Since the FCA’s introduction of Client Assets (CASS) rules in 2010, the industry has seen significant fines against firms and individuals. Now fresh funding has been agreed for the CASS team at the FCA with a shifting focus to banks. The financial services
industry faces an unparalleled level of scrutiny as organisations will have to demonstrate proactive proof of CASS rules being adhered to, or face severe penalties. How ready is your bank for the potential implications of the proposed reforms?
Although CASS compliance has improved within the industry, there is still a substantial journey ahead. Banks will need to respond to some important issues:
CASS vs. EMIR
There is a direct conflict between the two regulations with regards to client money distribution rules. Banks need to understand the legal and operational ramifications of porting (EMIR) vs. pooling (CASS). There are proposals for creating client money sub-pools
rather than treating it as a single pool in the event of a bank’s insolvency. The complexity, implementation and maintenance costs of compliance with these proposals will have a significant impact on operations.
The FCA has identified the high usage of third parties and custodians as a risk to banks’ ability to adhere to CASS rules. Banks must be able to demonstrate that appropriate controls (governance, structure and due diligence) are in place with external suppliers.
There is also a push for banks to improve the speed of return of their clients’ money and assets, reduce the market impact and achieve a greater rate of return in the event of insolvency. A bank will need to provide sufficient justification in relation to
its application of banking exemption and the alternative approach, where client money is mixed with house money. The introduction of intra-day buffers or a balance equalling the segregated money is an area that should also be explored.
To conquer CASS rules compliance strategically, there are several tactical battles to be won. Banks are finding themselves short of CASS expertise due to the constantly evolving regulatory landscape. In addition, compliance is far from an operations-only
issue, impacting most business functions. Banks face significant investment and the magnitude of compliance demands shouldn’t be underestimated. The key to success in the near future will be proactive preparation for the impending changes and operating at
the ‘cliff face’ of all key cross-jurisdictional CASS initiatives.