By Nicky Green (Advisory Director) | 24/07/2024

Enhancing your Client Asset Sourcebook (CASS) controls

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We’re now well into the third year of the FCA’s 2022-2025 strategy with supervisory work continuing in the three key areas outlined in the plan. CASS compliance is integral to the focus on “reducing and preventing serious harm” and anyone who’s recently heard Jim Feasby – (Head of Department – Resolution Strategy and CASS at Financial Conduct Authority) speak at industry events will have heard him emphasise this theme in the context of CASS and the need to reduce and prevent harm in the event of a firm failure.

We continue to see proactive supervisory work from the FCA with reviews of key themes driving their work in this area, noting some parts of the industry coming under particular supervisory scrutiny.

The FCA’s reactive work also continues and many firms will have had contact from the FCA following up on:

  • Audit reports with follow up most likely for adverse reports and qualified reports with continuing breaches year-on-year, although we’d also expect a clean audit report to prompt enquiries unless it relates to the simplest of CASS firms.
  • Breach notifications with follow-up focussing on ensuring remediation happens promptly and that preventative measures are put in place to manage the risk of reoccurrence of the breach.
  • Client Money and Asset Reporting (CMAR) submissions which the FCA will review in the context of what they understand of the business as well as comparing month-on-month submissions.

Throughout all contact with firms, the FCA’s CASS team will consider the CASS knowledge and experience apparent in the firm as well as assessing the attitude of the key stakeholders as to the need and importance of CASS compliance.

There are a few areas that the FCA has called out recently as needing more attention from firms and this echoes what we see in our work with our clients:

Change management – the FCA has highlighted that they often see audit reports calling out breaches which have been caused as a result of change management that hasn’t given appropriate consideration to CASS implications. This might be a corporate transaction that impacts the CASS risk of the firm, a technological change which has an inadvertent impact on CASS processes or even the introduction of a new service line without consideration of how it touches on CASS.

Root causes – the FCA has flagged that firms need to assess the root cause of issues identified to understand whether there is a wider CASS impact to consider. This includes understanding the root cause of CASS issues to understand whether system changes or additional controls are needed to prevent reoccurrence. It also includes assessing any possible CASS touchpoints of wider issues, to understand whether additional controls are needed to manage CASS risk.

Title Transfer Collateral Arrangements (TTCA) – it feels like the FCA has been shouting about this from the rooftops for a long time now, but they are still seeing cases where TTCA is being used despite it not being relevant to the client or the product being offered. Even when the use of TTCA is appropriate, it’s essential to make sure that compliant agreements are in place and that monitoring of obligations is carried out frequently enough to enable the firm to justify the amounts being held under TTCA. The FCA has specifically said that its focus in this area will continue.

Use of Payment Service Providers (PSPs) in the flow of client money – depending on how these arrangements are set up, they can cause a failure to use the normal approach to the receipt of client money and can lead to shortfalls in money held during clearing periods. The FCA is clear that whilst it is not against the rules to use PSPs to facilitate the receipt of client money, it must be done in a way that ensures receipt of the money directly into the client bank account, in a way that ensures the money is held compliantly at all times, and with clarity over which CASS firm is responsible for it.

Cash interest – as seen in the Dear CEO letter in December 2023, this has a Consumer Duty overlap, but the FCA is keen to emphasise that CASS compliance is a primary concern, regardless of the Consumer Duty impact. The FCA has also flagged that the Dear CEO letter should be considered by all firms and not just direct recipients. Receipt and payment of interest on client money can present significant operational challenges and firms need to make sure that processes in place manage the risk of over segregation and under segregation.

So, what can we do to help?

We can help to develop the knowledge of your internal teams through firm-specific training as well as providing external support to bolster the expertise of your teams. We can provide resource to carry out CASS compliance monitoring, do wide ranging health checks of your CASS arrangements, help with breach remediation or support you in navigating the CASS audit.

  • We can provide CASS expertise to input into your change management programme, to help you identify and manage any CASS impacts of the proposed changes.
  • We can help you to develop processes and controls for assessing and addressing root causes of issues, breaches and complaints
  • We can review your use of TTCA to assess whether it’s aligned with the rules both in terms of how you use and whether it’s appropriate for the client or product type and whether the controls you operate ensure compliance with the detailed requirements.
  • We can review your use of PSPs and arrangements for the receipt and payment of interest on client money to assess whether the arrangements enable you to comply with the CASS rules at all times.

About Square 4

Square 4 was founded with the vision to support people and businesses to grow and thrive. As an organisation, we were founded with the mantra of providing an unrivalled level of interaction – service and expertise, supporting firms across a diverse and changing regulated agenda. We work in partnership with our clients to drive critical regulatory business change across our core service lines and combine this expertise with best-in-class technology across an evolving spectrum of conduct, financial crime and operational risk.

Please reach out to our team at hello@square4.com for any support or further information.

 

 

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