On 6 March 2015 the Financial Conduct Authority (“FCA”) published some further changes to the Client Assets module of the FCA Handbook of Rules and Guidance (“CASS”) as part of CP 15/8. The proposed changes are designed to clarify aspects of the changes made to CASS in Policy Statement PS 14/9.
CP 15/8 addresses the following areas:
- External custody reconciliations of client assets
- Registration and recording of legal titles to client assets
- Use of the normal approach to client money segregation for certain regulated clearing arrangements
- Delivery vs payment rule for regulated collective investment schemes
- Amendments to the client money distribution rules to make clear the constitution of the client money pool
- Various loan-based crowdfunding changes
From 1 June 2015, FCA authorised firms will need to comply fully with all of the changes published in PS 14/94. On this date, the FCA will make the remaining changes to CASS.
There are other changes in addition to those in PS 14/9 and CP 15/8 due to come into force and the FCA still has to finalise its changes to the Client Money Distribution Rules in CASS 7A. Please see our briefings CASS Changes: Top 10 To-Do’s Before December 2014 and FCA CASS changes: 15 things left to do before June for details.
This briefing identifies 6 key areas that investment firms, fund managers and crowdfunders should be considering in light of these proposed changes.
1. External custody reconciliations of client assets
The FCA is proposing to amend the relevant rules to allow CASS 6 firms to perform external custody reconciliations against these third parties’ system records for uncertified units or securities governed by the relevant uncertified securities regulations in Ireland, Jersey, Guernsey and Isle of Man.
Confirm with third party custodians that in Ireland, Jersey, Guernsey and Isle of Man, subject to finalisation of changes to CASS 6.6, reconciliation with the records of those custodians should be possible.
2. Registration and recording of legal title to client assets
The FCA is proposing to amend the rules to make clear that, when a CASS 6 firm deposits a client’s safe custody assets with a third party, the CASS 6 firm need not be the party responsible for registration and recording of legal title to those assets deposited with the third party.
Review arrangements with third party custodians and, subject to finalisation of changes to CASS 6.2, make amendment to agreements clarifying that the firm need not be the party responsible for registration and recording of legal title.
3. Use of the normal approach to client money segregation for certain regulated clearing arrangements
The FCA is proposing to amend the relevant CASS 7 rules to ensure that when clearing member firms have entered into arrangements with a Central Counterparty (“CCP”) and, in accordance with the rules governing, use a single house bank account to receive payments from and make payments to the CCP, the clearing member firm may also use that house bank account to receive payments of pure client money.
For clearing members of CCPs, review arrangements for receiving from and paying client money to CCPs and, subject to finalisation of CASS 7.13.72, make changes to bank accounts.
4. Delivery vs payment rule for regulated collective investment schemes
While the FCA made clear in PS14/9 that the final client money rules do not prevent authorised fund managers (“AFMs”) in this context from transferring client money (except cheques) from a client bank account into a corporate account before the money is transferred to a third party, the FCA is proposing to clarify in the rules that AFMs would not be in breach of the client money rules if they do this in this context.
For AFMs, review arrangements for making payments to third parties and, subject to finalisation of CASS 7.11.21, make any changes to bank accounts.
5. Amendments to the client money distribution rules to make clear the constitution of the client money pool
The FCA is proposing to amend CASS 7A to make the constitution of the client money pool clear, in that it should include any client money in client bank accounts and client transaction accounts and any client money identifiable in any house account held by the firm into which client money has been received.
Note the proposed changes and, subject to finalisation of CASS 7A.2, ensure changes are reflected in any explanations of the pooling process to clients.
6. Various loan-based crowdfunding changes
The FCA is proposing to amend the transitional provisions in the Consumer Credit Sourcebook (“CONC”) so that they do not exclude the application of CASS or related parts of SUP for loan-based crowdfunding firms, making it clear these firms are subject to CASS as stated in PS14/4.
The FCA is also introducing some transitional provisions in CASS. The amendments to CONC concern the table of the transitional provisions in CONC 12.1.4R, in relation to the notification and report on client assets in SUP 3.10 and client money and assets return (“CMAR”) in SUP 16.14 – but no changes are proposed in SUP itself.
The FCA notes that:
- Firms with interim permission to carry out loan-based crowdfunding and which qualify as CASS medium or large firms will not be able to appoint a CF10a (CASS operational oversight function) because they will not have employees exercising significant influence functions. The FCA would still expect these firms to ensure that the relevant functions that would have been carried out by a CF10a are allocated to a suitably senior person, even if the person doing the tasks will not technically be a CF10a.
- Firms with interim permission to carry out loan-based crowdfunding and which qualify as CASS small firms will also not have any employees exercising significant influence functions. The FCA will introduce a transitional provision in CASS making it clear that, while these firms will not have a CF10a or CASS oversight officer, they must allocate the roles and tasks that would have been carried out by a CF10a or CASS oversight officer to a suitably senior person.
For firms carrying on crowdfunding activities with interim permission, check arrangements for making notifications and apportionment of responsibility for overseeing compliance with CASS and, subject to finalisation of CASS TP 1.1 and CONC 12.1, implement any necessary changes.