Illuminating client money rules Client Money and Assets Policy Statement 14/9

July 2014

Ben Blackett-Ord

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The new CASS Policy Statement

FCA objectives:

• to address specific risks

• to clarify the requirements firms must comply with

• to enhance our client assets regime to achieve better

results for consumers and increase confidence in

financial markets.

• Does this clarify grey areas?

• What does this mean in practice?

September 2013 Consultation Paper – CP 13/5

June 2014 Policy Statement – PS 14/9

Purpose of the CASS rules

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To ensure records

of client assets

are accurate and

up to date

To protect client

assets from the

liquidator in the

event of a firm’s

insolvency

To encourage

appropriate

governance and

oversight

To prevent firms

misusing clients’

assets

The context – FCA agenda

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“Increasing firms’ compliance and awareness of CASS rules

is a key aim for us in 2013/14.

We will increase the supervision of firms holding client money

and safe custody of assets through more intrusive visits to firms,

thematic projects and desk-based reviews, actions initiated

through Client Asset and Money Return (CMAR) / audit

information and taking regulatory action where firm failings

are identified….”

FCA Business Plan 2013/14

Key dates

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1st July 2014 Limited, immediate changes not requiring

significant lead time or infrastructure

changes

1st December 2014 Requirements around the provision of

information to, or obtaining the agreement

of new clients and documentation

standards with any new counterparties.

1st June 2015 Implementation of all new rules, including

new contract wording for all clients

• Scope of Permission

• Terms of Business

• Client bank accounts

• Trust status acknowledgement letters

• Identification / boundary issues

• Custody arrangements

• Reconciliations

• Compliance monitoring

• Management oversight

• CMAR

• Mandates

• CASS Resolution Pack

FCA focus areas

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Client Money

Do you :

• Hold it?

• Control it?

Not usually restricted to particular client types

Client Assets

Do you:

• Hold assets? (safeguarding and administering)

• Arrange for others to do so?

Always restricted to particular client types

Do you have the right permissions?

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Making required disclosures and obtaining consent

Areas to be updated:

• Use of banking exemption, title transfer collateral arrangements

• Right to use arrangements

• Use of Delivery versus Payment (DvP) window in relation to

commercial settlement systems or units in regulated schemes

• Arrangements with third parties

• Custody arrangements

New clients: from 1st December 2014

All clients: from 1st June 2015

Review Terms of Business

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Client bank accounts

• Must be at a bank

• Must be an account in the name of the firm, not a parent or

group company

• Must contain the word “Client” in the name of the account

• An up to date list, clearly identifying relevant bank accounts

by account number as client bank accounts must be maintained

Client transaction accounts

• Accounts with counterparties, clearing houses, intermediate

brokers and other third parties

• Client money held by the above for a client of the firm, remains

client money of the firm

• Above requirements apply

Client bank / transaction accounts

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• Applies to banks and third parties

• Standard wording to be drafted on firm letterhead

• Drafted to accommodate multiple accounts but in all circs at least

one unique identifier should be associated with each client bank

account or transaction account.

• Removal of the grace period

• Removal of exemption for overseas banks / third parties

• Flexibility on choice of law / jurisdiction

• Requirement for an annual review

• Reasonable endeavours approach to signature verification

Existing arrangements to be repapered by 1st June 2015

Any accounts opened after 30th November 2014

Re-issuing trust status letters

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Banking exemption

• Default is use of banking exemption

• Terms of Business may need to be updated to reflect

circumstances

where exemption ceases to apply

• Notifications to clients required

Title transfer collateral arrangements

• Each to be set out in a written agreement

• Documented procedures for moving back into CASS protection

• No requirement to accept request to seek protection

Rules take effect from 1st December 2014

Transitional to 1st June 2015 for existing clients

Identification / boundary issues

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Delivery vs Payment window for commercial settlement systems

Applies to both money and assets

• Purchase: Date payment received for max of 3 days before

client money rules apply

• Sale: Date stock delivered for max of 3 days before

custody rules apply

Reference to use of window to be included in Terms of Business

Rules take effect from 1st December 2014

Transitional to 1st June 2015 for existing clients

Identification / boundary issues

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• Agreements required with custodians / sub custodians

• Further guidance on the selection, appointment and review of third

party custodians

• Restrictions on circumstances in which client assets can be

registered in the same name as firm assets

• Rules updated to accommodate firms that use integrated systems

to maintain records of custody assets

• Introducing more detailed notification and recordkeeping

requirements

Custody arrangements

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• Continues to be a source of difficulty for firms in relation to both

client money and assets

• New rules provide further guidance in both cases

• Assets: new rules introduce a minimum frequency for

undertaking reconciliations.

• Client money: further guidance issued in relation to internal

client money reconciliations

• CASS 7 Asset Management Firm

Reconciliations

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Example client money reconciliation methods

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• CASS is high risk and should be given appropriate status in a

monitoring programme

• Effective monitoring will pick up deficiencies allowing swift

resolution and limiting regulatory intervention

• Issues picked up must be escalated appropriately

• The culture should promote effective monitoring

• Monitor all aspects of CASS compliance

• Outsource if appropriate

Compliance monitoring

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• CF10a – accountable for CASS

• Terms of Reference of appropriate board committees

• Evidence of board engagement

• Appropriate CASS MI which is regularly reviewed and acted upon

• Training

• Senior management

• Operational staff

• Compliance

• CASS Resolution Pack

Management oversight

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Good governance – things to consider

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• Clearly defined roles – how

monitored?

• End to end view

• Formal authority levels

• Clear strategy

• Formalised and embedded

risk appetite

• Appropriate committees to

provide oversight

• New business – wholesale

change and non wholesale

• Sufficient and appropriate MI

tools in place

• Risk dashboard/heat map

[versus] risk appetite

• Timely, relevant and reliable

MI

• CASS specific MI

• Operational MI

• MI that is fit for purpose

• Board reporting

• Centralised breach log

• Who owns regulatory

relationship?

• How are regulatory issues

communicated/

escalated (internally and

externally)?

• Governance over

remediation exercises.

• Assessing impact of

regulatory change

• Integration between

Operations and Compliance

• Periodic review of system

design – are key processes

still suitable?

• Are controls operating

effectively?

• Is documentation up to date

and accurate (trust letters,

client agreements etc.)

• Are staff trained on CASS

matters?

• Books and records

• Key controls

• Segregation of duty

Governance arrangements

Clear and focussed MI

FCA relationship

CASS compliance

• Remains the principal window on a firm’s CASS arrangements

• CMAR and CMAR Guidance being updated in line with changes

• Is responsibility for completion and oversight of CMAR clear?

• Does it fall within scope of Compliance Monitoring and

Management Oversight?

Client Money and Asset Return (CMAR)

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• No longer need to be in written form

• A comprehensive and up to date list must be maintained

• Records to be retained for five years (Mifid business)

New rules come in 1st June 2015.

Mandates

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Definition:

…any means that give a firm the ability to control a clients

assets or liabilities.

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Illuminating CASS?

• By and large these changes are positive

• In CASS black and white is best

• All firms that hold or control client money or assets will

be affected

• Thematic CASS visits will continue

Firms will need to undertake a gap analysis and start planning

now for how they will deal with the changes

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Questions