What are we talking about? The FCA set out the CASS rules (Client Asset Sourcebook) to help guide and regulate FCA registered firms who hold or control client money or custody assets.
The sourcebook is a comprehensive document that deals with all elements of CASS including who should apply what elements of the rules and what they need to do.
CASS Rules in Focus
Though there are 13 main sections to the sourcebook, we will summarise three of the CASS rules here, the ones that are most likely to have an impact on the procedures of the business.
- CASS 5 – Client money: insurance mediation activity
- CASS 7A – Client money distribution
- CASS 8 – Mandates
Additionally, for CASS 7 – Client money rules, there is a brief summary of its implications here.
CASS 5: Insurance mediation
By carrying on any regulated activities in relation to insurance, e.g. assisting in the administration of a contract of insurance, a company must abide by the requirements of CASS 5. Client money includes premiums received from clients pending payment to the insurer as well as claims monies and premium refunds that are due to be repaid to clients.
There are two approaches that firms can adopt in applying these rules:
a) Arrange for a risk transfer from the intermediary to the insurer.
A written agreement must be obtained from all insurers that the intermediary works with. These must be retained for review by the auditors. Where this is the case no separate client money accounts need be maintained as the risk is deemed to be the insurers. (CASS 5.2)
b) Segregation of client money in client bank accounts.
There are two types of account that the funds may be held in, statutory or non-statutory. The main difference between the two is that a firm operating a non-statutory trust (NST) account may make advances of credit to enable premiums to be paid to the insurers prior to being received from the client. The operating of an NST for retail customers will result in an increased capital resource requirement of £50,000. It is otherwise £10,000.
Every 25 business days the company must conduct a client money reconciliation to confirm that the funds they have available to repay to clients (their client money resource) is sufficient repay what they owe (their client money requirement). There are additional considerations to bear in mind if the company is supporting Appointed Representatives (AR) including procedures to ensure that the AR is operating an appropriate client bank account. (CASS 5.5.18)
CASS 7A: Client Money Distribution
The rules consider the impact on the client money held by a firm in the event that the company (a primary pooling event) or a third party such as the bank that holds the client account (a secondary pooling event) goes into liquidation.
Where a primary pooling event has occurred, in theory, all of the clients money should be returned to them so long as the rules have been followed. Where a secondary pooling event occurs there is a potential loss to the clients. The rules specify that any loss be shared evenly between those affected and go into detail about how this should be calculated. (CASS 7A)
CASS 8: Mandates
A mandate is permission from a client to allow the company to manage money on their behalf, for example investing in a variety of stocks and shares. Where a mandate is in place, the firm does not need to comply with CASS 5 or 7. The key consideration is whether the firm’s records and internal controls are adequate.
They must include a detailed record of the mandates that are held including any conditions or limitations that apply to them. It is critical that evidence of the existence of the mandate is retained, for example a signed document or recorded telephone call, where this is not the case the mandate may not be valid.
Understanding client money rules under CASS
The client money rules under CASS are a complex and detailed area for good reason. The protection of client’s money is imperative. At Menzies we understand the rules and how they can impact on a company, we want to get to know you and your business so that we can provide relevant and tailored advice and help your business grow without encountering any unwelcome regulatory issues.
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 11 January 2016.