It is clear that the FSA regards client asset failings as an industry-wide problem and has established a specialist Client Assets Unit (Unit) to tackle these failings. This Unit is made up of various client money and asset specialists carrying out risk prioritisation, data collection, specialist supervision (via focused firm visits) and policy roles. Richard Sutcliffe, the head of the Unit, has described it as providing the FSA with a client money and assets "centre of excellence", working to ensure that client money and assets are adequately protected. Firms are now undoubtedly subject to closer scrutiny in relation to their compliance with CASS requirements.
In 2010, the Unit identified three fundamental risks to the adequate protection of client money and assets by firms:
- insufficient resource and oversight;
- inadequate notification and acknowledgement of trust letters; and
- inadequate records, accounts and reconciliations.
The FSA found that a contributory factor to all of these risks was a poor understanding of the CASS rules and a lack of compliance with their requirements.
The Unit has helped the FSA take regulatory action in relation to £17 billion of client money since January 2010 through:
- enforcement action against 11 firms and 8 individuals, imposing a record £34 million in fines;
- the referral of 5 firms to the FSA's enforcement division;
- the issuing of 2 private warnings to firms; and
- requiring 28 firms to commission s.166 skilled persons reports.
This action clearly demonstrates the FSA's commitment to higher standards of CASS compliance and is in line with the FSA's move towards more intensive and intrusive supervision and its credible deterrence strategy. This approach was recently highlighted by the imposition of a £1.2 million fine on a major financial institution for failing to segregate and protect client money.
Firms should make it a priority to consider the adequacy of their existing systems and controls and consider whether they are giving this area the right degree of senior management focus. If a firm has not already done so, it should review its written procedures, staff training, staff resourcing, trust documentation and the frequency, accuracy and completeness of its reconciliations. It is also important to ensure it undertakes adequate due diligence before it places any client assets or money with third parties (see also "Intra-group client money deposits" below).
Some of the key dates for action are set out below.
This article was first published on www.complinet.com on 31 January 2011.