With large fines, firm visits and the introduction of new proposals for CASS firms, now is a good time to review your current client money arrangements.
Under FSA Principle 10 (Clients' assets) "a firm must arrange adequate protection for clients' assets when the firm is responsible for them". The FSA has made it very clear that this protection is a regulatory priority during 2010.
Following on from its 'Dear CEO' letters and the publication of its Client Money & Asset Report which were sent to firms with permission to hold client money and assets during January 2010, the FSA has continued with its firm visits, some of which have resulted in headline making fines. The most high-profile case related to a firm being fined a record breaking £33.3m for failing to segregate client money appropriately in accordance with the Client assets sourcebook (CASS) rules over a seven year period.
There have also been other significant fines levied against other types of organisations in addition to firms being subject to skilled persons reports in the form of regulatory assurance reports under s166 of the Financial Services and Markets Act. These fines and s166 reports along with the establishment of a new client asset unit in addition to the consultation paper (CP 10/09 Enhancing the Client Assets Sourcebook) are a clear indication that the FSA will continue with its programme of intense supervision, and that it will take action where it believes client assets are not protected sufficiently.
The Proposals
The consultation paper contains a number of proposals. Some that will impact on CASS firms include the following. Establishing a CASS oversight controlled function The draft rules will require one person at certain firms to have ultimate oversight responsibility for client money and assets. This person will perform a proposed controlled function (CF) – the client assets oversight function.
Reintroducing a Client Money and Assets Return
The FSA has proposed a new return framework by reintroducing a client money and asset return (CMAR). The CMAR will need to be reviewed and authorised by the newly established CASS oversight CF on a monthly basis for medium and large firms and bi-annually for small firms (based upon a bespoke CASS stratification of firms).
Prohibiting the Use of General Liens in Custodian Agreements
Some firms in the UK appear to have inappropriately allowed custodians and sub-custodians to include a general lien in contractual agreements. The FSA believes that liens covering liabilities unrelated to the assets in question or the company that placed the assets with the custodian or sub-custodian have contributed to significant delays in insolvency practitioners recovering assets. Accordingly, the FSA has proposed prohibiting the use of certain liens in custodian agreements.
The consultation period ended on 30 June 2010 and the policy statement containing the final rules is expected during Q3 2010.
Summary
If you are a CASS firm, now is a good time to review your current client money arrangements to ensure that you are compliant with the applicable rules and are in a position to accommodate any changes that are likely to be required. CASS firms should consider the following.
- Reviewing systems, controls and processes surrounding client money to check whether the firm is compliant with the CASS rules, especially if the firm has undergone a period of change and/or restructuring.
- The appropriateness of the frequency that the firm prepares its client money and custody asset reconciliations by taking into account the risks to which the business is exposed, including the complexity of the business in addition to the nature and volume of transactions.
- Whether appropriate systems are in place to facilitate the preparation of the CMAR and any potential changes to existing systems that may be required.
- Who to appoint to the CASS oversight controlled function. In large and medium CASS firms (based upon a bespoke CASS stratification of firms) this will need to be a director or senior manager. In small CASS firms this will need to be a director.
- Revising agreements with custodians to remove any non-compliant lien provisions that may be included.
The FSA's Client Money & Asset Report published in January 2010 and the findings and concerns within it, taking action where necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.