CASS 5 compliance: the FCA advises

Broking Business - December 2023

read timeRead time: 28 mins

If your firm is preparing for a CASS 5 audit, our recent conversation with the Regulator may provide some crucial guidance.

The FCA meets regularly with us and the other large CASS auditor firms in order to clarify areas of doubt. So what is the current focus, and what are the most common breaches?

Credit write-backs

An increasing concern since COVID, and which the FCA sees as a potential indicator of weak financial resilience, is ‘credit write-backs’ (CWBs). Are there more incidents in the market than before?

The Regulator takes a strong view on this. It considers CWBs to be a breach of the director’s fiduciary duties in protecting client money and also a potential breach of trust law. The FCA would only condone a CWB where there had been express consent from the entity to write off the balance. In such circumstances, it would expect the firm to pay away the monies to charity, rather than keep them for their own account.

Group restructuring

Related to CWBs is the issue of group restructuring – especially where larger private equity-backed groups are aiming to simplify their group structures by applying to the FCA for permission to revoke client money permissions. They typically do this where the business has been transferred to another entity in the group, so that various regulated entities can be de-authorised and closed down.

In such cases, it’s sometimes difficult to clear away all client balances and the transferor is left with client money which it cannot easily pay away, possibly because of historic and/or other legacy issues. But the FCA has clarified that, as long as there is a ‘novation clause’ and the firm has properly informed its clients that it intends to move its residual client money to another entity in the group, this scenario would be acceptable.

Is it client money?

So what happens if monies are received in a ‘client bank account’, but the recipient firm is unclear as to the nature of the receipt and whether it constitutes client money or not? Should the amounts be moved out immediately to prevent possible trust pollution? The FCA says no. It’s fine to leave them in the client bank account while the firm investigates, in order to ‘protect’ the possible client money.

Mystery cheques

Similarly, what about ‘cheque banking’? Sometimes a cheque is received which the firm is unclear about. For example, do the funds rightfully belong to the firm or to its clients (and have perhaps been wrongly made out to the firm). Should the cheque be banked or not banked, awaiting the results of enquiries as to its identity?

As above, the FCA would expect the client money to be ‘protected’ by banking the cheque, pending research by the firm before acting accordingly.

High-interest accounts

In the context of the rise in interest rates, we asked the FCA whether firms could transfer client money to properly designated high-interest client bank accounts.

It confirmed this is not an issue, as long as all consumer duty obligations are met, the firm has considered carefully how long it proposes to tie up the deposit in the ‘term’ accounts, and is mindful that it must satisfy insurer payment requirements under terms of credit and so on.

Investment products

As well as pure ‘money market’ accounts, there are now also ‘investment’ products beginning to appear to invest client money. On these the FCA’s chief concern is that there could be a breach, as the firm would be acting as a ‘discretionary money manager’ for which GI firms do not have the relevant permissions.

We can help

If you would like further guidance on issues raised in this article or on CASS 5 compliance in general, please contact Paul Goldwin or Ian Cowan