Finding you’re holding client money without meaning to can happen more easily than you think. Whether you’re a CASS firm or not you should make sure it doesn’t happen to you, and if it does, report it.
At Bovill, we’re seeing a definite focus from auditors on times when firms might be holding client money inadvertently. It’s something that affects firms both with permission to hold client money and those without.
Picture this: you’ve invoiced your client for their monthly fees but for some reason, you’ve invoiced them £100 too much – whether it’s because of system issues, fat fingers or maybe just a lapse in concentration. Your client is trusting and pays the invoice in full and on time. As a result, you end up
with £100 that you shouldn’t have had. £100 that rightly belongs to your client.
An alternative scenario – your client decides they’re going to pay their fees ahead of time, so maybe you receive two months’ worth of fee payments in one month. So you end up with an amount of money that isn’t yet due and payable to you. An amount of money that rightly belongs to your client.
Assuming the services you provide to your client fall within those covered by CASS 7 (primarily designated investment business and MiFID business), then that those amounts will be client money and as long as an exemption doesn’t apply, it should be covered by CASS 7 protection.
A similar issue is that of complaint compensation. Something went wrong, your firm was at fault and you’ve agreed to pay compensation to the complainant. If you don’t specify when that compensation will be payable to the client, it could be argued that it’s due and payable at the moment you agree to pay it. If you don’t pay it out at that moment, then you could end up holding money that rightfully belongs to the complainant, which is also likely to be your client. Assuming again that the services complained about fall within the remit of CASS 7, then you have a client money breach.
Once might be misfortune, more than once is careless
These issues are being picked up by auditors more and more frequently. For firms with CASS 7 permission, it means they’ve held client money outside of the protection that it’s due and for non-CASS firms, it will mean that they’ve held money without permission. A one-off incident is likely to be overlooked as an error, it gets corrected and controls put in place to stop it happening again. If it happens more frequently, then it could be argued that the firm has a control failing, which could indicate wider issues. Either way, having a breach reported where client money has been held either without protection or without permission is never a good place to be.
If you’re a CASS firm…
If you’re a CASS firm, it’s always wise to identify all instances where client money or custody assets might arise within your firm. Carrying out a total capture exercise can help focus attention exactly where it’s needed and make sure that all client money is protected appropriately.
If you’re not a CASS firm…
If you’re not a CASS firm, take some time to think about the parts of the rule book that don’t apply to your firm and make sure that there is never a circumstance where they might inadvertently apply. That might be looking for times where you might end up with client money outside of the normal course of business, or it might be identifying instances where the mandate rules might apply.
Whatever the circumstance, it’s always advisable to report any breaches like those outlined above to the FCA as soon as they’re identified. It’s far better for a firm to have self-identified a breach, disclosed it fully and honestly and taken steps to correct and prevent it, than for the audit report to be the first the FCA hear of it.