We have received queries on client assets (CASS) compliance related to the current disruption caused by coronavirus (Covid-19). Here we summarise some of the queries received and our position on the relevant issue.
Where a regulated firm has a query about how to apply the CASS rules in the current circumstances, it can contact us by emailing [email protected].
As usual, we expect firms to have taken reasonable steps to research and analyse the topic before approaching us (and in some cases, where possible, it may be helpful for firms to obtain professional advice). We will treat any such requests for guidance in line with our approach set out in SUP 9.2.
Firms have noted some difficulties being caused by cheques being delivered to unmanned offices and remaining unbanked.
Clients send cheques to firms for a variety of reasons. We expect firms to consider potential harm caused by not being able to cash the cheque on a case-by-case basis – for instance, whether it means that the customer cannot receive the product or service intended until the cheque is cashed. Firms should communicate clearly with clients on this.
Where a cheque representing client money is not paid into a client bank account promptly, there are two main issues from a CASS perspective.
- The CASS rules generally require a firm to bank a cheque into a client bank account within one business day and in the interim before banking the cheque to hold it securely and record its receipt. Where there are logistical difficulties in relation to these requirements arising from coronavirus, we expect firms to take such mitigatory steps as are possible in the circumstances, to ensure that clients assets remain protected.
- If payment is made out of a client bank account for a client who has paid using an (unbanked) cheque, this will usually breach the CASS rules. But when a firm subject to CASS 5 or CASS 7 is aware of clients who have paid by cheque and acts upon their payment instructions without having banked the relevant cheque, it is not a breach if the firm has previously paid an amount of its own money into a client bank account, in line with CASS 7.13.41R - CASS 7.13.53R (for investment firms) or CASS 5.5.10R (for insurance intermediaries). Insurance intermediaries operating a non-statutory client money trust under CASS 5.4 may not be affected by this issue, as credit can be advanced from the non-statutory trust where the trust deed allows for it in accordance with CASS 5.4.8R(1).
Otherwise, to act upon the client’s payment instruction without breaching the CASS rules, the firm should:
- ask the client to make a payment directly into the client bank account by alternative means before completing the instruction
- and return or destroy any cheque received in line with the client’s instructions
CASS audit reports
Some firms are concerned the current situation could lead to additional breaches needing to be reported and costs of the CASS audit reports could increase.
CASS auditors usually group multiple breaches in their reports, avoiding the need for extensive repetition and additional cost. We have not heard from auditors that reporting on extra breaches would result in significantly increased costs of audits.
If an audit firm subject to SUP 3.10.4R is not able to submit a particular CASS audit report to the FCA within the 4-month deadline (SUP 3.10.7R), it should follow the ‘late reporting’ rules in SUP 3.10.8, sending an email to [email protected] setting out:
- the name and FRN of the regulated firm
- the period covered by the audit report
- a full account of the reasons for the delay
- when it expects to be able to report
If the audit firm is aware of any significant matters with the firm’s CASS compliance, it should also notify us by emailing [email protected]. This is under the ‘statutory duty to report’ referred to in SUP 3.8.10 and set out in The Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001 (SI 2001/2587).
Audit firms may wish to remind their clients that regulated firms may also be under a duty to notify the FCA through CONNECT of certain matters under Principle 11, SUP 15 and various provisions in CASS.
Physical asset reconciliations
Some firms subject to CASS 6 have reported difficulties reconciling physical safe custody assets as they cannot access the location where the assets are held.
CASS 6.6.22 R requires a firm to reconcile physical safe custody assets as often as is necessary and, in any event, every 6 months. Where there are logistical difficulties in relation to this requirement arising from coronavirus, we expect firms to take such mitigatory steps as are possible in the circumstances, to ensure that clients assets remain protected.
CASS 6.6.57 R (5) requires a firm to notify us if it is unable to conduct a physical asset reconciliation.
Depositing client money
Some firms subject to CASS 7 have noted that an increase in client money holdings may lead to some operational challenges in terms of meeting segregation and diversification requirements. The rules in CASS 7 specify that client money can be deposited in accounts opened with any of the following:
- a central bank
- a CRD credit institution
- a bank authorised in a third country
- a qualifying money market fund
Firms should continue to follow the rules on diversifying holdings in CASS 7.13.
If a firm is experiencing any challenges in being able to segregate money, we expect it to have assessed the options available to it in detail before contacting us.
Notification of CASS breaches
Firms may be required to notify us of CASS breaches under Principle 11 and SUP 15.
In addition to these general duties, the CASS rules contain various requirements to notify us of specific issues (for example if a firm is unable to carry out a reconciliation or unable to pay any shortfall into a client bank account).
These specific requirements in CASS relate to fundamental components of the regime and firms should continue to make any notifications required under CASS.
CASS firm classification
Some firms have reported increased holdings of client money and/or custody assets.
Firms should continue to operate as normal and notify us of their categorisation in January as usual.
Delays to improvement programmes
We are aware that some firms are unable to progress planned improvement programmes to improve compliance with the CASS rules. Firms should consider reporting such delays to FCA as per Principle 11 and SUP 15 and, where relevant, keep existing CASS contacts at the FCA notified of progress towards compliance.