After several high profile liquidations, the Financial Conduct Authority (FCA) has increased its focus on firms’ ability to comply with the client assets sourcebook (CASS). In particular, it will focus on how firms are applying the FCA’s CASS rules and how compliance with these rules is incorporated into firms Business As Usual (BAU) processes.
While not an explicit CASS requirement, the FCA is placing increasing focus on the importance of a strong CASS governance and oversight framework. The FCA is giving increasing importance to attestations so firms must have an appropriate framework for enabling individuals to make and rely upon these attestations. Key themes arising in respect of firms’ governance and oversight framework include:
- Unclear accountability and responsibility for aspects of the firm’s CASS compliance
- Lack of CASS-specific management information
- Governance/oversight not carried out with a legal entity view
- Inadequate or no CASS training
- Lack of oversight and review of key CASS processes and lack of end-to-end view of CASS rules and application
- No framework for the escalation of actual/potential CASS breaches
Legal entity focus
Firms - typically multinationals - may organise their operations on a line of business rather than regulated entity basis. This can affect how a firm monitors their activities and control frameworks for CASS compliance on a regulated entity basis. Common implications arising in this area include:
- Unclear contractual arrangements regarding the entity the client is contracted with
- Management information is not considered on a regulated entity basis
- Books and records do not distinguish which entity/firm/branch the client has contracted
The FCA is increasingly focusing on how firms apply the banking exemption. Historically, firms may not have applied the banking exemption as the FCA intended and instead, considered it a complete exemption from the CASS rules. This is an area coming under increasing scrutiny. Firms must consider their cash flows and how these affect their ability to comply with the banking exemption, including which controls they have to help them obtain compliance. Firms should consider whether their contractual arrangements with clients align to their operational practices and that the appropriate notifications to clients are in place.
From 1 April 2014, the FCA began regulating loan-based crowd funding. This is where people lend money to individuals or businesses hoping for financial returns in the form of interest payments and capital repayments disintermediating the banking system. The FCA already regulated investment-based crowd funding. The move to regulate loan-based crowd funding may have a significant impact on the sector.
Loan-based crowd funding will fall within the scope of the CASS rules, with firms expected to comply fully by 1 October 2014 following a six month transitional period. Money received under loan-based crowd funding is expected to be protected as client money in accordance with CASS 7. This will also bring firms in scope of CMAR reporting and other applicable rules.
Firms should make sure they consider the implications for their business. They should not underestimate the time and costs involved in adapting business models to ensure they are able to be CASS-compliant.