Since the collapse of Lehman’s and the other financial scandals of the noughties; regulators across Europe have been increasing the pressure on regulated firms to do a better job of protecting client money and assets.
In the UK, the Financial Conduct Authority (FCA) are the vanguard of that effort to improve the client money practices of asset managers, crowdfunders and others subject to its Client Asset (CASS) regulations. In the last few years there has been a raft of consultation and policy papers amending the regulations by setting out broad principles and specific rules for what is required to protect client cash and securities.
The net effect of these regulations is to impose an almost impossible standard of care on firms that hold client money and assets. Simply put, the regulated firm must have a controls and protection regime which is so robust that, if the firm should fail that day without warning, the appointed liquidator or administrator could:
- Easily identify cash and assets belonging to each client,
- Return cash and assets to the client promptly,
- Pay the client in full: the client would receive all the cash and assets held for them by the firm without fear of any shortfall or “haircut”.
The regulated firm needs to be able to prove the robustness and completeness of its procedures to inspectors and regulators. This requires a complex mapping of the byzantine CASS regulations to the firm’s own procedures and practices and this needs to be kept up to date.
The FCA’s Senior Managers and Certification Regime (SM&CR) threatens career-ending consequences for any failure to comply with the spirit and letter of these regulations. The new senior manager regime allows firms to split accountability for CASS compliance from its oversight. Responsibility for CASS must however stay with one of the new Significant Management Functions (SMFs) with the likely candidates being Chief Operations Function (SMF24) or the Chief Finance Function (SMF2). These SMFs may, if they so wish, appoint an appropriately qualified person to the role of an operational CASS Oversight Function (CASSOF) but they cannot “outsource” responsibility for CASS to this function.
Finally, the new CASS audit regime, implemented by the Financial Reporting Council (FRC) for reporting periods commencing 1st January 2016, means any non-compliance by a firm is much more likely to be detected and reported to the FCA. Reports so far indicate that has been the case, with a large number of firms having some sort of qualification on their client money audit report
The net effect of all these new regulations and enforcement is to leave the SMF and the operational CASS Oversight Function with nowhere to hide from their CASS challenges.
How can we help?
The AAB Associate Consulting Network members have several decades of experience in the field of CASS, advising firms from small crowdfunder start-ups to large international banks and asset managers on CASS operating models and compliance.
- Conduct detailed reviews of your operations, procedures and documentation,
- Advise on and implement any changes required,
- Help you deal with the regulators, should that be required,
- Advise on technology and help you select the best solutions to enable you to reach best practise standard.