If a financial services provider holds or controls client money or assets, then it is imperative for them to adhere to the regulations stipulated in the FCA's Client Asset Sourcebook (CASS). The purpose of these CASS rules is to establish a framework that guarantees the protection of client assets in the unfortunate event of the firm experiencing insolvency.
Contents:
- What are ‘client assets’?
- What is CASS and what does it aim to do?
- Which financial activities attract CASS obligations?
- Are there other financial activities which involve CASS obligations?
- What kind of protection for client assets does CASS provide?
- How is my business categorised for CASS compliance purposes?
- How do CASS obligations differ for CASS large, medium and small firms?
- Why is compliance with CASS so important to the FCA?
- Conclusion
What are ‘client assets’?
Businesses authorised to undertake financial services in the UK may hold money on behalf of their customers, or have custody of financial assets which belong to customers. These customer-owned funds or assets are known as ‘client assets’.
Financial services customers need to feel safe entrusting their assets to regulated financial services businesses. This includes knowing that, if a regulated business fails, client assets can be readily segregated from assets owned by the firm and be promptly returned to customers. For this reason, the Financial Conduct Authority (FCA) has made dedicated rules to protect client assets held by regulated firms.
Protecting client assets can be a complex area requiring your business to establish robust procedures and undertake regular oversight and monitoring. Harper James’ financial services solicitors are available to provide advice and support for regulated firms (both large and small) on establishing effective protection for your client assets and complying with your regulatory obligations.
What is CASS and what does it aim to do?
All regulated firms holding client assets must comply with FCA rules designed to protect these assets. There are different requirements for firms depending on the business which you do and the amount of client assets which you hold.
FCA rules aim to ensure that client assets can be easily segregated from assets belonging to your firm. This facilitates those assets being quickly and accurately reunited with customers if your firm fails.
FCA Principle for Business 10 requires a regulated firm to arrange adequate protection for clients' assets when it is responsible for them. Underpinning this high-level Principle is a complex set of FCA Handbook rules set out in the Client Assets Sourcebook (CASS).
CASS has 14 chapters setting out detailed technical requirements for firms undertaking different business activities and holding different types of client assets.
Which financial activities attract CASS obligations?
Financial businesses which have obligations under CASS include:
- Investment businesses which hold client assets as security (CASS 3)
- Investment businesses which provide safe custody of client assets (CASS 6)
- Investment businesses which receive or hold client money (CASS 7)
- Businesses which receive or hold client money when distributing insurance products (CASS 5)
When first applying for FCA permission to undertake relevant business activities, you will need to notify the FCA if you intend to hold client assets and, if you do, demonstrate that you have adequate arrangements in place for managing these.
If you do not wish to hold client assets, a restriction will generally be placed on your FCA authorisation, meaning that you are not permitted to hold client assets. Restrictions on holding client assets are shown against firms’ records on the Financial Services Register.
If your business model does involve holding client assets, you should ensure that you have permission to do this. You must then ensure that you are fully complying with your obligations under CASS.
Are there other financial activities which involve CASS obligations?
Yes. There are additional CASS rules which apply to firms doing specialist types of financial business. For example, there are CASS requirements for firms which have mandates which allow them to control client funds and for businesses providing prime brokerage services or offering debt or claims management services.
These aspects of CASS are outside the scope of this article but, if any of these activities may apply to your business, please do not hesitate to contact Harper James financial services solicitors for more information.
What kind of protection for client assets does CASS provide?
CASS rules can be detailed and complex, especially because arrangements for protecting client assets need to be robust enough to hold up in a formal process to wind up a failed firm.
If your business holds client assets, you should ensure that you take appropriate specialist advice to ensure that you understand your CASS obligations and how they apply to your business.
Your obligations for protecting client assets might include:
- Putting in place comprehensive policies and procedures for handling client assets
- Keep detailed records of client assets held (which can include regularly reporting client assets held to the FCA)
- Keeping client money in segregated client accounts and doing regular reconciliations
- Making sure that legal title to safe custody or collateral assets is recorded properly
- Maintaining an information pack to support insolvency practitioners and the FCA to return client assets if your firm fails
- Providing periodic statements to customers showing client assets held on their behalf
- Arranging for appropriate external auditing of client asset arrangements.
How is my business categorised for CASS compliance purposes?
CASS obligations are designed to be risk-based, in proportion to the amount of client assets held by your business.
Where your firm has permission to hold client assets, the FCA will ask you to fill in a categorisation questionnaire each year. This questionnaire confirms whether you are holding client assets and, if so, to what value. You are then given a compliance category:
- Large CASS firms: businesses holding more than £1 billion in client money or more than £100 billion in safe custody assets.
- Medium CASS firms: businesses holding from £1 million to £1 billion of client money or £10 million to £100 billion in safe custody assets.
- Small CASS firms: businesses holding less than £1m in client money or less than £10 million in safe custody assets.
How do CASS obligations differ for CASS large, medium and small firms?
Large and medium CASS firms need to complete a Client Money and Asset Return (CMAR) each month showing details of client assets held. These firms must also designate a director or senior manager who has been pre-approved by the regulators as formally responsible for compliance with CASS obligations. This individual may be held accountable if a firm fails to comply with its obligations under CASS.
Small firms do not need to complete the CMAR. Although they should have a suitably experienced person looking after CASS compliance, this does not need to be a director or pre-approved senior manager.
Why is compliance with CASS so important to the FCA?
The FCA sees the effective protection of client assets as central to pursuing its operational objectives.
- Consumer protection: Client assets are protected if a firm fails.
- Market integrity: Market participants can feel confident that their assets are protected.
- Competition in the interests of consumers: Firms providing financial services compete on the cost and quality of their services not on the level of protection they offer for client assets.
The FCA has invested significant effort in enhancing protection for client assets. CASS is regularly updated and the FCA has also carried out active supervisory work on how firms are implementing requirements to protect client assets.
You should therefore ensure that you are aware of all the latest requirements under CASS. You should be mindful that the FCA is likely to take any failure to comply as serious.
Conclusion
Robust arrangements to protect client assets are important to establishing customer trust and growing the reputation of your financial services business.
Failure to comply with CASS and FCA Principle 10 can also cause significant issues for your firm, or for any individual designated by your business as responsible for compliance with client asset rules.
Harper James’ financial services solicitors can help you to understand your regulatory obligations under CASS, to set up compliant processes and to ensure that your customers’ assets are properly protected.
