FCA WEBINAR NOTES AND NEWSLETTER December 2015 · FCA WEBINAR NOTES AND NEWSLETTER December 2015...

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FCA Webinar Notes and Newsletter – December 2015 1 © 2020 Innovation Training Limited - 2015 FCA WEBINAR NOTES AND NEWSLETTER December 2015 Presented by Ian Fletcher FCA 2020 Innovation Training Limited Copyright These notes can be printed or photocopied as many times as you like or installed on an intranet or network, providing they are used solely within your firm. Alternatively, additional copies are available from 2020 Innovation Training Limited. For information of users This programme should be read in conjunction with the detailed legislation or regulations. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this programme can be accepted by the authors or 2020 Innovation Training Limited.

Transcript of FCA WEBINAR NOTES AND NEWSLETTER December 2015 · FCA WEBINAR NOTES AND NEWSLETTER December 2015...

Page 1: FCA WEBINAR NOTES AND NEWSLETTER December 2015 · FCA WEBINAR NOTES AND NEWSLETTER December 2015 Presented by Ian Fletcher FCA 2020 Innovation Training Limited ... • Non-executive

FCA Webinar Notes and Newsletter – December 2015

1 © 2020 Innovation Training Limited - 2015

FCA WEBINAR NOTES AND

NEWSLETTER

December 2015

Presented by

Ian Fletcher FCA

2020 Innovation Training Limited

Copyright

These notes can be printed or photocopied as many times as you like or installed on an intranet or network, providing

they are used solely within your firm. Alternatively, additional copies are available from 2020 Innovation Training

Limited.

For information of users

This programme should be read in conjunction with the detailed legislation or regulations. No responsibility for loss

occasioned by any person acting or refraining from action as a result of the material contained in this programme can

be accepted by the authors or 2020 Innovation Training Limited.

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Training Disclaimer

The current requirements with which an authorised person, and an approved person, must

comply are set out in the Financial Services and Market Acts 2000, the regulations made

under that Act and the rules in the FCA Handbook. Under that Act, FCA are given the

power to give guidance – and they do so extensively in the Handbook. FCA call this

‘general guidance’. FCA also give guidance to particular firms in their particular

circumstances. They call this ‘individual guidance’.

The information which we will give to you on this course is for training purposes only. It is

not guidance in either of these two senses. I hope you will appreciate that I am not in a

position to give you, or your firms, individual guidance. The purpose of this session is to

give you a better understanding of FCA provisions and to enable you to apply them to your

circumstances.

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Introduction

WELCOME TO THE DECEMBER FCA NEWSLETTER AND WEBINAR NOTES

We look at the FCA news, new regulations, CPs and PSs. This quarter we focus on the new CASS

rules for investment businesses.

Future Webinars:

The 2016 dates for FCA webinars have been released.

Please contact Helen or Clair on 0121 314 2020 for booking and prices or see

www.the2020group.com for further information.

Remember: 2020 Members also get free access (available and unlimited to all partners and staff) to

12 x 2 hour CPD courses in 2016 and attendance at our full day Regional CPD seminars (held twice a

year at a venue near you!)

See www.the2020group.com for further details.

Contents:

Recent News and website review

Recent Consultation Papers

Recent FCA Policy Statements

Summary of the year

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1 RECENT NEWS AND WEBSITE REVIEW

Gabriel has moved location, new login as follows:

https://gabriel.fca.org.uk/portal_authentication_service/appmanager/merportal/desktop

FCA calls for inputs on Big Data in the General Insurance Sector:

Christopher Woolard, director of strategy and competition said: "Big Data is having an ever-growing

social and commercial impact, and has the potential to transform practices and products across

financial services. We are starting our work on Big Data by seeking to better understand how

insurance firms are using data, and how this may evolve in the future."

"We are keen to talk to both consumers and industry to understand Big Data’s impact on firms’

decisions, and in turn the effects that this is having on consumers. We will then be able to consider

what further steps may need to be taken."

Although the use of Big Data is developing across financial services, the FCA will focus on retail

general insurance. This reflects how extensively data is already used in the sector and the

significance of the sector for consumers.

The Call for Inputs will focus on three key topics:

•Does Big Data affect consumer outcomes?

•Does Big Data foster or constrain competition?

•Does the FCA’s regulatory framework affect developments in Big Data in retail general

insurance?

In looking at consumer outcomes, the FCA is also interested in how Big Data might affect consumers

who may not be able to access standard insurance products, including those with disabilities or in

vulnerable situations.

The Call for Inputs will close on 8 January 2016. The FCA will be meeting with firms, consumer

groups, industry bodies and other interested parties, and seeking data from firms from December

2015 to early 2016 to help inform any next steps.

The FCA will use the findings from this Call for Inputs to determine its next steps, including whether

a market study, adjustments to policy or guidance or any other form of intervention is appropriate.

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The FCA will publish a Feedback Statement mid-2016 detailing the findings from the Call for Inputs

and any necessary next steps.

FCA Website review: Regulation round up section – Visit this before you do any work for a client

Connect: Replaced ONA to make applications and give FCA notifications

Connect is our online system that you can submit applications and notifications for:

•approved persons

•appointed representatives

•variation of permission

•standing data

•passporting

•part 4A permission (dual regulated firms still have to use the paper forms)

•payment institutions: authorise, register or cancel

•PSD agents: add, amend or remove

Useful training video:

http://www.fca.org.uk/firms/systems-

reporting/connect?utm_source=homepage&utm_medium=promo&utm_campaign=extra-hp-promo

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FCA Website has now been streamlined for easy access to the Register, Connect applications and

GABRIEL reporting:

Client Assets audits:

On the 9 November the FRC published its Standard on providing assurance on Client Assets

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The standard can be downloaded at:

https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Standard-Providing-

Assurance-on-Client-Assets-to.pdf

This seminar will review the standard.

2 RECENT CONSULTATION PAPERS

Please see previous newsletters and webinar recordings for CPs before June 2015.

These are extracts from the FCA website section: “Your Firm”

CP15/29: Amendments to Various Forms

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) set out

proposed amendments to four forms used by firms and individuals relating to regulatory approval

for certain roles. The forms changed are forms D,F (FCA), D (PRA) and M. D relates to changes in

circumstances for approved persons, F for overseas firms, M (PRA only) for Non – Execs and Key

function holders.

CP15/30: Pension reforms – proposed changes to our rules and guidance

In this paper FCA set out expectations as to how existing rules and guidance operate in the new

pensions environment, consult on a number of changes aimed at ensuring their rules are fit for

purpose and invite discussion on areas where FCA are minded to carry out further work.

With the recent Pensions reform rules and Automatic Enrolment the FCA are updating their rules for

their role in supporting consumers and firms, in line with their statutory objectives.

CP15/31: Strengthening accountability in banking and insurance: regulatory references

In partnership with the Prudential Regulation Authority (PRA), FCA are consulting on proposals for

regulatory references as part of the wider package of reforms that aim to improve accountability in

banks and insurers.

In this consultation the FCA and the PRA set out proposals for regulatory references for candidates

applying for:

• Senior management functions (SMFs) under the Senior Managers Regime (SMR).

• Significant harm functions under the Certification Regime (CR).

• PRA senior insurance management functions (SIMF) under the Senior Insurance Managers

Regime (SIMR).

• FCA insurance controlled functions.

• Notified non-executive director (notified NED1) roles within a Relevant Authorised Person

(RAP2) or Solvency II firm.

• Non-executive director roles in credit unions.

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• Key function holders (KFH3) and notified NED roles within an insurer.

CP15/32: Smarter Consumer Communications: Removing ineffective disclosure requirements in

our Handbook

FCA are consulting to remove a number of disclosure requirements which they identified as not

being effective in terms of informing consumers about a product or service and to reduce the

regulatory burden on firms. This reflects their commitment to create a sustainable regulatory

framework.

CP15/33: Consumer credit: proposals in response to the CMA's recommendations on high-cost

short-term credit

The Consultation Paper contains proposals for additional standards for price comparison websites

(PCWs) which compare high-cost short-term credit (HCSTC) products and invites views on them. The

Consultation Paper also addresses a number of other areas: the use of real-time data sharing to

enable informed credit assessments, measures to improve shopping around without affecting

consumers’ credit ratings, improved disclosure on the costs of borrowing, and credit broking/lead

generation.

CP15/34: Regulatory fees and levies: policy proposals for 2016/17

This Consultation Paper (CP) sets out our proposed policy changes to how FCA fees will be raised

from 2016/17.

CP15/35: Policy proposals and Handbook changes related to the implementation of the Market

Abuse Regulation (2014/596/EU)

In this consultation document, FCA set out proposals for the necessary changes to the Handbook

required to implement the new Market Abuse Regulations (EU MAR). FCA seek feedback on these

proposals and also invite comments on the different options for implementation the regime offers

EU Member States in two areas.

In October 2011, the European Commission published proposals for a Regulation on insider dealing,

market manipulation and the improper disclosure of inside information. The resulting Market Abuse

Regulation (EU MAR) was adopted by the European Parliament and the Council of the European

Union and published in its final form in the Official Journal of the European Union in June 2014. EU

MAR updates the civil market abuse framework formerly established by the EU Market Abuse

Directive (EU MAD) and will apply from 3 July 2016.

In the UK, the obligations under EU MAD were implemented principally by changes to the Financial

Services and Markets Act 2000 (FSMA). This regime was supplemented by the FCA Handbook (the

Handbook), which is made under powers given to the FCA by FSMA. The FSMA civil market abuse

regime and the relevant Handbook provisions will continue to apply until July 2016.

The Treasury is preparing secondary legislation to repeal or modify existing domestic law, where it

conflicts with EU MAR, to meet the UK’s amended obligations under the new regime. This secondary

legislation will also cover new EU MAR obligations which are not covered by the existing market

abuse regime, such as the requirement for employers to have internal procedures for employees to

report infringements of EU MAR.

In this consultation document, FCA set out proposals for the necessary changes to the Handbook

required in implementing this new regime.

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CP15/36: Future regulatory treatment of CCA regulated first charge mortgages

Prior to 31 October 2004, first charge mortgages were regulated under the Consumer Credit Act

1974 (CCA) if they fell below the relevant financial threshold. In November 2015 the Government

made legislation1 which will make the administration of these mortgages a regulated mortgage

activity from 21 March 2016 and the CCA will then no longer generally apply. This consultation

paper sets out proposed rules for firms administering or performing activities in relation to

variations of these mortgages, which FCA refer to as ‘pre-2004 first charge CCA mortgages’.

CP15/37: Consequential amendments to the Senior Insurance Managers Regime (SIMR)

This CP proposes changes to the Society of Lloyds rulebook and consolidates Actuaries, Auditors and FSCS Part and the Lloyd’s Part in the PRA Rulebook into a single Part. It also proposes amendments to S133/13 on market risk, SS12/13 on counterparty credit risk, Consequential amendments to the Senior Managers Regime (SMR) and the Senior Insurance Managers Regime (SIMR) and amendments to definitions related to credit unions. CP15/38: Provisions to delay disclosure of inside information within the FCA's Disclosure and Transparency Rules

FCA address recent developments around the disclosure of inside information by issuers with

securities admitted to trading on a regulated market.

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3 RECENT FCA POLICY STATEMENTS

Please see previous newsletters and webinar recordings for PSs before June 2015. These are

extracts from the FCA website section: “Your Firm”

PS15/22: General Insurance Add-Ons Market Study – Remedies: banning opt-out selling across

financial services and supporting informed decision-making for add-on buyers

In March 2014 FCA General Insurance Add-ons Market Study (the market study) found that

competition in add-on markets was not effective and was not working in the best interests of

customers. FCA proposed four remedies to address this:

• introducing a deferred opt-in for Guaranteed Asset Protection Insurance (GAP)

• introducing value measures across the general insurance market

• a ban on opt-out selling

• improving the information provided to customers buying add-ons

In December 2014 FCA consulted on rules to address issues identified in the GAP insurance market.

In June 2015 FCA made these rules final, as well as publishing a discussion paper on potential value

measures for general insurance markets.

For the remaining two remedies, FCA consulted in March 2015 on rules banning opt-out selling and

improving information provided to customers buying add-ons. The ban on opt-out selling is designed

to improve competition in the market around add-on sales and prevent the exploitation of customer

biases, which can lead to customers purchasing products they do not need and overpaying for those

products. The market study found that customers were overpaying for add-ons by as much as £108m

to £200m per year. The Guidance on information provision is designed to encourage more informed

and active decision-making by customers.

FCA proposed that the rules and guidance would apply across general insurance add-on products,

not just those featured in the market study. FCA also proposed that the ban on opt-out selling

would apply across all financial services sectors, not just insurance markets. FCA are now finalising

the rules to ban opt-out selling across financial markets. FCA are also finalising both their

Handbook, and non-Handbook, guidance to improve the information that is provided to add-on

buyers in the general insurance market. This policy statement sets out an overview of the

consultation feedback and FCA response on:

• The rules banning opt-out selling; and

• The Handbook guidance.

The final rules and guidance do not differ significantly from those consulted on. The rules banning

opt-out selling come into force on 1 April 2016. The Handbook guidance will come into force at the

same time. The non-Handbook guidance will be effective immediately. FCA recognise that firms will

need time to implement any necessary changes, but expect that firms should already be working

towards delivering appropriate and timely information for add-on sales. FCA expect firms to

have made the necessary changes to their sales journey by 30 September 2016.

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PS15/23: Consumer credit – feedback on CP15/6 and final rules and guidance

In this policy statement FCA set out responses to the feedback we received to the consultation

Consumer credit – proposed changes to our rules and guidance (CP15/6), published in February

2015. This response deals with the issues relating to credit broking, lending, financial promotions

and debt. FCA response on issues relating to the Mortgage Credit Directive was published in PS15/20

in July 2015. As noted in CP15/6, FCA consumer credit regime is relatively new. FCA are still

learning more

about how the market operates, and the risks to consumers. They are therefore finding it necessary

to propose more changes to the requirements than they would usually do for a sector that they

have been regulating for longer. FCA will continue to monitor developments in the market, and

outcomes of their work in authorising and supervising firms, and may need to propose further

changes.

PS15/24: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers

Individuals working for financial institutions may be reluctant to speak out about bad practice for

fear of suffering personally as a consequence. Mechanisms within firms to encourage people to

voice concerns – by, for example, offering confidentiality to those speaking up – can provide

comfort to whistleblowers. This document sets out a package of rules designed to build-on and

formalise examples of good practice already found in the financial services industry. These rules

aim to encourage a culture in which individuals raise concerns and challenge poor practice and

behaviour. The rules in this policy statement complement FCA recent initiatives to reform senior

management arrangements and remuneration in the financial services industry.

The new rules affect:

• UK deposit-takers with assets of £250m or greater, including:

––banks

–– building societies

–– credit unions

• PRA-designated investment firms, and

• insurance and reinsurance firms within the scope of Solvency II and to the Society of

Lloyd’s and managing agents.

These are collectively referred to as ‘relevant firms’ throughout this document. For all other firms

FCA regulate, the text of the rules will act as non-binding guidance.

PS15/25: PSR regulatory fees 2015/16

Decision and fees rules on how 2015/16 PSR regulatory fees will be calculated and collected from

participants in regulated payment systems.

PS15/26: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and

other Disclosure Rule and Transparency Rule Changes

On 20 March 2015 the FCA published a joint Consultation Paper (CP)1 with HM Treasury (the

Treasury) setting out the proposals to implement the Transparency Directive Amending Directive

2013/50/EU (TDAD) through changes to the Financial Services and Markets Act 2000 (FSMA) and the

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FCA’s Disclosure Rules and Transparency Rules (DTRs). In this Policy Statement the Treasury and the

FCA summarise feedback from that CP and set out respective responses to it.

The FCA also took the opportunity to propose other miscellaneous changes to the DTRs in CP15/11

which were not directly related to TDAD implementation but were required to clarify or improve

the current regime. In this Policy Statement, FCA set out the feedback to those proposals and the

FCA’s response to it. The new DTRs will come into force on 26 November 2015.

4 SUMMARY OF THE YEAR

The big news this year was the unveiling of the new CASS rules and the FRC Consultation paper

on auditing CASS clients.

Guidance notes are below:

Holding client assets FCA firms can only hold ‘client assets’ (including safe custody assets, such as securities, and client money) if they are permitted to do so. The relevant permission is ‘safeguarding and administration of assets (without arranging)’. This should not be confused with an ‘arranging safeguarding and administration of assets’ permission. The Financial Services Register entry for a firm that is able to hold client assets typically includes a statement such as ‘Able to hold client money’ when such permission exists. APB Bulletin 2011/2 (see chapter 10 of these guidance notes) notes that, rather than holding client assets directly, some FCA firms use special purpose entities (SPEs) to hold client assets in order to facilitate repayment of monies to clients in the event of a ‘pooling event’ (the failure either of the firm or of its bank at which client money is held). As an alternative, firms can hold mandates enabling them to operate a client’s own bank account. Some DIFs are moving towards use of mandates as the rules are less onerous. In addition (as noted in chapter 10 of these guidance notes), a firm only holding mandates and no other client assets will not require a ‘reasonable assurance’ report. See paragraph 8.6 below. Paragraphs 151 to 161 of Bulletin 2011/2 describe some complex scenarios in which it may be unclear whether client assets are held and thus whether the FCA’s rules are applicable. In practice, auditors in such situations are advised to ask the firm to clarify the position with the FCA. Rules for handling client assets The Client Assets Sourcebook (CASS) in the FCA Handbook contains the detailed rules for handling investment and insurance client assets (including mandates and collateral).

A separate chapter (CASS 5) covers insurance mediation client money. This is outside the scope of this DIF manual. The active CASS chapters are as follows: CASS 1 Application and general provisions CASS 1A CASS firm classification and operational oversight CASS 3 Collateral

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CASS 5 Client money: insurance mediation activity (see above) CASS 6 Custody rules CASS 7 Client money rules CASS 7A Client money distribution CASS 8 Mandates CASS 9 Information to clients CASS 10 CASS resolution pack CASS 11 Debt management client money CASS 12 Commodity Futures Trading Commission Part 30 exemption order There are also transitional provisions and schedules. APB Bulletin 2011/2 contains a table on pp15-17 cross-referring these CASS chapters to the general categories of CASS rules. CASS reform In 2014 and 2015, the CASS rules were significantly revised following the FCA’s Policy Statement 14/9 (‘PS 14/9’). The well-publicised failures relating to CASS by a number of well-known investment banks, among others, led to a number of consultations by the FCA and its predecessor resulting in PS 14/9. While some of the CASS rule changes in PS 14/9 took effect on 1 July 2014 and 1 December 2014, the majority of the changes took effect on 1 June 2015. Among the most significant changes are:

more comprehensive provision of information to clients and documentation of the firm’s policies and decisions relating to the CASS rules (for example, the frequency of reconciliations of the client money and safe custody assets held);

use of template acknowledgement letters (CASS 7.18) when opening bank accounts or dealing with authorised counterparties;

numerous changes to CASS 7 (resulting in the complete rewrite of its text); and

a more rigorous reconciliation regime for safe custody assets (within CASS 6). These guidance notes reflect the revised rules since 1 June 2015.

CASS firm classification and operational oversight

CASS 1A applies to all investment client assets held by FCA firms (insurance mediation client money is excluded). Such asset-holding firms are described as ‘CASS firms’. CASS 1A classifies these into three size groups, based on the higher total of client money and assets either held in the previous calendar year or (if none so held) the projected totals for the current year, as follows:

CASS firm type Highest total of client money

Highest total of safe custody assets

CASS large firm more than £1 billion more than £100 billion

CASS medium firm between £1 million and £1 billion

between £10 million and £100 billion

CASS small firm less than £1 million less than £10 million

Notification of balances and CASS firm type to the FCA From 1 January 2013, CASS 1A firms need to notify the FCA each year of the highest total of client money and safe custody assets, and their CASS firm type. The deadlines in CASS 1A.2.9 are as follows:

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Circumstance What the firm must report Deadline

Firm held client assets in the previous calendar year

The highest total of client money and safe custody assets held in that year

The 15th business day of January

Firm did not hold client assets last calendar year, but (by 15th business day in January) predicts it will do so this year

The highest projected total of client money and safe custody assets to be held this year

Firm predicts (after this date) it will hold client assets this calendar year

The business day before it begins to hold client assets

Any of the above CASS firm type (small, medium or large)

When above report is made

Operational oversight Firms must allocate either a director or senior manager (performing a significant influence function) responsibility for oversight of the firm’s compliance with CASS, reporting to the firm’s governing body on such matters, and - for medium and large CASS firms - for completion of a client money and asset return called the CMAR (see below). Small CASS firms need only keep an internal record of this individual (and only if this person is other than the compliance officer).

The custody rules (CASS 6) FCA-authorised firms are required to have adequate safeguards by way of segregation and

identification to ensure the safe custody of clients’ assets and to separate them from the assets of the business. The specific procedures required are covered by the assurance programme contained within section G of this manual. CASS 6 was substantially revised on 1 June 2015, in particular with regard to reconciliations of the safe custody assets held by the firm - see below. NB. The custody rules will not apply if a firm only holds assets temporarily (passing through the office). Such assets should be kept secure and for a minimal time only (e.g. one day), recorded as a temporary asset and then promptly forwarded to the client. Title to safe custody assets will normally reside in the client’s name, though there may on occasion be valid reasons why this cannot be the case. Firms may hold assets directly or may employ nominee companies to hold them. If the latter, the firm must ensure that it maintains adequate control over the arrangements so as to protect the assets (and hence customers’ interests). Where third parties (3Ps) are used to hold assets, there needs to be a defined process to select suitable 3Ps (normally EEA-based). In some cases, clients transfer full title of the assets to the firm under ‘title transfer collateral arrangements’ (‘TTCAs’) - these exempt the relevant assets from the custody rules but there are detailed rules and restrictions on the use of TTCAs. In rare cases firms may use safe custody assets to assist in financing a transaction for their own use (see CASS 6.4). This clearly needs customer consent. From 1 June 2015, a significantly more rigorous system of reconciliations under the custody rules took effect (the previous chapter on this topic, CASS 6.5, was replaced entirely with CASS 6.6). There are three key reconciliations to be performed as follows:

an internal custody record check (‘ICRC’), which checks that the firm’s own records of its safe custody assets corresponds to its records of obligations to its clients to hold such assets. This check is conducted either by a direct reconciliation of the two records (the ‘internal custody reconciliation method’) or by an evaluation of the firm’s systems and controls (the ‘internal system evaluation method’).

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a physical asset reconciliation (‘PAR’), which reconciles the firm’s records of physical assets (such as share certificates) to the assets themselves, either on a total or a rolling basis.

an external custody reconciliation (‘ECR’) which reconciles the firm’s records of assets held by third parties with those parties’ own confirmations.

The firm must decide how frequently to conduct each of these reconciliations, and must document and regularly assess its decision. The minimum frequency for each reconciliation is as follows:

Reconciliation Frequency

ICRC and ECR At least every month

PAR At least every six months

Firms may hold assets as collateral for the borrowings of a client (e.g. in a hedging arrangement). CASS 3 contains rules and guidance for the controls firms need to adopt in order to manage the risk that obligations will not be met by the collateral held. Firms may hold mandates, i.e. written deeds of authority to control a client’s assets. CASS 8 contains the rules for safeguarding such mandates and passbooks.

The client money rules (CASS 7)

Client money is held by the firm on trust. In summary, CASS 7’s requirements are that such money must be segregated from the firm’s own money and held separately (usually in one or more client bank accounts). Payments to, or withdrawals from, these accounts must comply with certain conditions and with the exception of specified instances, interest must be calculated and paid on the balances. The specific requirements are covered by the assurance programme in section G of this manual.

Client money is money of any currency that, in the course of carrying on investment business, a firm receives and holds on behalf of a client. In addition, a firm’s own money is not client money and must not be held in a client bank account. Firms may choose to deposit client money in qualifying money markets, provided customers can oppose this should they wish (see CASS 7.13.26-29). Bank account rules When a firm opens a client bank account it must complete and sign (and ensure that the bank countersigns) an acknowledgement letter (see CASS 7.18) confirming that:

all money standing to the credit of the account is held by the firm as trustee (or if relevant in Scotland, as agent) and that the bank is not entitled to combine the account with any other, or to exercise any right of set-off or counterclaim against the money for any sum owed to it on any other account of the firm; and

the title of the account sufficiently distinguishes the account from any account containing money that belongs to the firm and is in the form requested by the firm (e.g. it could be titled ‘XYZ investment client account’).

A firm must place client money with an approved bank (see CASS 7.13) and should have procedures for on-going risk assessment of the holdings at such banks, diversifying where prudent for large deposits. Payments and withdrawal from the client account When a firm receives electronic client money transfers, this must be paid directly into the client bank account (CBA). Physical receipts (e.g. cash and cheques) must be paid in promptly and no later than the following business day (see CASS 7.13.32).

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There are optional ‘alternative’ rules in CASS 7.13 for firms segregating large volumes of transactions. Use of these rules also requires an assurance report including an opinion on whether the proposed approach/method will achieve the desired regulatory outcome, and three months’ notice to the FCA, before the firm can adopt the proposed approach/method. Use of the alternative approach is expected to be restricted to very large investment banks, and an engagement to issue the assurance report noted above is beyond the scope of this manual. Auditors of firms intending to use the alternative approach are advised to seek guidance from their professional body. From time to time a firm may receive mixed remittances (comprising client money and its own money) into the CBA. When this happens the firm must withdraw non-client money from the CBA within one business day of it clearing. Minimum non-client money sums are permitted in the CBA (e.g. to keep the account open). Interest earned on CBAs should be handled in accordance with the client agreements (or else paid wholly to the client). CASS 7.11 contains rules and guidance for withdrawals. These are only permitted if money is paid to the client, to an account in their name or on their instruction. Money that becomes due to the firm ceases to be client money and must be withdrawn promptly. Accounting records and reconciliations CASS 7.15 requires firms to have adequate systems to record CBA transactions, including capture of all relevant details such as the client’s name, date of receipt / payment, payee or recipient details, etc. A daily internal reconciliation is needed to compare the amount of client money held (per cash books) to the amount required for clients’ obligations. There are standard methods for this reconciliation (set out in CASS 7.16). Use of a non-standard method requires a reasonable assurance opinion from the auditor that systems are adequate to allow its use. As for the alternative approach (see ‘payments and withdrawal from the client account’ above), such an assurance engagement is beyond the scope of this manual and auditors of such firms are advised to seek guidance from their professional body. At least monthly, firms also need to conduct an external reconciliation to compare their cash books to bank statements or their equivalent. Firms experiencing daily transactions would be expected to perform daily external reconciliations. Pooling events If a secondary pooling event (i.e. failure of the bank at which the CBA is being held) has occurred, CASS 7A.3 contains rules and guidance for pooling and distributing the balances in such accounts.

Mandates

Mandates are agreements (whether written or non-written) with clients by which the firm can control those clients’ assets and money (for instance, the ability to set up and control bank transfers and direct debits). The mandate rules in CASS 8 do not apply to money or assets held directly by the firm (since this is covered by the CASS 6 or 7 rules as outlined above), but would, for example, apply to an authority to receive money from a client’s own account via direct debit. As noted in paragraph 8.1 above, many firms are moving toward the use of mandates as an alternative to holding client money directly.

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Firms must establish and maintain adequate records and controls regarding its mandates, including:

up-to-date lists of all mandates held;

records of transactions arranged under mandate;

controls to ensure mandates are operated properly; and

safeguarding controls over passbooks and equivalent. Client money and assets return (CMAR)

Large and medium CASS firms are required to submit the CMAR to the FCA on a monthly basis (within 15 days of the month end). Small CASS firms were originally required to submit such returns (on a more infrequent basis) but were later exempted from this requirement. The CMAR is found in SUP 16 Annex 29R and is completed electronically. The purpose of the CMAR is to help the FCA to monitor the client money and asset levels being held by larger firms and to provide statistical information for thematic review.

Information to clients (CASS 9) CASS 9 was introduced along with the CMAR as part of a package of measures designed to

strengthen CASS. Prime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors who need the ability to borrow securities and cash in order to invest on a netted basis and achieve an absolute return.

CASS 9 introduces the requirement for a daily statement made to clients including the total value of safe custody assets and client money held for that client, plus the value of transactions made on its behalf in the day and other related information. In addition, agreements with such clients must include a disclosure annex describing the risks to that client’s safe custody assets and the limits that the firm can hold.

CASS resolution pack (CASS 10) This chapter applies to a firm which:

holds financial instruments, or is safeguarding and administering investments, in accordance with CASS 6; and/or

holds client money in accordance with CASS 7. However, the chapter does not apply to a firm to which CASS 6 applies merely because it arranges safeguarding and administration of assets. The purpose of the CASS resolution pack is to ensure that a firm maintains and is able to retrieve information that would, in the event of its insolvency, assist an insolvency practitioner in achieving a timely return of client money and safe custody assets held by the firm to that firm's clients. The pack includes (in summary):

a master document (i.e. an index);

a list of appointed representatives and similar agents, and the written contract terms with them for holding client assets; and

a list of senior managers and directors who are involved in CASS 6 / CASS 7 activity, including the individual overseeing CASS for the firm.

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Providing Assurance on Client Assets to the Financial Conduct Authority - Consultation on a new

Assurance Standard

The FRC produced a Consultation Paper in May 2015. The Standard applies accounting periods

commencing on or after 1 January 2016. Early adoption permitted.

In the context of the issuance of the FCA’s revised CASS rules the primary objectives of the FRC in

developing an Assurance Standard to supersede the extant guidance is to:

a) Improve the quality of CASS audits;

b) Adequately support and challenge CASS auditors when undertaking CASS engagements and,

in particular, to define the nature and extent of the work effort required for both

reasonable assurance and limited assurance CASS engagements without undermining the

importance of the CASS auditor’s judgment;

c) Support the objectives of the FCA’s Client Asset regime regarding the effective safekeeping

of client assets and client monies and in particular to guard against systemic failure of the

CASS regime;

d) Manage the expectations of:

i. The management of firms that hold client assets; and

ii. Third party administrators when they engage a practitioner to provide assurance to the

FCA on client assets that they handle or account for;

e) Support the effective training of CASS auditors by both the accounting bodies and other

training organisations;

f) Help to establish realistic expectations regarding the integrity of the UK Client Asset Regime

with the beneficial owners of client assets; and

g) Underpin the effectiveness of the FRC’s enforcement and disciplinary activities with respect

to CASS assurance engagements.

This Standard would be the material referred to in SUP 3.10.5B G to which the FCA would expect

CASS auditors to have regard for reports issued on or after the effective date.

The Preface to the document states:

“The Client Asset Assurance Standard contains basic principles and essential procedures indicated

by paragraphs in bold type, with which a CASS auditor is required to comply in the conduct of an

engagement to report to the Financial Conduct Authority in respect of Client Assets. The Client

Asset Assurance Standard also includes implementation guidance, including appendices, in the

context of which the basic principles and essential procedures are to be understood and applied. It

is necessary to consider the whole text of the Client Asset Assurance Standard to understand and

apply the basic principles and essential procedures.

The Client Asset Assurance Standard is the material referred to in SUP 3.10.5B G to which the FCA

expects CASS auditors to have regard for reports for periods commencing on or after 1 January

2016.

For the purposes of the Client Asset Assurance Standard the term “Client Assets” encompasses

“client money” and “custody assets” as defined by the FCA’s “Glossary”. Notwithstanding that the

engagement is not an audit, the generally accepted expression CASS auditor is used in the Client

Asset Assurance Standard to refer to the persons conducting the CASS assurance engagement.

Attached to the Client Asset Assurance Standard is contextual material which is intended to provide

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a non-technical introduction to, and overview of, the Client Asset Assurance Standard. This does not

form part of the Standard.”

The Standard applies to CASS audits where the auditor reports to the FCA. It covers the

requirements applicable to:

● All Client Assets Engagements;

● The expression of a RAR;

● The expression of a LAR;

● The expression of hybrid opinions;

● RAR and special reports; and

● Non – Statutory Client money trusts (CASS 5).

Anyone undertaking a CASS report should have regard to this Standard as it constitutes “Best

Guidance”.

On the 9 November the FRC published its Standard on providing assurance on Client Assets

The standard can be downloaded at:

https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Standard-Providing-

Assurance-on-Client-Assets-to.pdf

Mercia revised audit programmes

Ian Fletcher and Jeremy Williams have finalised these.

Work schedules may be shown during the seminar. Please note these are copyright Mercia. Extracts

will be shown for training and guidance purposes only and they are not to be relied upon by

individuals or firms as definitive guidance.

For further information please call Mercia direct on 0116 258 1200.