At first glance, Chapter 4 of the FCA’s Consultation Paper 25/37 looks like a welcome simplification of the Client Assets (CASS) regime. For many firms, the headline benefit is clear: the potential removal of certain unavoidable breaches from audit reports. But focusing on that outcome risks missing the bigger picture. As with most FCA consultations, the real impact lies not in what is being removed, but in what is being subtly reshaped.
In discussions at the TISA Spring CASS Forum, Square 4 Advisory’s Nicky Green and Chloe Curtis explored how these proposals go beyond technical rule changes, highlighting new expectations around documentation, judgement, and the growing intersection between CASS and Consumer Duty.
CP25/37: Key Proposed Changes and Practical Implications for Firms
CP25/37 was published back in December 2025 to weave Consumer Duty standards throughout the FCA Handbook. Alongside this, the CP includes proposals for some changes to the FCA Handbook to reduce duplication and minimise the administrative burden for firms.
As far as Chapter 4 of the CP goes, there are a couple of proposed changes that will be very welcome to many firms and shouldn’t bring too much in terms of additional effort required:
- Third party due diligence – changing the 5-year timescale to refer to the date on which the record was created or modified instead of referring to the end of the third-party relationship. This will be welcome because it will mean that many firms may finally see an end to the repeated auditor-reported breaches relating to historic due diligence that either wasn’t retained in the first place or dates from a point in time when the due diligence rules didn’t exist. If the changes are implemented as proposed and provided firms have kept records of due diligence updates carried out in the last 5 years, they will no longer be in breach of the record retention requirements.
- External data sources for custody asset reconciliations – a rule modification that has been available to firms for many years could now be incorporated into the rules. This would enable CREST members to utilise Euroclear’s IFS as the source of external data for uncertified fund units. The proposals include requirements related to agreement that firms have in place with Euroclear, but these shouldn’t be onerous for firms to comply with.
There are other proposed changes that, while still welcome, will require careful planning and documentation on the part of firms. For example, the FCA is proposing changes to reconciliation frequency for cases where external data can’t be obtained on a monthly basis. This acknowledges that the Euroclear IFS option won’t be available to all firms, and some firms will still be unable to obtain monthly statements from third parties, particularly from certain fund managers and transfer agents. There are two approaches proposed in the Consultation Paper, each of which covers a different scenario, depending on whether the issues with obtaining monthly statements are temporary or a permanent state, although the proposals don’t currently acknowledge the potential overlap between the scenarios. Whilst the proposed changes are likely to be welcomed by those firms that are consistently in breach of the monthly reconciliation requirements through no fault of their own, they will likely bring some additional administrative burden for firms. Firms will need to:
- Document its efforts to obtain statements on a monthly basis including the third party’s reason for refusal to provide a monthly statement. This could be challenging and in many cases, the best firms will be able to do is to record attempts to contact the third party because there will often be no response to the requests by the firm. If the firm is unable to elicit a response from the third party, will the auditor consider the firm to be in breach?
- Conduct external reconciliations as often as possible, given the information available – this could mean having to carry out reconciliations on an ad hoc basis, particularly if the fund manager or TA issues statements in response to trigger events, with variable frequency.
- Update policies and procedures to explain how wider systems and controls mitigate the risks associated with carrying out reconciliations less frequently than monthly. It’s likely that firms will already have documented controls around this to minimise the impact of the existing breach, but we don’t yet have visibility of how much detail the FCA and auditors will be expecting in this documentation.
- Undertake an annual review to determine whether the situation can be resolved – for some firms, this could be an onerous process to repeat the effort to attempt to get a response from multiple third parties.
Another proposed change concerns how firms receive interest earned on client money. This is another area where the changes are welcome, because they could result in unavoidable breaches being removed. For example, in cases where interest earned on client money is received into the client bank account but is due to the firm or not yet due to the client, firms will currently be in breach of the CASS rules because they will be deemed to be comingling, despite the firm’s best efforts. The FCA is proposing a couple of changes here:
- The first will allow the receipt of interest due to the firm into client accounts, provided the firm can evidence that it has taken all possible steps to change how the interest is received. This is another area where the proposed rules are unclear on – we don’t know what that evidence will need to look like or how frequently it will need to be revisited by firms. The proposed rules also require firms to promptly address risks arising from receiving non-client money into a client bank account. This is another area where many firms will already be taking action and documenting what they’ve done in order to minimise the impact of the breach, but we don’t yet have clarity on what the regulator and auditor will expect to see.
- The second proposed change relating to interest receipts will address circumstances where interest is received before it is due to clients. The proposals would mean that firms could elect to treat the money as unallocated client money until it the point at which it can be allocated. This would mean that if interest is received from the client money banks more frequently than the firm is contractually required to pay it to clients, it can be held under CASS protection until it becomes due and payable to clients. This also brings a record keeping requirement, with firms needing to keep records of the election that they have made under the rule. It’s not yet clear what form this record will need to take and whether it will be something that will need to be revisited and if so, how often.
The last category of changes in CP25/37 are those that relate to rules that not all firms are subject to, but for those who are, careful consideration will be needed on how they comply:
- Retaining interest on client money – the current rules require firms to notify retail clients if interest received on client money is going to be retained by the firm. The proposals in the CP bring in Consumer Duty considerations for any interest amounts retained by the firm with respect to money held for retail clients. As such, firms will be expected to be able to demonstrate fair value and ensure that clients understand the implications of the firm retaining the interest. Based on our work with firms, we would argue that many firms are already doing this, with fair value assessments and costs and charges disclosures including consideration of the impact on the client of retaining interest. However, firms will need to carefully consider whether current processes are enough to satisfy a reference to Consumer Duty within the CASS rules.
- Use of retail assets for securities financing transactions – these proposals also bring Consumer Duty into sharp focus in the context of CASS, explicitly placing an onus on firms to ensure that any use of retail client’s assets for securities finance transactions is aligned with the Duty. The proposed changes for this type of business emphasise the need to ensure that the client understands what they’re agreeing to and the risks associated with it. In the last couple of years, we’ve seen some firms exploring the possibility of using securities financing as a means of increasing returns for clients. However, some of those firms take the view that collateralisation of those arrangements mitigates the risk for the client. These proposed changes are likely to require those firms to do a lot more to demonstrate that the client understands the risk that their assets are exposed to and how that risk is managed.
The Consultation Paper specifically states that CASS auditors won’t be expected to audit compliance with Consumer Duty obligations. However, reference to the Duty is ingrained in the rules rather than forming accompanying guidance and, for that reason, it’s difficult to know where auditors will draw the line in assessing whether the firm is compliant with relevant CASS rules.
This then raises the question of where the responsibilities of the CASS team end and wider firm obligations begin. Will CASS team members need to have specific Consumer Duty expertise to support the business in meeting the revised rules? Regardless of where the FCA lands with the proposed CASS changes, we’re seeing more and more that CASS teams can’t work in isolation and need to engage with teams across the business.
Our experience
Over the last year, we have been involved in various projects that have brought the overlap between CASS, Consumer Duty and the Conduct of Business requirements into sharp focus. Some were CASS-focussed, but brought Conduct of Business and or Consumer Duty into focus:
- Designing a compliant framework for Title Transfer Collateral Arrangements where work was needed to review the firm’s approach to client categorisation;
- Supporting the return of client assets by a firm that was aiming to exit CASS permissions, where consideration of client communication preferences and customer vulnerability was required.
Similarly, we’ve had Consumer Duty and Conduct of Business focussed projects involving largescale remediation resulting in redress payments to clients. This includes projects concerning refunds of periodic review fees, as well as projects to refund custody fees paid by clients where those fees were deemed to be disproportionate because the client fell outside of a firm’s target market. In all of these cases, CASS considerations were key to the successful delivery of the project and the FCA asked firms for detail of how they planned to run the project in a way that was CASS compliant.
This is why it’s essential that the CASS team have a good base knowledge of wider regulatory requirements that the firm is subject to, so that they can understand any CASS impacts of wider processes. It’s also important that CASS teams are aware of change and remediation projects within a firm and involved in them, when needed. Many firms make sure this happens for largescale projects, but for smaller projects, it can be a bit of an afterthought. It’s also important that the PRz is informed of strategic decisions being made by the firm, so CASS considerations are included in the decision-making process.
This isn’t just about compliance; it’s about ensuring the firm delivers consistent and compliant outcomes from start to finish. In practice, that means breaking down some of the silos we still see between teams.
How Square 4 can support
At Square 4, we can help you upskill your teams on CASS, Consumer Duty and Conduct of Business requirements. We can support projects and change initiatives to ensure the right CASS and Consumer Duty considerations are included. We can also support your Board in understanding the areas of overlap that could cause unexpected headaches for firms.
