CASS: Overhaul of Regime

Those firms that do not hold, or control, client assets or client money will doubtless be grateful that they do not have to contend with the 400+ page Policy Statement ‘Review of the client assets regime for investment business’ (PS14/9 – albeit that the contents page refers to PS14/8).

Those firms that are subject to CASS will be facing changes to rules and guidance that will be phased-in in three tranches: 1 July 2014; 1 December 2014; and 1 June 2015.

There are numerous changes but a high level summary can be found in chapter 2 of PS14/9 which firms can use to assess the impact upon their own operational model. Some highlights of what is proposed follow below.

CASS 7.8 concerns trust acknowledgement letters e.g. a bank acknowledging to a firm, within 20 business days, that a client bank account is held by the firm as trustee. The absence of trust status letters has been a source of several breaches, such as BlackRock Investment Management (UK) Ltd, and has been an area previously highlighted by the Regulator – see Regulatory Round 46 for further details.

Changes taking place on 1 December will mean the abolition of the 20 business day allowance; instead firms will have to have in place an acknowledgement letter(s) before a firm can hold or receive client money. Furthermore template letters provided in Annexes to CASS 7 will have to be used. Transitional Provisions allow a firm to continue with existing requirements until 1 June 2015 in relation to arrangements a firm has in place with its existing counterparties/clients as of 30 November 2014.

Whilst on the subject of depositing client monies with third parties, the due diligence requirements are being tightened up. From 1 June 2015, in situations where client money is not deposited with a central bank then CASS 7.13.11 sets out guidance as to what the firm’s due diligence should consider. The grounds for selection of the third party(ies) will need to be documented, as will the periodic review of the selection(s), and retained for five years after ceasing to use that particular entity. Firms will also have to periodically assess the need to diversify the third parties with which it deposits client money and make a record of that review (a five year retention period also applies).

The FCA is also revising the ‘delivery versus payment’ (DvP) regime of CASS 7.2. As currently set out, money need not be regarded as client money in respect of a DvP transaction through a commercial settlement system if it is intended that money due from as client for a purchase will be due to the firm within one business day upon the fulfilment of a delivery obligation or, if a client sale, money is due to the client within one business day following the fulfilment of the client’s delivery obligation – in each case the DvP exemption ceases if delivery/payment does not occur by the end of the third business day.

From 1 December the exemption will require the firm to be a member or participant (or be appropriately sponsored) of the commercial settlement system and the client needs to agree to the use of the exemption in writing. These changes will also be reflected in the DvP rules in CASS 6 (‘Custody rules’). Once again Transitional Provisions come into play so that whilst the rules come into force on 1 December for new clients, firms will have until 1 June 2015 to ensure that existing clients have agreed to these arrangements.

A similar DvP concept applies to transactions in relation to regulated collective investment schemes, provided such transactions are carried out in accordance with COLL. From 1 June 2015 the exemption ceases if the authorised fund manager has not paid the monies to the depositary/client by close of business on the next business day – the current rules permit a longer time window. Although this may sound harsh, the proposal in the earlier consultation was to remove the DvP exemption in its entirety for regulated schemes. As is the case for the ‘commercial settlement’ exemption, it will be necessary for the firm to obtain the client’s written agreement to the use of the exemption.

Revised rules surrounding unclaimed money, and rules introduced in respect of unclaimed safe custody assets, will enter into force on 1 December permitting firms to pay/transfer such assets to a registered charity of choice. For the purposes of these rules unclaimed client money will have a £25 (retail client) or £100 (professional client) de minimis; there will be no de minimis for unclaimed custody assets.

There will also be a need for firms to enhance the provision of information to clients. Under COBS 6.1.7 firms holding designated investments or client money must provide the client with certain prescribed information, although the rule is largely directed to retail clients. CASS 9.4, which is currently directed at prime brokerage firms, will be enlarged to cover the need for the same information to be provided to all client types and for all custody assets.

From 1 June 2015 CASS 7 will be reorganised so that CASS 7.1 to CASS 7.8 and CASS Annex 1 will be deleted, sections of which will appear in CASS 7.10 to CASS 7.18 e.g. trust status acknowledgement letters will thereafter feature in CASS 7.18.

The revised rules can be found in Appendix 1. For ease of reference the changes specific to CASS can be found commencing on pages 13/252 (1 July 2014); 53/252 (1 December 2014) and 112/252 (1 June 2015).