An FCA registration is a valuable thing: respectability, confidence and legitimisation come from having these three letters all over your business. However, it does come with its share of regulation. The primary legislation is the Financial Services and Markets Act 2000 (FSMA) but is also impacted upon by European directives, namely Markets in Financial Instruments Directive (MiFID) and the Capital Adequacy Directive (CAD).
The following is a brief attempt to untangle the requirements for audit and client money assurance under the FCA’s auspices.
Audit requirements for financial services
Following the usual small company exemptions per the Companies Act 2006 (CA06) many small financial services companies are exempt from the requirement to obtain a statutory audit however the following classes of companies/LLPs are required to have one:
- Authorised insurers
- E-money issuers
- MiFID investment firms*
- UCITS management firms
* Firms that satisfy regulation 4c(3)of the FSMA are also exempt from the requirement to obtain a statutory audit. i.e. if a firm could be non-MiFID, then small company exemptions apply.
Appointed Representatives (AR) are firms that are not FCA registered themselves, but ‘piggyback’ on the registration of another FCA registered company. An AR is exempt from audit provided they meet the normal CA06 criteria.
Client Money and/or Custody Assets (CASS) Assurance Requirements
Not-with-standing their statutory audit requirement, FCA firms may need a CASS Assurance report. There are two types of reports that may be needed, the reporting deadline for both is 4 months following the end of the reporting period. This can be up to 53 weeks long and typically is in line with the accounting year end.
- Reasonable Assurance – a ‘positive opinion’ that the firm is correctly complying with the CASS requirements.
- Limited Assurance – a ‘negative opinion’ that there is nothing to indicate that the firm has breached the CASS requirements i.e. held client money.
Investment firms need a CASS report if they are permitted to hold investment client assets (including money) and/or if they require a statutory audit.
- Hold client assets – Reasonable Assurance Report
- Statutory audit requirement but don’t hold client assets – Limited Assurance Report
- No statutory audit requirement and don’t hold client assets – No Assurance Report
The report is sent to the FCA.
General Insurance (MGI) Business
MGI firms will need a CASS report if they hold client assets that exceed £30,000 at any time or if they hold funds in a non-statutory trust. This allows credit advances to be made.
- Hold over £30,000 of client assets – Reasonable Assurance Report
- Assets in an NST – Reasonable Assurance Report
- Under £30,000 held and not in an NST – No Assurance Report
The report is sent to the client (though addressed to the FCA) and the FCA may then ask to see it. It is the responsibility of the firm to identify whether they need an Assurance report, a statutory auditor is not expected to check whether there is a requirement.
Where these firms have Appointed Representatives, it is the responsibility of the FCA registered company to confirm that the AR complies with the CASS requirements.
Understanding FCA requirements
The requirements of the FCA are many and complex. The above is just a brief outline of one area, we will publish future explainers to dissect CASS further, however the following articles may also be helpful in developing your understanding:
Please note that the above information is correct as at 15 November 2016.