What Rules Must Firms Follow when Holding Client Money or Assets? Image

The Financial Conduct Authority (FCA) have pledged to increase their regulation of financial services firms to reduce and eliminate the risk of financial crime in the UK. Their primary objective is to protect consumers, however, they're also responsible for promoting a competitive market and improving the integrity of the UK's financial system.

As part of their dedication to ensuring that consumers' best interests are at the heart of each business' company culture, the FCA published their '11 Principles for Business'. 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'. To supplement this Principle, the FCA also require businesses to comply with their Clients Assets Sourcebook (CASS). These obligations were implemented to mitigate any risks posed to client money and assets if a firm fails and leaves the market.

Who do these rules apply to?

FCA's client money rules apply to all regulated firms that receive money from a client. It's worth noting, however, that a firm is permitted to opt out of applying these rules if they hold money on behalf of a professional client. The client would have to provide written acknowledgement that they understand the implications of this, including the fact that the funds would not be protected by the CASS client money rules. This means that their funds would not be segregated from the firm's money if the business went into liquidation.

The CASS contains thirteen sections. The rules specifically relating to holding client money are found in the CASS 7 section. To comply with these regulations, the FCA Handbook identifies three key responsibilities for firms:

  1. To ensure the submission of accurate Client Money and Asset Returns (CMARs).
  2. To produce CASS Resolution Packs (CASS RP) and provide annual confirmations to your boards that these are up to date.
  3. To ensure adequate systems are in place to allow compliance with CASS.

Client Money and Asset Return (CMAR)

Unless you're a CASS small firm, you must complete a Client Money and Asset Return (CMAR) each month. A CMAR is used to give the FCA an overview of your client money and safe custody assets. This is usually completed by the director or senior manager responsible for CASS via the FCA's Gabriel reporting system. Gabriel is the online platform firms must use to submit regulatory data. The FCA can use this information to spot trends in the industry, which means they know when to intervene, either on a firm-specific or thematic basis.

CASS Resolution Packs

If the CASS 7 rules apply to your firm, you are legally obliged to maintain a Client Assets Resolution Pack (CASS RP). This was introduced to help streamline the return of client money and assets if a firm fails. The FCA's rules on this require firms holding client assets from investment businesses to keep certain new and existing documents and records relating to client assets in a CASS RP. This way, the relevant documents can be retrieved quickly if the firm goes into liquidation. These records can be held in electronic form and must be readily retrievable. They CASS RP must be in place from the moment the firm begins to hold the client assets, and the documents should be maintained for the whole period that the firm holds the client assets.

What Rules Must Firms Follow when Holding Client Money or Assets?

Complying with CASS

There are many rules outlined in CASS 7. For example:

  1. Receiving, recording and banking client money: Client money should be paid into a client bank account as soon as practicable. Usually, this means the money should be in the client bank account by the following business day.
  2. Passing client money to a third party: Insurance intermediaries are examples of a third party. Firms must exercise the necessary skill, care and judgement in selecting third parties to do business with, to ensure that clients' money is protected. This is in the firm's best interests as if the third party fails, the firm is still liable for client money. Firms are only permitted to allow another insurance intermediary to hold their client's money if it's for the purpose of the transaction for the client. They must also keep a record of client money held by third parties. This requirement is to ensure that the firm can complete an accurate client money calculation.
  3. Discharging your financial duty: A firm holding client money under a statutory or non-statutory arrangement is held by law to have a fiduciary duty to its clients when holding their money. This means that they have a legal obligation to act in the best interest of the client.
  4. Repaying money to clients: When a firm receives money for a client this must be paid into either the statutory or non-statutory trust client bank account or directly to the client as soon as possible.
  5. Mixed remittances: A payment comprising both client and non-client money is called a mixed remittance. If a firm receives one of these, it must pay the full amount into a client bank account as soon as possible. The money that isn't client money must then be removed from the client bank account no later than 25 business days after the mixed remittance is cleared.
  6. Withdrawing commission and fees from cleared funds: A firm can only withdraw commission or fees from its client bank account when it's received payment from the client, the payment has cleared, or when the commission is paid.
  7. Controlling client money: This rule is only relevant if a firm has their client's permission to control as well as hold client money. Controlling assets and liabilities means having access to the client's bank account and holding a client's credit card details. The firm must have written consent from the client and they should record all transactions entered using the client's authority. If the client has any special conditions, the firm must ensure that they have appropriate internal controls to accommodate them. Where a firm holds a client's sensitive documents, they must safeguard against loss, unauthorised destruction, theft, fraud or misuse. They must also keep a record of what they hold.

Why are the rules important?

Compliance, accountability and a proper focus on the interests of consumers leads to positive outcomes. For example, adhering to these rules encourages healthy, stable markets that are effective. Therefore, market participants can be reassured that they can trade and purchase services with confidence. Failure to comply with the CASS regulations has serious consequences, including significant fines and even criminal prosecution.

An example of this occurred in 2013 when Barclays bank failed to properly protect their clients' custody assets, which were worth over £16 billion. This list of breaches included flaws in account naming, incorrect data that suggests assets belonged to Barclays rather than the clients, as well as many more. After the FCA investigated, the bank was fined over £37 million for breaching CASS rules and Principle 10 of the FCA's Principles for Businesses. This highlights how seriously the authority takes CASS compliance.