstrate you’ve had in place a set of systems that are reasonably related to what you’re trying to prevent,” says Henderson. “Even if something goes wrong, there is a difference in terms of consequences between the FCA saying 'you don’t know what you’re doing' and saying 'you’ve broken the rules.'"
8. Keep everything in its correct place
The FCA is enhancing the due diligence requirements that firms must carry out on banks with which they place client money. Firms are required to periodically assess whether they are diversifying these third parties appropriately.
9. Segregate money
The FCA is generally requiring firms to receive all client money directly into a client bank account – except where firms are using the alternative approach to client money segregation.
Fulcrum Compliance’s Sampson says: “Firms taking an alternative approach have more to do in order to comply with CASS, as they have to justify their alternative approach to their auditors and the FCA. If not now, then certainly in the near future.”
10. Ask yourself, "Is everyone trained?"
Your CASS operational oversight function might know all the issues. But Sampson urges firms to consider whether other employees require training in client assets and money.
He asks: “Do board directors understand your firm’s client money issues? Do client-facing staff know what they should do when presented by clients with an envelope of share certificates?
“Firms may want to think about including something on CASS guidelines in their regular compliance updates, whether it’s via newsletters or emails. Some firms run regular face-to-face seminars for their staff.”
It is advice worth heeding considering that, as with cyber security, an organisation’s compliance is often only as strong as its weakest link. And as the fining of Bank of New York Mellon has demonstrated, firms cannot afford to take any chances when it comes to CASS compliance.