CASS compliance – the bigger picture

Speech by David Lawton, director of markets at the FCA, delivered at the FCA CASS Conference 2014 event for CASS large firms. This is the text of the speech as drafted, which may differ from the delivered version.

Protection of Client Assets and Money (CASS) is still a priority for the Financial Conduct Authority (FCA) and this is not going to go away. I want to use my time today to talk about our CASS rules, the expectations on those ensuring their firms’ compliance with the regime, and how this fits within the bigger picture of FCA work.

As you can imagine, with limited resources the FCA must prioritise its focus. Firms with assets of greater than £100bn and money greater than £1bn get more supervisory attention than their smaller counterparts, given their greater ability to impact consumers if things go wrong. As you’ll know well, in a lot of UK investment markets, certain large players hold the lion’s share of CASS holdings and it is of vital importance for market integrity and stability that these firms are getting things right.

As large firms, the organisations you represent are those lions, accounting for around £68bn of cash and almost £10tn of assets. Between you, that’s 74% of all cash and 89% of all assets held in the UK. So you are naturally our focus for the most intense supervision.

But the good news is that your attendance here today is a clear demonstration that you understand our interest and the importance of CASS compliance for your business and your customers.

CASS was a key priority for our predecessor organisation, the Financial Services Authority (FSA), following the collapse of Lehman Brothers and, to this day, it continues to be a key priority for the FCA.

In my brief talk today, I would just like to speak about how the CASS regime – both our policy work and supervision – fit within the FCA’s broader approach to regulation as well as with other pieces of work we are doing… the bigger picture.

FCA objectives and approach

So, starting at the beginning. No FCA speech would be complete without the speaker first detailing the FCA objectives. So here we go.  The strategic objective is to make markets function well, which we’ll do by:

  • securing an appropriate degree of protection for consumers
  • protecting and enhancing the integrity of the UK financial system, and
  • promoting effective competition in the interests of consumers

The reason I raise these today is that clearly CASS is important for all of them:

  • CASS protects consumers’ assets and money when a  firm fails
  • CASS enhances the integrity of the financial system by giving participants confidence that their money is protected upon insolvency; and
  • the CASS rules set a minimum standard of protection that allows for a competitive market in investment and custodial services – not competing on levels of protection but on cost and the quality of services provided

A further demonstration, if needed, of how CASS compliance is high on our agenda is that it is one of the only areas of our rulebook, that is also itself one of the 11 FCA Principles for business. You’ll know these Principles act like the FCA’s own version of the ten commandments – number 10 here being, “A firm must arrange adequate protection for clients' assets when it is responsible for them”. Like the ten commandments, our Principles are a fundamental statement of what we believe.

What I am conveying is that CASS is and remains an FCA priority. And it has been so since we learned the painful lessons in 2008 of the Lehman collapse. As you know, at this point the CF10a role was created, and we started introducing new requirements such as the Client Money and Assets Return and later tightened up the rules on CASS audits. The road has not been entirely smooth since then, with failures such as MF Global continuing to educate us all about the issues we should address.

I don’t intend to delve deep into all the details of this history, well known to all of you, but just to say that past experience has created a memory that lives on.

And now, that memory and experience is being used to protect clients’ money and assets in new areas – notably, consumer credit. We took responsibility for regulating ‘consumer credit’ from April, and this brought up to 50,000 new firms into our regulatory perimeter. Although the headline CASS holdings are smaller in this market than in some investment businesses, the basic rules are the same and the protections are of equal importance to the parties involved.

A key change for the FCA is the new focus on the accountability of individuals for their actions and the actions of their firms.

CASS, in new areas and old, forms part of the FCA’s new wholesale conduct approach. What is wholesale conduct? This is the term we use to describe how market participants interact with each other and conduct their business in wholesale markets. The purpose of this is to encourage healthy, stable markets that are fair and effective, and reassure market participants that they can trade and purchase services with confidence. So, for example, if investors place money with an asset manager, we expect that manager to truly act as an agent for the client, clearly disclosing charges and levels of service, and undertaking activities as directed by the client and in their best interest. Where that manager then conducts business with the sell-side firm, they must equally treat them fairly and put the client first.

This approach is designed to inspire confidence in the market, rooting out bad practice and bad apples, and providing market integrity. Ensuring client money and assets is protected, which throughout remains the property of their owners, is a significant part of this.

A further key change for the FCA is the new focus on the accountability of individuals for their actions and the actions of their firms. This was demonstrated recently in action we took against the senior executives at the insurance company, the Swinton Group, who were responsible for the firm’s aggressive mis-selling of insurance add-on products. These executives were personally fined a combined £928,000 for their role in allowing the mis-selling to take place. We aren’t expecting perfection from individuals working in the financial services sector, nor for there never to be a firm failure again. However, what we do expect is that individuals know our rules and understand our expectations, be diligent in ensuring that things are done right within their areas of responsibility and, most importantly, are putting consumers at the heart of their business models.

To help organise ourselves better, as well as implement the recommendations of the Parliamentary Commission on Banking Standards (PCBS), we are developing the concept of a new Senior Managers Regime and Certified Persons Regime. These regimes will be applied to all deposit-taking institutions – from the largest banking groups to the smallest credit union – and to the nine largest investment banks we oversee. This will include many of the organisations represented in this room.

You’ll probably know that the consultation on these new regimes closed recently and that, by doing away from the existing ‘controlled functions’, of which CF10a is one, there will be some changes for this audience. The paper is recommended reading on a key element of the new FCA approach.

However, without going into the specifics of the new regimes, the message I want you to take away is that we will be no less focused on those responsible for CASS compliance than before. We will have new powers to hold individuals to account who are truly reckless in the way they carry out that responsibility.

And lastly, within our new approach is our new business-friendly approach to innovation and competition. Martin Wheatley recently launched the FCA’s ‘Project Innovate’. This is designed to help and encourage new and innovative new businesses and ideas to help consumers in financial markets. We’ll be providing ‘informal steers’ to new financial firms, tech firms, and existing firms on how regulation applies to their new business ideas.

FCA policy developments

I’ve mentioned consumer credit and the accountability regime we are introducing, but there are a few further policy ‘puzzle pieces’ that will form the bigger picture relevant to your responsibilities.

There is the post-crisis prudential reforms, particularly around recovery and resolution, which are vital for improving financial stability. Measures agreed in Europe and implemented or soon to be implemented domestically in the UK, such as CRD IV which came into force this January, or the Recovery and Resolution Directive, will help minimise the chance of specific funding issues quickly leading to failure. Or where they do, ensuring that failure is not as disruptive as we know it can be.  There is space and links within these reforms to ensure that client money remains protected and can be returned promptly.

And to further ensure these goals, we obviously also have our domestic CASS review reforms. This has been a substantial piece of work by our CASS policy unit over the last few years. Thank you to all of you for engaging with us so enthusiastically, asking questions and pointing out potential issues that arise from our proposals.

Key strands of this work include:

  • The new requirement to have written custody agreements.
  • The new requirement to have written agreements for TTCAs.
  • The setting of minimum frequency at which firms must undertake reconciliations of their records for custody assets.
  • Enhancing the due diligence requirements that firms must carry out on banks with whom they place client money.
  • Prohibiting firms from placing money in a deposit with an unbreakable term of more than 30 days.
  • The requirement to have immediate segregation of client money directly into client bank accounts.
  • The requirement for firms to have acknowledgement letters using our template letter.
  • The creation of rules around multiple client money sub-pools for Central Counterparties (CCPs) when holding margin.
  •  A large number of clarifications on the application of our rules, which have arisen through questions we’ve received over the last few years.

Compliance, accountability and a proper focus on the interests of consumers leads to good outcomes.

Many of these changes to our CASS rules took effect in July this year, and more came into effect on 1 December. The remainder take effect in June next year, completing this package of work. So, some of it is now implemented, some is still to come. The rules hopefully improve on past rules, improving certainty for firms and asset owners.

And lastly, we have the government‘s review of the Special Administration Regime for Investment Banks, due to conclude next year, which will update the rules to learn the lessons of handing the administration of firms like MF Global.

I’m sure you’ll agree, with the new FCA approach and a swathe of new rules, there is much for us all to consider and do. However, it is important to note that new rules, however detailed or numerous, don't lead to good outcomes - it is compliance, accountability and a proper focus on the interests of consumers that leads to good outcomes.

Recent FCA enforcement cases

But why is all this necessary? If I haven’t convinced you so far of the importance of this area, then it may be useful for me to talk about a recent example of failings we’ve seen. Apologies in advance if certain individuals feel under the spotlight in this section.

The Barclays case – Barclays was fined almost £38 million in September, our largest ever fine for breaches of our CASS rules and Principle 10. The firm failed to properly protect clients’ custody assets worth over £16 billion - a staggering sum. And the list of breaches was highly disappointing:

  • Significant failing in apply our rules when opening 95 custody accounts in 21 different countries.
  • Incorrectly recording which company within its Investment Banking Division was responsible for the assets in its accounts.
  • Failure to establish appropriate legal arrangements with custodians it used.
  • Basic flaws in account naming.
  • Incorrect data that suggested assets belonged to Barclays instead of its clients.

This covered five years of failings. And this came on the back of a £1.1 million fine from the FSA in 2011 of similar CASS systems and controls failings in the eight years before that. Barclays’ lack of focus on the rules was unacceptable.

I don’t raise this to pick on individuals and their firms, but these serve as a warning and indication of how seriously we take CASS compliance. There are lessons that all firms can learn here and this should have been a wake-up call to everyone in this room to ensure your own house is in order.

We appreciate the largest institutions run ever more complex businesses, with multiple different business lines, a variety of different clients and the holding of money for a number of different purposes. We also recognise that in these circumstances that Barclays did not fail, so no assets were lost. And perhaps the chances of failure are lower than in previous years, resulting from safer post-crisis businesses, a growing economy, and firms regaining some of their previous strong profitability.

However, these are not excuses for a lack of focus by compliance teams or the boards of major banks and investment firms.

The doomsday scenario of a large firm failure still remains a real risk, and if CASS rules are not complied with, clients face delays in return of assets, extra costs and, worst of all, losing their assets. The FCA is not willing to accept this risk.

Key messages

So, in conclusion, you’ve heard about the FCA approach and how it applies to CASS; you’ve heard about some of the new rules we’re introducing to the CASS handbook and elsewhere that are important for you to understand; and, you’ve heard about what can happen if rules are not complied with.

I hope I’ve left you in no doubt that CASS is an FCA priority and important to all of our objectives. It is hugely important for market stability to ensure CASS is done right – in good times and bad.

You, as CF10a, are the forefront of ensuring things are done right – it is your role to ensure day-to-day compliance. Our handbook gives you three key responsibilities: (i) ensuring the submission of accurate CMARs; (ii) producing CASS Resolution Packs and providing annual confirmations to your boards that these are up-to-date; and, most importantly, (iii) ensuring adequate systems and controls are in place to allow compliance with CASS.  At events like today’s, we are here to support you in meeting these responsibilities.

But equally, your firms’ board members take responsibility for prioritising CASS. By us pressing you about this issue, we hope this helps you get sufficient board attention and the resources you need to do what you need to do.

Recent experience has shown that, as a market, not everyone is where they should be. We are confident this can be improved. New rules will help but together we must still focus on getting the basics right. We hope today’s conference is a helpful step towards this.