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Blog - Published 12th November 2018

CASS 7 – Client Money Reconciliations for Designated Investment Firms

calculator and pen

One of the most time intensive requirements of being authorised by the FCA is completing Client Money Calculations. These are essential to ensure that if anything were to go wrong, clients’ money is always protected. Not to put too light a point on it, but the effective completion of this ensures continued consumer confidence in the UK’s financial system.

CASS 7.15.12 explains that the calculations are required to check that your obligations to your clients (the client money requirement) are sufficiently covered by the amount shown in the accounting records as client money (the client money resource).

This is the ‘Internal Client Money Reconciliation’ and should be carried out each business day, based on the records at the close of the previous business day. There are two standard methods available for completing the reconciliation, though it should be noted that the normal approach is assumed unless the FCA are informed otherwise (CASS 7.15.16):

Normal approach

The reconciliation checks that the client money requirement is equal to its client money resource. (Client money transactions are made through a separate client bank account and the check at the end of each day confirms this is correct.)

Alternative approach

The reconciliation ensures that the client money requirement is equal to its client money resource. (Client money transactions are made through the firm’s own bank account and a transfer made at the end of each day to ensure the client account has the correct balance.)

There is also the option to use a non-standard method, though there are additional steps required for this to be approved, including a written report from an auditor to the FCA confirming that the system has been tested and meets the requirements. (CASS 7.15.17)


So what is the Client Money Requirement?

This is what is held on behalf of clients. There are two methods to calculate this available: ‘Individual client balance method’ and ‘Net negative add-back method’.

Individual client balance method (CASS 7.16.16) may not be used by loan based crowdfunding firms, unless a non-standard method has been approved for use. It calculates the amount of client money that a firm should be holding for each of its clients and totals all clients together.

calculator and paper

  • Individual client balances (CASS 7.16.22); less
  • Negative client balances; less
  • Client equity balances; add
  • Margined transaction requirement (CASS 7.16.32); add
  • Other segregated amounts.

 

Net negative add-back method (CASS 7.16.17) may only be used by asset management or loan based crowdfunding firms, unless a non-standard method has been approved for use. It calculates the amount of client money that a firm should be holding in each of its client bank accounts (per the accounting records) and totals all these balances together.
– Amount the firm’s internal records show as held on each account; less
– Any negative amounts that the internal records show attributable to said accounts.

With either method above, the firm should also consider the requirements of CASS 7.16.25-27 which sets out some further amounts to bear in mind during the calculation including:

  • Unallocated client money;
  • Cash or cheques received but not deposited;
  • Cheques written which have not yet left the bank account; and
  • Client funds held by third parties.

And the Client Money Resource? (CASS 7.16.8)

bank-of-englandEssentially this is the money that your accounting records show is held on behalf of clients at any given time.

This will be the aggregate balance of the firm’s client bank accounts but will not include any cash/cheques etc. that have not yet been deposited with the bank.

 

Isn’t there an External Client Money Reconciliation too? (CASS 7.15.20)

The external client money calculation is the reconciliation between the internal records and those of any third parties holding client funds, for example a bank.

Each one must be carried out within a month of the previous one, though due to the relative simplicity of this and the fact that an internal reconciliation is being carried out daily, many firms choose to do this daily as well. It will compare:

  • The balance on the firms’ internal client account records; with
  • The balance on each client bank account per the bank statement.

Anything else?

Mike Ayres_320x238Where a discrepancy is identified on an internal reconciliation, any shortfall or excess should be investigated and corrected before the end of the business day on which the reconciliation has been performed. (CASS 7.15.29)

In the case of an external reconciliation showing a discrepancy, any steps to rectify must be taken ‘without undue delay’. This may require funds to be transferred to or from the firm’s own funds (its ‘office’ account).

Completed client money reconciliations should be signed and dated by your CASS Compliance Officer and should be retained, along with any supporting documentation, for at least 7 years – though these can be in electronic format. Your CASS auditor will need to review these.

If you aren’t able to, or do not perform the calculation the FCA must be informed immediately.

Please note that the above does not include all intricacies and options involved in the client money reconciliations but instead aims to set out what is required in the majority of cases. Please ensure your individual circumstances are considered when preparing your client money reconciliations.

Menzies LLP provides, amongst other services, CASS Assurance and Statutory Audit services to clients across London and the South East, if you have any questions or would like to speak to us about how we could help you, please contact Mike Ayres by email, mayres@menzies.co.uk, or by phone, +44 (0) 1252 894911 .

Please note that the above information is a summary of selected chapters of the FCA Handbook and should not be solely relied upon when making decisions. Please always ensure the appropriate professional advice is obtained to ensure compliance. The FCA Handbook contains the detailed rules and can be accessed here. This information is correct as at 1 November 2018.

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Mike Ayres - ACA

Senior Manager

Mike Ayres is a Senior Manager at Menzies in Farnborough specialising in advisory services, audit and compliance for SME and medium sized businesses.