CASS – The FCA Being True to Its Word

We have been contacted by a number of brokers who have been invited (in a regulatory context) to participate in an FCA Client Asset Assessment, instigated, it is clear, following responses to the two Financial Resilience Questionnaires issued by the regulator in June and September.

Importantly, however, this assessment is underpinned by the FCA’s September Dear CEO letter in which the regulator reminded firms of the ongoing obligation to maintain ‘adequate arrangements to safeguard the client money…they hold for customers’ and included areas they felt were of particular importance.

So, we knew something was brewing…. didn’t we?

If not, then we should have done, because as way back as 2012, our then regulator – the FSA - drew to our collective attention their concerns regarding (amongst other things):

  • Understanding of the CASS (CASS 5) rules
  • Poor compliance
  • Missing or incomplete documentation (i.e. trust deeds and letters of exchange) and
  • Infrequent calculation

This review followed the FSA taking on responsibility for general insurance in January 2005, yet the FCA’s heightened concern today stems from other aspects that hitherto would have been almost impossible to predict, namely (amongst others): Brexit and Covid-19.

This assessment therefore is designed to help the FCA understand whether these events, and others, have impacted on its duty to ensure that customers remain confident that their assets continue to be protected, especially in an environment where insolvency is becoming more commonplace.

Let’s be clear, there is a correlation between the financial resilience questionnaires and the CASS Assessment because the risk of failure, based on the Financial Resilience returns, is very real in the eyes of the regulator.

At this point I’d like to remind you of an article I wrote in April this year entitled: RWA’s Bruce Fayle continues his personal crusade (see here: Handling Client Money (rwabusiness.com)).

I don’t want to go into too much detail or even gloat (because it is not in my nature) but I want you to consider whether you feel you would be in a different position to other brokers receiving the Assessment invitation if you held money as agent of insurers (under Risk Transfer)?

This is something you could discuss with your RWA Business Manager.

It is clear the FCA are doing what they said on the tin, they are assessing whether firms have adequate arrangements in place. Openness, honesty and cooperation is the key. They’re not trying to trick you; they simply want to understand. Indeed, one recent participant in the Assessment has recently been ‘signed-off’ despite some hiccups and missing documents along the way

So, what is the likely vision in the FCA’s attitude or direction for the future?

It is fair to say the impact of Covid-19 on brokers is only just starting to show. 2021 will no doubt show that some firms’ resilience is leaving the FCA with some concerns and the question of protecting clients will be high on its radar.

The introduction of SM&CR has implications for all individuals appearing on the FCA register especially around the client money requirements.

I am old enough to remember when “Dear CEO” letters were a rarity. Now they seem to appear more and more frequently. The latest letter, published on 30th September 2020, entitled “Adequate Client Money Arrangements – For General Insurance Intermediaries” is possibly the most interesting FCA letter of the 2020 even. The regulator has not tried to upgrade the CASS 5 regulations since the old FSA failed to get the Consultation Paper 12/20 through, some 8 years ago. Could this latest letter be trying to upgrade the CASS practices of the insurance industry almost surreptitiously?

The letter, like several of the earlier ones this year, is driven by concerns about the impact of Covid-19 and it seems to have taken the FCA a little longer to raise concerns about the insurance industry than with the asset management and e-money institutions. We must indeed be cursed to live in interesting times.

The FCA’s letter reminds the insurance industry that there is really only one great commandment in Client Money regulation: that the Senior Managers of regulated firms are responsible for ensuring Client Money is 100% protected. The foundation of the client assets and money regime is set out in Principle 10 of the FCA's Principles for Businesses:

"A firm must arrange adequate protection for clients' assets when it is responsible for them."

The disruption caused by Covid-19 has impacted on firms' abilities to comply with the client money rules. For example, the rules require firms to bank cheques received into a client bank account within one business day. However, where cheques are delivered to unmanned offices, they may remain unbanked. Firms may therefore have to take steps to modify their usual practices, for example by requesting clients to make payments directly into a client bank account.

We’ve seen recently that a number of firms have had to cease trading due to client money “issues” and the FCA is undoubtedly concerned over the impact of Covid-19 in the sector.

Firms and Senior Managers can easily help themselves by looking at these points:

  • Application of client money rules to firm’s business model. 
  • Adequacy of governance and oversight. 
  • Oversight of third parties, including due diligence.
  • Client money calculations and reconciliations.
  • Bank acknowledgement letters for all client money accounts.

If, as many people suggest this business environment is the new normal, it may be time to upgrade your firm’s approach and perhaps increase the robustness of your cash operations process. After all it can’t hurt and can be a huge positive to demonstrate to the FCA when they make further enquiries.

CASS protection is never optional but is only really needed when there is heightened risk of business failure. Covid-19 has clearly greatly increased that risk for even the strongest of businesses, either directly due to decreased activity or as a knock-on effect of business partners and agents failing. 

If the industry is to survive this and recover quickly from it, then now is the time to make your CASS 5 processes iron-clad and liquidation-ready. Yes, I know “it will never happen”. However, it does not matter, liquidation-ready is the required standard for the well-governed and compliant firm these days.

It is fair to say that some two years ago we were all warned about the FCA’s attitude to CASS 5 irregularities:

Charles Randall, Chair of the FCA and Payment Systems Regulator, delivered a speech at ICAEW Canary Wharf Members’ Club in September 2018 where he stated: "be warned: we have a very low tolerance for CASS failings, because of the significant customer detriment these can cause, and we expect auditors to identify CASS failings when they report to us."

So, in light of Covid-19, the FCA has been active in responding to queries and concerns, including for example, physical asset reconciliations and CASS audits. Given current circumstances and the FCA's explicit expectations, how is your firm and, where applicable, the senior manager delegated with the relevant responsibility, managing client assets and money responsibilities?

Is it time to mitigate regulatory risk by accepting that you have risk transfer (and all that brings) and could continue to operate just as you are but without being under the microscope?

Bruce Fayle co-authored with Grant Scott

About the author

Bruce has worked in financial services for the whole of his professional life, including 11 years as a Compliance Director of a US owned Independent Financial Advisory and Wealth Management business. At RWA, Bruce leads the Audit and Conduct Risk department from our Manchester office. He is RWA's lead consultant to the Guernsey Financial Services Commission (GFSC).

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