Mandates are no longer the second-class citizens of the CASS world. More and more clients are approaching us for CASS 8 advice and with auditors and the FCA paying attention, it is worth taking the time to fully appreciate the application of the mandate rules to your business. Getting it wrong is easy, but getting it right can enable you to realise new economies of scale.
So what is a mandate? A mandate arises where a client gives a firm engaged in designated investment business or MiFID business (or an insurance intermediary or debt management firm) authority over their money or assets where they’re held with another firm. The mandate will enable the firm to give instructions in relation to the money or assets without the need for further client involvement. This is a common approach for firms that offer advice to clients on investments that are custodied with a platform. But as we shall see, mandates affect a wide variety of firms in the investment sphere.
But why are mandates a problem for many firms?
In the first instance, many firms have not fully appreciated the scope of CASS 8. It is not uncommon for firms to be operating unknowingly within the mandates sphere. You might think, for example, that the above definition would bring into scope scenarios where investment managers look after assets custodied at a client’s own custodian or that it affects fund managers who have authority over their client’s bank account. And you would be right. But what of direct debits for the payment of fees? They too can fall within the scope of CASS 8 and yet many firms operate them without any knowledge of their CASS 8 importance. A customer can also verbally give a firm mandated authority. Even the provision of such authority for a “one-off” activity needs to be treated per the rules. The lesson is a simple one: take a fresh look at how you receive and move money and assets and assess if there is a CASS 8 exposure. If you hold client assets, do not just assume that CASS 6 and 7 are the extent of your CASS obligations . Further, if you do not hold client assets, do not immediately assume you have no CASS obligations.
In addition, identifying all of your mandates is only half the battle. When caught by CASS 8, good record keeping is the key. Your records must include an up-to-date list of each mandate that the firm has obtained, including a record of any conditions placed by the client or the firm’s management on the use of the mandate. You also have to record each transaction entered into under each mandate as well as having:
- internal controls to ensure that each transaction entered under a mandate is carried out in accordance with the mandate terms
- details of the procedures and internal controls around the giving of instructions under mandates
- internal controls for the safeguarding of any passbook or similar document belonging to the client held by the firm (where the firm holds a client’s passbook or similar documents).
To any firm with experience of the CASS 6 and 7 grind, such controls are hardly intimidating. Indeed, their relative simplicity is central to the attraction of CASS 8. For certain firms, the effective utilisation of mandates can enable them to stop holding client money and custody assets while maintaining their investment offering. CASS 8 can enable the elimination of client money accounts and safeguarding arrangements in favour of mandated control over clients’ accounts with third party custodians. This can limit you to an arrangement whereby the client contracts with you for investment management purposes and contracts with another firm for custodial purposes, thus transferring the headache of custody to third parties that specialise in this regard. As a result, firms can eliminate the need for daily client money calculations and monthly wresting with custody reconciliations and ISEMs.
And the advantages do not end there. Firms that cease to hold client money and custody assets may be in a position to reduce their capital requirements. A firm offering portfolio management services (with no dealing on own account) can drop from IFPRU 125K to IFPRU 50K with such a move. And a fund manager could find itself outside CRD IV in its entirety, with such a change rendering it subject to BIPRU rather than IFPRU rules.
But is it that easy? In a word, no. Not every investment operation works such that client money can be removed from the equation. And even where the removal of client money is sound in principle, the unpredictable nature of our industry means reality can be very different. The removal of client money permission, for example, can cause new problems. After all, if you do not have permission to hold client money you simply cannot and must not hold it. But money will still become due and payable to clients – clients may need to be compensated if they complain and fees may need to be reimbursed where clients are overcharged. What is more, failure to make such payments within one day of them becoming due and payable moves the relevant funds into the client money sphere. So are you confident you can pay compensation within a day of it being decided? Do you have confidence in your invoicing process? Remember, if you overcharge a client and do not realise this until the subsequent quarter, you have been holding however much you overcharged for the intervening period. In other words, you have been holding client money for three months without permission. The FCA and auditors do not look kindly on frequent breaches of this variety.
It is important to remember that many firms have CASS 6 and/or 7 exposure alongside their CASS 8 obligations. Do not fall into the trap of thinking that following one approach frees you of the other. Even if you have no appetite to shed your ability to hold client money and custody assets, it is sensible to do a full review of your business to check if you have a CASS 8 exposure and if so, that it is catered for suitably. Remember, your controls around mandates are every bit as important as those around reconciliations, particularly if you choose to cease holding client assets and rely purely on the mandate approach.