If a financial services provider holds or controls client money or assets, they must follow the rules outlined in the Financial Conduct Authority's (FCA) Client Assets Sourcebook (CASS). These regulations are designed to mitigate any risks posed to client money and assets if a firm fails and leaves the market.
Protecting client money plays an important part in helping the FCA achieve its objectives. For example, CASS protects consumers' assets and money when a firm fails, which demonstrates how they secure an appropriate degree of protection for consumers. The sourcebook also enhances the integrity of the financial system by giving participants confidence that their money is protected. Finally, the CASS rules set a minimum standard of protection that allows for a competitive market in investment and custodial services.
Classification of firms
There are three types of CASS firm types: small, medium and large. It's important to know how your firm is classified, as the rules and regulations vary depending on the company's CASS size. You can determine which category your company falls into by calculating the size of your client money and/or custody asset holdings. Your firm must make an annual notification about the money and assets you hold to identify if you are small, medium or large.
- A CASS large firm: If the highest total amount of client money your firm held in your last calendar year is more than £1 billion, you are most likely large.
- A CASS medium firm: If the highest total amount of client money your firm held in your last calendar year is an amount equal to or greater than £1 million and less than or equal to £1 billion, your firm is probably medium.
- A CASS small firm: If the highest total amount of client money your firm held in your last calendar year is less than £1 million, your firm is most likely small.
You must complete the CASS classification questionnaire annually, within 15 working days of 31 December. Usually, the FCA email the director or senior manager responsible for CASS in December with the questionnaire. Even if you've reported a zero balance in the previous calendar year, you're still obligated to complete the questionnaire.
How can you comply with CASS?
The CASS contains 13 sections, each outlining rules specific to the types of procedures undertaken by a business. The rules specifically relating to holding client money are found in the CASS 7 section. It is your responsibility to ensure that your company complies with CASS in all its day-to-day activities and procedures. The FCA Handbook identifies three key requirements:
- To ensure the submission of accurate Client Money and Asset Returns (CMAR) each month: This rule is only applicable to CASS large and medium firms, as CASS small firms don't need to submit CMARs. A CMAR is used to give the FCA an overview of your client money and safe custody assets. The FCA needs this information so that they can spot trends in the industry. This means that they know when to intervene, either on a firm-specific or thematic basis.
- To produce CASS Resolution Packs (CASS RP) and provide annual confirmations to your boards that these are up to date. Firms holding client assets from investment businesses are required to keep certain new and existing documents and records relating to client assets in a CASS RP. This rule is important, as it means that if a firm fails, the relevant documents can be retrieved quickly. Companies must ensure that the CASS RP is in place from the moment the firm begins to hold the client assets. The documents should be maintained for the whole period that the firm holds the client assets.
- To ensure adequate systems are in place to allow compliance with CASS. This means that records should be maintained to show what procedures are in place to ensure client money is received, segregated and paid on by the representatives. Firms are also required to demonstrate what training was provided for the employees responsible for holding client money. The director or senior manager responsible for CASS must be competent and suitably qualified, and their conduct should be monitored regularly. As well as regulating all the processes and procedures involved with CASS, these appointed representatives must also endorse 'prudent' behaviour from other employees. An example of this in practice includes supplementing the client money with office money if the accounts are short.
Why must you comply?
Compliance to the regulations outlined in CASS is also relevant to the FCA's 'Principles for Businesses'. These Principles represent the standards of conduct all firms must follow to meet regulatory obligations. Principle 10 states that: 'A firm must arrange adequate protection for clients' assets when it is responsible for them'. If a company breaches any of the Principles for Business, the FCA has enforcement powers including imposing fines, removing authorisation and even launching criminal prosecutions. These penalties can have a significant impact on a business' turnover as well as their reputation as a trustworthy company.
The collapse of the financial firm Lehman Brothers is an excellent example of the horrifying consequences of not complying with client money and assets rules. Lehman Brothers had become heavily involved in the mortgage market and by 2008, the bank held thirty times as much in real estate products as it had capital. However, the firm had been borrowing far too much money to fund its mortgage investments. When the market turned, Lehman couldn't sell so many risky low-rated mortgages. In the first half of 2008, the company lost 73% of its value. Naturally, investors withdrew from them, having lost confidence in their integrity and competence. The collapse of the Lehman Brothers transformed the financial industry in the US, which had global implications. Stock markets plummeted and debt spiralled.
In 2014, the director of markets at the FCA, David Lawton, delivered a speech that explained how CASS is a high FCA priority. Lawton cited the Lehman collapse, claiming that the FCA's predecessor, the FSA, responded to the scandal by enforcing stricter regulations to prevent the same scandal occurring again. The FCA has since continued to review and update these measures, ensuring that consumers can trust financial services providers. This highlights how hard the FCA works to ensure that the best interests of consumers are a priority over profit. Following their regulations not only protects you from prosecution but it also protects your clients and helps maintain a stable economy.