The difficult market conditions and the consequent increased chance of insolvency of regulated entities prompted the Financial Services Authority (FSA) to carry out firm visits over the last 6 months to a range of investment and insurance broker firms to assess their compliance with the client money rules contained in the Client Asset Sourcebook (CASS) of the FSA Handbook. Following these visits, the FSA published a report entitled "Client Money and Asset Report" on 19 January identifying a number of failings in firms' compliance with CASS (the Report). The FSA believes that the failings identified at these firms is indicative of weaknesses across the market. Weak areas discovered for insurance intermediaries include (amongst others): unclear allocation of duties amongst senior management and lack of senior level responsibility, inconsistency between Terms of Business Agreements and client money calculations, unallocated cash and legacy balances not being reduced promptly enough, firms being overly reliant on CASS audit reports rather than performing their own assurance checks and the review and sign off processes for client money calculations not always evidenced. As a result, the FSA has initiated remedial work in a number of firms and intends to raise the level of awareness across the market on compliance with CASS.

In line with its findings and its stated low tolerance for CASS compliance failures, the FSA intends to work on the following throughout 2010:

  • Increasing firm visits including both generic CASS visits and specialist thematic CASS visits, exercising regulatory intervention where it finds CASS failings and producing a further report of the findings later in 2010.
  • Improving the standards of CASS audits. The FSA proposes referring cases where it has concerns about the audit report to the professional standards section of the Institute of Chartered Accountants in England and Wales.
  • Reintroduce client money reporting with an interim solution by mid 2010 and the final solution being implemented in 2011.
  • Work closely with HM Treasury to publish a consultation paper on amendments to the CASS rules in the first quarter of 2010, addressing the failings raised by the Lehman case (see blog here []). Other amendments are proposed to improve Handbook guidance for CASS auditors.

The FSA has concluded that there is still a significant amount of work for firms to do in order to ensure clients' money and assets are adequately protected and that firms comply with Principle 10 (which states that a firm must protect clients' assets when it is responsible for them.) However, during visits the FSA took regulatory action ranging from private warnings through to a ban on taking new business, demonstrating that infringement of the CASS rules will not be tolerated. For full details of the Report, please click here.