Covid-19 raises specific challenges when it comes to client money rules, and for some firms, breaches are almost inevitable. But the current situation certainly isn’t carte blanche to relax your controls. The FCA has published a number of guidelines on handling CASS during the coronavirus crisis which provide a useful reference. The regulator expects firms to do what is required with regard to client assets, but also seems prepared to look at issues on a case by case basis. Being able to demonstrate you are on top of the situation before you get in touch with the FCA will stand you in good stead.
The FCA webpage ‘Client assets and coronavirus’, published last week gives a useful summary of queries it has received and its position on each. The overarching message is “we expect firms to take such mitigatory steps as are possible in the circumstances, to ensure that client assets remain protected”. Ultimately, the FCA seems prepared to consider possible solutions to problems that firms have, but the current situation is no excuse for non-compliance.
Client assets and coronavirus – the FCA’s position
Many firms are struggling with handling cheques. Either they are not physically in the office to receive cheques sent by clients or limited services and opening hours at banks are creating issues. This in turn can cause problems when the client wants to deal using funds paid in by cheque, but the cheque hasn’t yet been banked or cleared.
The FCA makes it clear that it expects firms to consider, on a case-by-case basis, the potential harm to clients of not being able to bank cheques and communicate with clients on it. Wherever possible, firms should be urging clients not to pay money in by cheque, but instead to use bank transfer or other means to make the payment. If a cheque hasn’t cleared by the time the client wants to trade, firms should consider whether it’s appropriate to pay firm money into the client bank account, to effectively pre-fund the transaction. If this option is used though, firms will need to make sure that their prudent segregation policy and record is up to date to take account of these temporary issues and the amount of money held – this is something we can help you with.
CASS audit reports
The FCA’s webpage addresses the possibility that in some cases, it might not be possible to submit the CASS audit report to the FCA within the four-month deadline. The FCA emphasises that in these cases, it’s up to the audit firm to follow late reporting rules and email the CASS audit team to notify them. Additionally, auditors are reminded of the need to notify the regulator of any significant matters identified with the firm’s CASS compliance. Firms should also remember their own notification obligations under Principle 11, SUP 15 and CASS.
Physical asset reconciliations
Some firms have physical asset reconciliations that are due to be carried out during lockdown and so have been unable to access the physical assets in order to carry out the reconciliation. The FCA has reiterated its expectation that firms take ‘mitigatory steps’ to make sure assets are protected and notify them if a reconciliation can’t be performed. What those steps might look like for this issue will depend on the firm, the assets held and the frequency with which physical asset reconciliations are carried out. Consider some points:
- What is your flow of transactions in physical assets like? Presumably, if you haven’t been able to access the office, you haven’t been able to either remove or newly lock up any assets.
- Can you be confident that no one would have been able to access the office and/or the safe in the period of lockdown?
- How frequently do you do the physical asset reconciliation? Is it more often than the minimum required frequency? Taking account of the other consideration points outlined, is there an argument for a less frequent reconciliation temporarily?
If you do conclude that you can do reconciliations less frequently, don’t forget that your CASS documentation will need to be updated, including the rationale for chosen frequency. Also, remember to prioritise any outstanding reconciliations as soon as the safe can be accessed.
Client money and custody asset balances
Some firms are experiencing increased client money balances and it seems that issues with segregation and diversification of client money have been raised by firms. The FCA reminds firms of their obligations to safeguard client money with a central bank, CDR credit institution, bank authorised in a third country or qualifying money market fund. It also reminds firms to follow the rules on diversifying client money. This can present some particular challenges. In the event that a firm determines that more diversification is required, it’s not an easy time to open a new client bank account!
Similarly, firms may be experiencing spikes in balances of custody assets held. It’s important to bear in mind that any such increases in custody assets or client money could affect a firm’s CASS categorisation and the FCA has made it clear that they expect firms to notify them of their categorization in January, as usual. If you’re a small CASS firm moving into medium CASS territory though, bear in mind that there are a few additional requirements that will apply to you (CASS Oversight Officer, monthly CMAR).
Delays to improvement programmes
Some firms are reporting delays to planned programmes of improvements for CASS compliance. The FCA asks firms to consider reporting such delays to them under Principle 11 or SUP 15 and keeping any existing CASS contact notified of progress towards compliance.
From the FCA webpage, it’s clear that the regulator is open to contact from firms to discuss any current challenges with CASS compliance, but they expect firms to have researched the options open to them first. We suggest not only researching the available options, but also having a proposed plan of action to discuss with the FCA. It’s almost inevitable that some breaches will occur because of the current situation, whether caused by staff absence or access to premises, so remember to consider whether a breach needs to be reported to the FCA and make sure you record the rationale for your decision.
We can help
Bovill can help with breach assessment, reporting and resolution, researching options and formulating a plan before a firm contacts the FCA as well as providing temporary resource whether for your day-to-day operations or to help keep planned improvement programmes on track.