In June 2014, the Financial Conduct Authority (FCA) published its proposed changes to the bulk of the Client Assets module of the FCA Handbook of Rules and Guidance (CASS) in Policy Statement PS 14/9.
Two waves of rules came into force on 1 July 2014 and 1 December 2014.
From 1 June 2015, FCA authorised firms will need to comply fully with all of the changes published in June 2014. On this date, the FCA will make the remaining changes to CASS.
Following our earlier briefing, FCA CASS changes: 10 things to do before December, we have set out below:
- an outline of the 15 areas of the remaining changes relevant for FCA authorised firms, to whom CASS applies, and
- an indication of the next steps firms will need to take to address these areas of change in time for the 1 June 2015 deadline.
Please note, there are other changes due to come into force and the FCA still has to finalise its changes to the Client Money Distribution Rules in CASS 7A.
Unlike the 1 December 2014 changes, compliance will be necessary for all clients. Firms will have to ensure that the 1 December 2014 changes, applicable only to new clients, apply to existing clients from 1 June 2015.
Where firms make changes to agreements with existing clients, they must check whether the clauses in those client agreements permit this taking into consideration the Unfair Contact Terms Act and Treating Customers Fairly issues.
1. CASS requirements that came into force on 1 December 2014
Many of the rules which came into force on 1 December 2014 required firms to make changes to client documentation or procedures with respect to new clients. Those changes include: provisions governing unclaimed custody assets and client money; written custody agreements; title transfer collateral arrangements; handling client money in the course of a transfer of business; acknowledgment letters; the alternative approach to client money segregation; and information to professional clients and eligible counterparties.
- Review FCA CASS changes: 10 things to do before December
- Ensure that changes made for new clients before 1 December 2014 are applied with respect to existing clients.
2. Delivery versus payment for Authorised Fund Managers
The FCA has revised the circumstances in which authorised fund managers (AFMs) will be permitted to cease to treat money as client money for a one-day window while carrying out a ‘delivery versus payment’ (DVP) transaction for the purpose of setting a transaction in relation to units in a regulated collective investment scheme.
An AFM will have to ensure that, where it is unable to pass money received from a client to the depositary of the fund which the AFM manages by close of the business day following receipt, it treats that money as client money. The same requirements will apply where the AFM is unable to pass money from the depositary to a client on a redemption by close of the business day following redemption.
- Review and amend terms of business to address the AFM DvP Exemption be given to new clients for signing to the extent not already done.
- Ensure that terms of business with existing clients can be amended to address the AFM DvP Exemption and send relevant notices or obtain written consents.
- Review and confirm that systems and controls and arrangements with depositaries are consistent with and can give effect to requirements under the more restricted AFM DvP Exemption.
- Where reliance on AFM DvP Exemption is no longer possible, ensure that client money arrangements are in place.
3. Cleared funds
The FCA is reiterating the principle that one client’s money should not be used to fund another client’s investment business. In its guidance the FCA indicates that a firm must ensure that its organisational arrangements are adequate to minimise the risk that client money may be paid for the account of a client whose money is yet to be received by the firm. The FCA sets out examples of what it would expect in this regard.
Review policies and procedures in place for using client money to purchase investments, monitoring and reconciling such payments with money received.
4. Reporting to clients
Provisions in CASS will now: require firms to honour client requests for information on their holdings of client assets, but will permit firms to agree to charge clients they reasonable costs for doing so; and clarify that where a firm provides a report to a client on its holdings of client assets for that client, a firm should ensure that it is clear from the report when assets or monies are, or are not, protected under either or both our custody rules and client money rules.
Some of these requirements are currently contained in COBS but will be moved to CASS.
Review and, where necessary, amend terms of business with all clients to reflect CASS requirements.
5. Registration of firm assets and custody assets
CASS will restrict a firm’s ability to register title to its own assets in the same name as any custody assets registered in the name of a nominee to circumstances in which this is necessary to facilitate a client transaction (e.g. handling dealing errors, allocating bulk deals and/or processing transaction in fractional shares), or a result of the law or market practice of an overseas jurisdiction.
- Review manner in which assets are registered and make changes to comply with revised rules.
6. Depositing custody assets when using third parties
The FCA has made various clarifications, reordered rules to improve readability and amended the matters a firm should consider when selecting, appointing and periodically reviewing any third party custodian with whom it deposits assets.
- Review policies and procedures for selecting, appointing and periodically reviewing any third party custodian and amend as necessary.
- Review suitability of third party custodians in light of revised policies and procedures and make changes to relationships, as necessary.
7. Custody record-keeping, record checks and reconciliations
The FCA is updating its rules to accommodate firms that use integrated systems to maintain their records for custody assets; introducing a minimum frequency at which firms are required to undertake reconciliations or perform other checks to ensure the accuracy of their records for custody assets of their records for custody assets; clarifying the obligation on firms to fund shortfalls in custody assets only for which they are responsible (using a firm’s own assets or, where appropriate, other funds); and introducing more detailed notification and record-keeping requirements (including requiring firms to maintain internal procedures and policies for their custody reconciliations).
- Review record-keeping, reconciliation and reporting systems, change as necessary and review and/or test effectiveness of changes.
8. Title transfer collateral arrangements procedure for switching
The FCA is prescribing the mechanism firms should follow if a client requests protections under CASS for assets and monies subject to title transfer collateral arrangements.
Review mechanisms for switching in response to client requests and amend terms of business governing transfer collateral arrangements as necessary.
9. Client bank accounts – due diligence and diversification
The FCA is enhancing the due diligence requirements that firms must carry out on banks with whom they place client money and requiring firms to periodically assess whether they are appropriately diversifying the third parties with which they place client money and following each assessment make adjustments (to the third parties and/or amounts placed at each) accordingly.
- Review policies and procedures for carrying on due diligence and periodic assessment of banks with whom client money is held.
- Review arrangements with banks holding client money in light of revised policies and procedures and make changes to relationships, as necessary.
10. Immediate segregation
Except where firms are using the alternative approach to client money segregation, the FCA is generally requiring firms to receive all client money directly into a client bank account. The final rules will permit firms who act as a clearing member of CCPs in certain situations to receive client money into a house bank account before transferring that money to a client bank account so long as they maintain prudent segregation in their client bank account to address intra-day risk.
Review policies and procedures for monitoring the receipt of client monies, change as necessary and review and/or test effectiveness of changes.
11. Physical receipts
The FCA is clarifying how firms should treat client money receipts in the form of cash and cheques and how these should be reflected in the internal client money reconciliation.
- Review policies and procedures for physical receipts, change as necessary and review and/or test effectiveness of changes.
12. Prudent segregation
The FCA is setting out procedures and record-keeping requirements that firms must follow if they intend to prudently segregate money in a client bank account to address specific risks.
Review procedures and record-keeping systems, change as necessary and review and/or test effectiveness of changes.
13. Client money relating to custody assets held at custodian
The FCA is revising its rules to clarify that where a firm deposits custody assets with a third party, any client money derived from those assets should either be held in a client bank account or in a client transaction account, as appropriate.
- Review third party custody arrangements and make any necessary changes to clarify basis on which money deriving from assets should be held.
14. Client money record-keeping and reconciliation
The FCA is: establishing clear requirements as to the steps a firm is expected to follow when undertaking an internal client money reconciliation (a ‘standard method’); clarifying the circumstances in which a firm is able to undertake a non-standard method of internal client money reconciliation; mandating the minimum frequency at which firms should undertake client money reconciliations (both internal and external); and introducing more detailed notification and record-keeping requirements.
Review record-keeping, reconciliation and reporting systems, change as necessary and review and/or test effectiveness of changes.
15. Non-written mandates
The FCA is introducing revised rules to: ensure firms keep appropriate records of non-written mandates; remove the requirement on firms to hold records of all mandates indefinitely; and clarify the form and content of records to be retained around mandates.
- Check whether non-written mandates are entered into.
- If so, check record-keeping systems and form and content of records, change as necessary and review and/or test effectiveness of changes.