Client assets are defined as assets which belong to a client but held by an investment firm for investment purposes. Examples of assets include cash, equities and bonds. Client money applies to the money of any currency in the form of cash, cheque, draft or electronic transfer, which a firm holds or receives for or from a client. Client money must be held in the currency in which it was received unless the client instructs otherwise in writing. It's important to note that fees paid in advance for professional work agreed to be performed are not considered clients' money.
Client Assets Sourcebook
To protect consumers, the Financial Conduct Authority (FCA) regulates financial services firms by using their 11 Principles for Businesses. Principle 10 states that 'a firm must arrange adequate protection for clients' assets when it is responsible for them'. To comply with this principle, firms are obliged to follow the rules set out in the FCA's Clients Assets Sourcebook (CASS). These regulations were designed to protect client money and assets in situations where a firm fails and leaves the market.
Therefore, any financial services provider that holds or controls client money or assets must follow the rules outlined in the CASS. There are thirteen sections in the CASS, however, CASS 7 is the most important section as it explains in detail all the regulations firms must abide with. To secure effective compliance, the FCA identified three main responsibilities for the businesses:
The FCA Handbook identifies three key responsibilities:
- To ensure the submission of accurate Client Money and Asset Returns (CMAR). A CMAR is used to give the FCA an overview of your client money and safe custody assets. This must be submitted monthly.
- To produce CASS Resolution Packs (CASS RP) and provide annual confirmations to your boards that these are up to date. Firms must keep certain new and existing documents and records relating to client assets in a CASS RP.
- To ensure adequate systems are in place to allow compliance with CASS. This involves regularly monitoring the online systems used, ensuring recordkeeping is accurate and appropriate and training staff members properly.
Classification of firms
Firms holding or controlling assets must also report the value of their assets to the FCA. There are three types of CASS firm types: small, medium and large. You can determine which category your company falls into by calculating the size of your client money and/or custody asset holdings. It's essential that you declare your firm's classification and you must also ensure that employees understand the implications. This is important because certain rules do not apply to certain CASS firm sizes. For example, CASS small firms are not required to submit a CMAR.
Why is important to handle client money responsibly?
Many businesses find the CASS client money rules complicated and unnecessarily detailed, however, they are so comprehensive for good reason. The FCA has enforcement powers to penalise businesses that aren't compliant with their regulations, including fines, removal of authorisation and criminal prosecution.
For example, insurance intermediary, One Call Insurance Services, was fined £684,000 after the FCA found that they had failed to comply with the standards expected of them when holding client money. The authority reported that One Call inadvertently used £17 million of client money to pay directors and finance working-capital arrangements. This occurred because the company had poor controls in place to ensure they adhered to the CASS rules. As part of the penalty, the FCA also imposed a temporary ban on part of the business. Therefore, the company was subject to a 121-day ban on charging customers renewal fees. This penalty was perhaps even more detrimental to the business, as they forecast that the ban would cost them about £4.6 million.
The FCA are increasingly deploying temporary bans of business lines to force non-compliant firms to compensate customers further. The director of markets at the FCA, David Lawton, has spoken publicly about the importance of enforcing CASS requirement. Unsurprisingly, the authority is updating and tightening controls over how firms hold client money. Protecting your client's money is imperative, and if you fail to do so successfully, the consequences can impact your business' reputation and productivity.