The FCA’s CASS Expectations and How to Meet The Requirements

Complyport has noted growing attention from the Financial Conduct Authority (“FCA”) and UK financial firms on compliance with the Client Assets Sourcebook (“CASS”) rules. The Regulator is focused on ensuring firms adhere to CASS requirements for safeguarding client assets.

To comply with CASS, firms need to understand and follow the FCA’s rules and expectations, which cover key areas such as client money segregation, reconciliation processes, and accurate CASS reporting. In this article, we explore the FCA’s expectations for CASS and offer insights on how firms can meet them.

Common Pitfalls

It is crucial to understand where many firms are falling short on their compliance with CASS. These missteps not only pose regulatory risks but can also erode client trust.

  1. Incorrect Permissions: Failure to obtain the appropriate permissions to handle client money or client assets can result in firms being held accountable for their shortfalls by the FCA. This can include failing to secure the necessary regulatory approvals or overlooking updates to permissions as their business activities evolve.
  2. Insufficient Segregation of Client Money: One of the core principles of CASS compliance is the segregation of client money from the firm’s own funds. Firms may infringe this principle by merging client and company funds, resulting in compliance breaches.
  3. Inadequate Record-Keeping: Maintaining accurate and comprehensive records is essential for CASS compliance. Firms may fall short by inadequately documenting client asset movements, transactions, or reconciliations, making it challenging to demonstrate compliance during regulatory audits. Firms are expected to include the term ‘client’ to the title of all client money accounts (‘designated client’ for designated client accounts) and ensure that acknowledgement letters are held for every client bank account they operate.
  4. Failure in Client Money Reconciliation: Regular reconciliation of client money and assets is a fundamental requirement of CASS. Firms might face difficulties in reconciling client money accounts, leading to discrepancies that can result in regulatory consequences.
  5. Ineffective client money calculation: Firms must have client money calculations that align with the FCA’s rules and expectations. Client money calculation must be performed regularly to ensure that the firm has sufficient money in its client bank accounts (and held by third parties) to meet its obligations to clients.
  6. Inappropriate withdrawal of commission: Where appropriate, firms should only draw down commission after a client money calculation is performed and a surplus has been identified. This is because the amount of surplus in the calculation should represent the value of commission due and payable to the firm, or interest earned on the bank account. This approach ensures firms can evidence that the balances held for clients are accurate and there will not be a deficit once withdrawal(s) have been made.
  7. Inadequate client money audits: Client money audits must be arranged when a firm is subject to CASS or, for insurance intermediaries, operates a non-statutory client money account or had held over £30,000 in a statutory client money account at any point during the audit period. Before appointing an external auditor, firms are expected to perform their own due diligence to review and test the relevant client money arrangements.

Firms that want to enhance their compliance with CASS and avoid regulatory issues with the FCA need to be aware of these common pitfalls. The FCA monitors these closely and expects firms to show evidence of compliance in a clear and structured way, both for the FCA’s review and for their own internal framework.

FCA Requirements and Expectations: What You Need to Know

If you are a UK financial firm that holds or controls client money or assets, you need to comply with the CASS rules in the FCA handbook. These cover areas included but not limited to segregation, reconciliation, record-keeping, and acknowledgements.

To comply with CASS rules, you need to follow these steps:

Understand the CASS rules that apply to your firm, what the requirements are, and how you can best meet them.

Classify yourself as a CASS small, medium, or large firm based on the amount of client money and/or custody assets you hold or project to hold and notify the FCA annually using the CASS classification questionnaire, unless you are an insurance intermediary and only subject to CASS 5.

Appoint a director or senior manager responsible for CASS oversight. This role could fall under SMF18 within the Senior Management Function for Enhanced Firms, or the CASS Prescribed Responsibility (z), if not an Enhanced firm. This person will ensure that you have adequate systems and controls to comply with CASS rules and is ultimately liable for the efficiency of your firm’s CASS function. They should have sufficient prior experience, knowledge, and training relating to CASS to ensure they can execute the role to the standards FCA require.

Identify, assess, and mitigate the risks arising from holding or controlling client money or assets, and report any breaches or discrepancies to the FCA as soon as possible. For some reconciliation issues, you must notify the FCA immediately if you cannot resolve them within one business day.

Execute a compliance monitoring plan that measures your compliance performance, and link it to your business model, regulatory framework and policies and procedures.

How Complyport Can Help

At Complyport, our team of experts can assist you in obtaining:

  • the necessary permissions;
  • sample checking;
  • managing the burden of evidencing;
  • establishing a robust framework;
  • and implementing flexible solutions to streamline your CASS compliance.

We provide tailored support, helping you stay ahead of regulatory changes and build a strong foundation for your client asset protection and activity.

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