The Client Assets Sourcebook (CASS), governed by the Financial Conduct Authority (FCA), stands as a safeguard against the financial turmoil that has historically fallen onto institutions and clients alike. The collapse of notable banks due to insolvency, liquidity and bank runs, from the Lehman Brothers to the more recent Silicon Valley Bank, emulates the significance of this turmoil and the need for CASS compliance.
Insights from FCA Precedents
The cardinal CASS rule, which is to keep client money segregated from a firm’s own money, ensures that client assets remain protected and secure during insolvency.
Enforcement action from the FCA has been consistent over the years and there are important lessons to be learned from these cases.
Timeline of CASS enforcement action:
CASS 7 with BlackRock
A firm must have an acknowledgement letter from any bank holding its client money to ensure that, in the event of the firm’s insolvency, client money is clearly identifiable and segregated from the firm’s own assets, so that it may be promptly returned.
Blackrock failed to obtain such letters over a period of four years, from October 2006 to March 2010.
Blackrock was placing client money in short-term money-market deposits without the assurance from these letters that the banks receiving the monies were aware that they were holding assets belonging to customers instead of BlackRock itself.
The amount in question was £1.3 billion in client assets.
BlackRock’s failure could have been prevented altogether. The Regulator noted that the failure was neither deliberate nor reckless. Rather, the breach arose from a series of organisational changes which took place after its acquisition by BlackRock Group years prior. The subsequent departure of certain members of staff with critical CASS knowledge contributed to the firm’s delay in identifying and then addressing the breach.
Prior to this CASS breach, BlackRock had no previous disciplinary history with the Regulator. The loss of key staff with CASS expertise highlights the necessity of maintaining a complete and robust compliance team during organisational transitions and an effective succession plan.
CASS 5 with Aviva and One Call
Insurance intermediaries face two regulatory options for dealing with client money; the first is to avoid client money obligations altogether through the use of a risk transfer agreement, the second is to establish the necessary systems and controls for segregating any client money held.
Aviva chose the latter, engaging a third party to aid with their CASS compliance and outsourcing to them the administration of client money and external custody asset reconciliations. However, this outsourcing fell short of necessary oversight and control measures from Aviva.
With outsourced arrangements, firms remain responsible and accountable for compliance with the FCA’s CASS rules.
Aviva’s insufficient oversight led to inadequate controls over these activities. The FCA’s investigation into Aviva’s lapse in CASS governance, revealed a lack of resources and technical expertise for monitoring of the third party. Additionally, the regulator identified deficiencies and miscalculations in Aviva’s internal reconciliation process, resulting in a £74.4 million under-segregation of client funds.
One Call consistently mishandled funds from third-party premium finance providers, failing to recognise them as client money.
The firm’s business consisted of collecting insurance premiums from clients and subsequently disbursing these funds to selected insurers within their network to secure and purchase insurance products. Over a number of years, One Call failed to treat money received from third party premium finance providers as client money. Consequently, instead of holding client money separate to the firm’s own funds, these funds were erroneously spent, creating a £17.3 million deficit. This oversight was only recognised following a visit from the FCA, during which One Call could not immediately rectify the deficit.
These breaches reflect a deeper cultural and regulatory disconnect, demonstrating a gap in CASS 5 firms’ understanding and execution of their CASS requirements.
Reflections
Despite no actual loss of client money in the presented case studies, the FCA imposed steep disciplinary measures. The penalties were heavy and the reputational damage widespread. These enforcement actions serve as the Regulator’s commitment to upholding CASS standards.
How Complyport Can Help
Regardless of the type of CASS protection your firm operates, securing and segregating client money requires continued compliance oversight with a knowledgeable and skilled team.
At Complyport, our team of experts can assist you with:
- Pre-FCA Authorisation Assistance – Support during the FCA assessment process
- Evaluate your implementation of CASS in your firm and provide feedback and recommendations
- Review, draft and update your policies and documents in respect of CASS
- SM&CR support – Assist embedding CASS within your SM&CR framework
- Provide training on all aspects of CASS
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Understanding your CASS obligations is paramount for safeguarding client money and preserving the integrity of your firm.
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